Japan has been one of the Gulf’s most important buyers of crude oil, LNG and petrochemicals since the dawn of the petrodollar era in the early 1970s.
Over the same period, Japan Inc has played a foundational role in the GCC’s modernisation – influencing everything from infrastructure and construction to the growth of the region’s electronics and automotive retail sectors.
However, Gulf family offices and institutional investors have largely favoured the US and Europe since Japan’s dramatic market collapse ushered in its two “lost decades”.
Between 1990 and 2012, the Nikkei plunged from 40,000 to just 7,000 – one of the most brutal and prolonged bear markets in modern financial history.
While the major GCC sovereign wealth funds have dedicated allocations to Japanese equities, and Saudi Arabia’s Public Investment Fund has even doubled its exposure to the world’s fourth-largest economy over the past five years, there is still minimal participation from the GCC in Japan’s embryonic private equity and leveraged buyout market.
That may now be about to change, catalysed by two historic developments last month.
First, Japan’s ruling Liberal Democratic Party nominated Sanae Takaichi – a pro-market protégé of the late Shinzo Abe – as prime minister, forming a coalition with the Japan Innovation Party (Ishin).
An admirer of late UK prime minister Margaret Thatcher, Takaichi has made it clear she wants to draw Gulf capital back into Japan to accelerate growth and supercharge the country’s sunrise sectors, from AI and aerospace/defence to advanced semiconductors.
Japan, unlike China, is not a geopolitically sensitive investment destination for GCC funds
These industries are also a strategic focus for GCC states as they seek to diversify their economies, build sovereign AI hubs and forge cross-border national security alliances in Asia.
Secondly, Qatar’s sovereign wealth fund QIA has initiated the Gulf’s foray as a strategic investor in Japan Inc with a $2.5 billion corporate buyout fund in partnership with Japanese financial conglomerate Orix.
This is the most significant joint Japanese-GCC megafund collaboration since PIF and Mubadala contributed $60 billion to SoftBank’s historic $100 billion Vision Fund to invest jointly in Silicon Valley’s tech startups.
Corporate buyouts
Meanwhile, US private equity giants – including Blackstone, KKR, TPG, Carlyle and Bain Capital – have rolled out multibillion-dollar vehicles targeting Japanese corporate buyouts since the post-pandemic reopening in 2021.
Takaichi’s selection provides a powerful macro tailwind for these buyout themes. She is a forceful advocate of market reform – the long-delayed “Third Arrow” of Abenomics. It is a pillar of the late prime minister’s eponymous fiscal strategy – designed to complement monetary stimulus and finally pull Japan out of its deflationary malaise.
Takaichi has pressured the Bank of Japan not to tighten monetary policy in response to a CPI rise above 3 percent. This is the reason why the yen has slumped to 155-156, making it the cheapest G10 currency on a purchasing power parity basis.
A cheap currency and low interest rates make it attractive for GCC investors to enter into corporate buyout deals with specialist Japanese financial partners.
The Japanese stock market trades at 15.4x forward earnings, a significant discount to the S&P 500’s 23x. This means GCC investors can reduce their global portfolio risk via diversification by allocating capital to a Japanese buyout fund.
Japan, unlike China, is not a geopolitically sensitive investment destination for GCC funds as the US-China Cold War 2.0 reshapes global finance.
Profits and opportunities
Japanese corporate buyouts have also been more profitable than their US and UK peers over the past decade, delivering an average 2.5x return on invested capital.
The corporate buyout opportunity in Japan is enhanced by domestic megabanks’ willingness to expand their leveraged finance loan books.
Financing rates for buyouts are 3-4 percent in Japan but 8-10 percent on Wall Street.
There are 4,000-plus listed companies in Japan, and several hundred cash-rich quasi-conglomerate firms whose share prices do not remotely reflect their net asset value, particularly if they own significant land banks in Tokyo and Osaka.
Many Japanese companies have cross-shareholdings in other companies for historical reasons and can boost shareholder value if they divest or spin off peripheral subsidiaries.
Shareholder value maximisation has never been the sole focus of Japanese corporate boardrooms, which have not yet shed their DNA as zaibatsu – integrated conglomerates, often family-owned.
Further reading:
This is why activist US buyout funds have taken stakes in even blue-chip firms like Tokyo Gas, Kansai Electric Power, Sumitomo Realty, Mitsui Fudosan and Nissan Motor.
GCC investors have traditionally avoided hostile takeover bids or activist campaigns to sell non-performing assets. This is why they must partner with Japanese corporate buyout specialists, as the QIA did with Orix.
Japanese corporate culture is unique. GCC investors can only successfully navigate deal flow with a local partner in the Empire of the Rising Sun.
Matein Khalid is an investor in global financial markets and board adviser to leading family offices in the UAE and Saudi Arabia
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