Riding the Wave: Japan's Shift from Traditional Shareholding to Activist-Led Growth
By Martin Fritz, Tokyo
Activists Collaborate with Private Equity in Japan
It's a new day for Japan's corporate heavyweights. In 2024, they've been thrust into the spotlight like never before, wrestling with the demands of activist shareholders, both domestic and foreign. The once-derided concept of shareholder value is now squarely on their radar, long overdue for attention. In the past three years, Japan has seen a tsunami of activist campaigns, trailing only the United States in total numbers. According to Insightia, an impressive 80 campaigns were launched in the first half of 2024 alone, eclipsing the combined efforts of Germany, France, and the UK. And, shining as the second-largest market for private equity and shareholder activism worldwide, Japan demonstrates no signs of slowing down.
So, what changed?
Evolution of the Japanese Landscape
Japan's ascension to the private equity (PE) and shareholder activism hub of 2024 is rooted in market reforms, escalating capital inflows, and a paradigm shift among investors.
Regulatory Boost and Liberalization
Corporate governance code revisions and enhanced stewardship code standards have compiled the pressure on companies to prioritize shareholder returns, attracting PE buyouts and activist campaigns among underperforming businesses.
Capital Inpouring
In 2023, Japan’s Government Pension Investment Fund (GPIF) ramped up PE allocations by 46% to an astounding ¥680 billion ($4.2 billion), indicating growing confidence in alternative assets. The interest didn't wane; Japan-focused PE funds managed to gather an impressive $8.8 billion in 2024, a substantial hike from the 2023 total of $6.9 billion.
Regional Momentum
Surging Asia-Pacific PE buyout investments reached a staggering $138 billion in 2024, with Japan partaking in the geographic realignment as companies optimize their operations regionally. Moreover, Middle Eastern sovereign wealth funds increased their Asia-Pacific deployments, including Japan.
Activist Catalysts
- Corporate Governance: Activists singled out cash-rich entities with low ROE, capitalizing on governance code compliance requirements.
- Market Performance: Despite a 34.1% increase in the S&P Japan 500 in 2024, nearly 71% of active managers underperformed, revealing market inefficiencies that activists and PE firms seized.
- Impact Investing Expansion: Japan's impact market grew 150% to an astounding ¥17.3tn ($115.3bn) in 2024, drawing in capital with dual purposes focused on ESG-aligned buyouts.
Sector Opportunities
PEs zeroed in on consumer, tech, media, and telecommunications (TMT), and industrial sectors, executing a whopping 223, 221, and 155 deals, respectively, in 2024. These sectors presented ripe opportunities for restructuring and tech-driven value creation, aligning perfectly with Japan's pursuit of operational efficiency.
Market Dynamics
- Mid-Cap Rebound: Secondary trades in mid-cap firms skyrocketed as PE firms seized pricing dislocations.
- Operational Emphasis: PE firms bolstered in-house teams to drive cost optimization and digital transformation within their portfolio companies.
In essence, the perfect storm of capital, reforms, and sector depth has positioned Japan as an alluring destination for global PE and activist strategies in 2024, with the winds of change blowing stronger than ever.
In the year 2024, Japan, with its booming private equity (PE) and shareholder activism sector, will serve as the second-largest market for such practices worldwide. This surge is attributed to regulatory boosts and liberalization, capital inflows, and a shift in investor paradigms, with the Government Pension Investment Fund (GPIF) allocating a significant amount to PE in 2023. Japan's strategic location within the Asia-Pacific region, especially in relation to surging buyout investments, further cements its status as an attractive destination for PE firms and activist shareholders. These activists focus on sectors like consumer, tech, media, telecommunications, and industrial, seizing opportunities for restructuring and tech-driven value creation.
