From Behind the Money: Private equity’s push into Japan

Katie (0:00)

Hey, listeners, it's Katie. Unhedged is on a break for the holidays, but while we're off, we want to introduce you to one of the FT's other podcasts, Behind the Money. Every week, the host, Micaela Tindera, joins up with reporters from the FT to unpack one big story that's happening in business, news and finance. The episode you're about to hear is all about private equities push into Japan. If you like what you hear, you can subscribe to Behind the Money, where you get your podcasts. Enjoy.

Michaela Tindera (0:35)

What you're hearing is a trailer from an old Japanese drama. It's called Vulture or in Japanese, my colleague Leo Lewis, the FT's Tokyo Bureau Chief, loves this. Hear how locked in he becomes when we watch this trailer together the other day.

Leo Lewis (1:07)

That is just magnificent, isn't it? That's brilliant. Okay, do you want me to comment on it?

Michaela Tindera (1:13)

Yeah, go ahead.

Leo Lewis (1:14)

I mean, it was a big phenomenon at the time. It was the water cooler conversation in offices.

Michaela Tindera (1:21)

Vulture was about a foreign fund that exploits struggling Japanese companies. First, it was a TV show, and two years later, it was made into a film in 2009

Leo Lewis (1:31)

You know, it had a primetime slot, but it was also, thematically, it could not have been more on the minds of people going into their 9-to-5 jobs.

Michaela Tindera (1:43)

That's in part because just a few years before this, some major American private equity firms had started to set up shop in Japan.

Leo Lewis (1:51)

What's in the trailer is a series of scenes that depict the perceived problem with foreign capital, which is that capital doesn't care about the nature of Japanese companies and they're with sort of stacks of cash being thrown across the floor. You know, the look of the thing was a little bit like, you know, barbarians at the gate and kind of Wall Street and the idea that capital does kind of wicked things if it's left unchecked.

Michaela Tindera (2:37)

But fast forward to the present, and our colleague David Keohane, who's FT's Tokyo correspondent, says things are really different.

David Keohane (2:46)

The easiest way to put it is that private equity is everywhere. Private equity has basically managed to present itself as a solution to some of the problems that Japan faces from succession planning to consolidation. It's the world's fourth largest economy, and what you have now here is a cocktail that's perfect for private equity, with companies needing reform, government and regulators all pushing it, and private equity ready to take them private en masse.

Michaela Tindera (3:08)

But even as private equity increases its influence in Japan, some in the country still worry about the knock-on effects of this growing trend.

Leo Lewis (3:17)

The experience of companies and private equity in the United States, in Europe, has got a long track record, and it's not necessarily a track record that Japan would like to see emulated in full on its shores. There's not only tension with the idea of a foreign entity taking over a Japanese company, but I think also there's the real idea out there that private equity stories don't always end well for companies.

Michaela Tindera (3:47)

I'm Michaela Tindera from the Financial Times. After roughly two decades in the country, international private equity firms are finally becoming more of a fixture in Japanese markets. Today, on Behind the Money, we're talking about what's changed in Japan to make this happen, and how private equity's expansion might alter the country's unique corporate ecosystem.

David, Leo, welcome to the show.

Leo Lewis (4:22)

Hello there.

David Keohane (4:22)

Nice to be here, thanks.

Michaela Tindera (4:24)

So first, let's start at the beginning. When do private equity firms first make their way into Japan and who are they?

David Keohane (4:32)

You can probably date this back to the early to mid 2000s after Japan experienced an extremely aggressive asset price bubble that then very dramatically burst, leaving a lot of distressed assets on the table. There were some kind of specialist firms that came into the market, like Ripplewood, very famously taking over distressed financial assets. But the big guys we're talking about here, the Carlisles, Bains, KKRs and Blackstones, they're coming into the market around 2005, 2006, something like that.

Michaela Tindera (5:00)

When these firms first came into the country, how would you describe Japan's economy and business culture at the time?

Leo Lewis (5:09)

Yeah, so as David alluded to just there, the 1980s asset bubble was a defining moment for Japan and for Japanese companies. They went from being literally at the top of the world to being something that was a constant source of concern, that you weren't sure whether companies were going to collapse. And in very simple terms, companies had gone into a kind of defensive mode. They had been very aggressive risk takers. And what happened at the CEO level for quite a long time was that the predominant emphasis of your time as CEO would be not making a mistake. It wasn't about advancing the share price a whole lot. It was just about not having a disaster.