For much of last year, global private equity firms were waiting for Japan’s biggest ever take-private deal to materialise with the buyout of Toshiba.
Had the 147-year-old industrial conglomerate with its size and national significance put itself in the hands of a firm like Bain Capital, Brookfield or CVC, it would have been a historic moment for private equity’s advance into Asia’s largest advanced economy.
Unfortunately, and perhaps not surprisingly for a saga that began with an accounting scandal in 2015, the waiting game continues. All the latest signals suggest that the company’s management is keen to get a deal done with a consortium led by domestic buyout fund Japan Industrial Partners, which was granted the preferred bidder status in October.
For global and Asia-focused private equity firms, the failure to win the Toshiba deal would not necessarily signal a sudden backlash against foreign funds. Almost all the underlying factors that have led these firms to steadily build their presence in Japan would remain intact.
There are still plenty of opportunities for private equity created by succession challenges at Japanese companies and carve-outs of non-core assets at conglomerates such as Panasonic, Fujitsu and others.
In addition to the availability of cheap financing as central banks outside Japan raise interest rates, the country offers more predictability and less geopolitical risk for buyout funds than some economies as the technology dispute between the US and China escalates. These factors explain why deals in Japan involving private equity reached $20bn in 2022 — up 22 per cent from a year earlier, according to Refinitiv.
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Still, there is reason for caution as the Toshiba deal unfolds. A bullish period for the Japanese market may be coming to an end as concerns about the global economy lead domestic megabanks to tighten their lending for private equity deals.
One factor behind Toshiba’s drawn-out negotiations with JIP is the fund’s difficulties in securing a financing commitment from Japanese banks to pull off the potential $16bn deal, according to people close to the talks.
Regardless of economic outlook, banks have reason to be cautious about a deal involving Toshiba following the turmoil of the past seven years, as it survived a financial crisis and confrontation with shareholders.
And while JIP has previously acquired assets from groups such as Sony and Olympus, the fund has no record of buying out an entire company of Toshiba’s size.
The way JIP has cobbled together the proposal has not necessarily been reassuring either as it initially struggled to get the backing of corporate Japan, eventually convincing financial services group Orix and chipmaker Rohm as well as a slew of companies with business ties to Toshiba to chip in.
Executives at private equity funds say, however, that the wariness of Japanese banks extends well beyond the Toshiba deal. “There is no question that banks are turning conservative. On average, the financing conditions for deals are deteriorating,” said a Tokyo-based executive at a US private equity group.
Originally, the shift in sentiment of the lenders was blamed on KKR’s soured investment in auto parts maker Marelli, which entered court-led restructuring last summer. The debt-laden Marelli suffered a massive sales collapse during the pandemic, and the sharpness of its reversal raised red flags among Japanese banks that had previously viewed leveraged buyouts as a lucrative opportunity.
Among Japanese megabanks, MUFG and Mizuho have taken some riskier bets, like lending money to Elon Musk for his $44bn Twitter takeover. But they are becoming increasingly selective in their home market. That is expected to complicate private equity firms’ ability to fund deals. Private equity executives also say they have become more cautious because of the global economic uncertainty.
That said, many global private equity funds still have “dry powder” sitting in funds raised for Asian dealmaking that are yet to be fully deployed. KKR turned to its $15bn Asian private equity fund to finance its $5bn acquisition of Hitachi’s logistics subsidiary, which closed last year. Even with banks being more cautious, other deals include Bain Capital managing to raise $2bn in debt for its $3bn purchase in August of the microscope unit from Olympus.
But the Japanese market is not immune to the forces leading to a global slowdown in deal activity. How the Toshiba buyout concludes could be a harbinger of the year ahead.