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Prospects of Private Equity Funds in Japan-- Expectations toward Finance with Ideas and Commitment --

December 11, 2020
WASHIMI Kazuaki
Financial Markets Department
Bank of Japan

Abstract

Japanese firms have faced the need to adapt to globalization, digitalization, and post-COVID-19 economic structural changes against the headwind of a declining population. Japanese firms have reduced liabilities and raised their capital adequacy ratios since the late 1990s. While this has strengthened their resiliency against crises, it remains open to question whether they have made effective use of capital for business reforms. Meanwhile, business succession has been a crucial challenge for many firms as the aging of CEOs progresses remarkably, leading to the possibility that corporate restructuring could take place at a wider level. Against this backdrop, the role of finance with ideas and commitment for business reforms is becoming increasingly important. This paper focuses on the prospects of private equity funds (PE funds) as a vehicle to provide such a function.

The history of Japan's PE market is short relative to Europe and the U.S., and track records of deals are rarely available. Therefore, empirical analyses on the impact of corporate restructuring via PE funds have been extremely limited. That said, the empirical analysis in this paper together with a very recent study indicate that corporate restructuring by PE funds is expected to increase the value added per worker by increasing sales without reducing the number of workers on average--albeit those studies have had limited sample sizes. While care should be taken in interpreting those studies as the results could vary across firms, this might reflect the fact that investments by PE funds have increased added value by not only reducing costs but also improving the businesses of the investment targets. Expanding these investments could lead to improved productivity in the Japanese economy. In doing so, the following is required: (1) raising awareness of the economic benefits by PE funds and accumulating data and analyses; (2) expanding investments in PE funds by institutional investors; and (3) maintaining and developing professional human resources in business restructuring.

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