Inside Alternative Investment Capital’s Strategy for Japan’s Private Markets

While the global M&A market has struggled in recent years, Japan has been a notable exception, with transaction volumes continuing to grow. A key driver behind this trend appears to be increased activity from private equity firms investing and participating more actively in deals. In your view, what are the main factors that have positioned Japan as an outlier in the current global M&A landscape?

I’d like to explain this from two perspectives: why M&A activity is declining in the U.S. and European markets (the Western countries), while it’s growing in Japan. The primary reason is the rise in interest rates in Western countries, which makes leveraged buyouts (LBOs) less effective and loans more difficult to secure. This leads to discounted trades and a widening valuation gap between buyers and sellers. In contrast, Japan’s continued low-interest rate environment means LBOs remain a viable and effective strategy.

Another factor is the level of maturity in the private equity markets. In Western countries, the private equity space is already matured and well-developed, with a cyclical structure in place. Over the past years, those markets saw a surge in M&A activity and are now experiencing a natural downturn. Japan, on the other hand, still has a relatively immature private equity market as we are in the process of building that structural foundation. Corporate governance reforms in Japan have also played a key role, acting as a catalyst for increased private equity deal-making.

Demographic trends in Japan are another significant driver. In addition to corporate carve-outs, we’re seeing more cases of business succession issues, which are not tied to the traditional M&A cycle but still fuel deal activity. Taken together, these factors suggest that private equity in Japan is poised for continued growth in the mid- to long-term.

Can the Japanese M&A market continue to close the gap with that of the U.S. and the U.K.?

One way to gauge the activity of the private equity market is by looking at its size relative to GDP. In that regard, there’s still a significant gap in Japan. It’s interesting to observe that in the U.S., there are now more private companies than public ones, a major shift that has taken place over the past 20 years. Japan, on the other hand, has been quite unique in this respect. Until recently, the number of listed companies was actually increasing. However, last year marked the first decline in that number, which I see as a pivotal moment and a reflection of the growing influence of private equity in Japan.

This shift toward privatization has been driven in part by pressure from the Tokyo Stock Exchange (TSE), which has urged listed companies to maintain a price-to-book ratio (PBR) of at least 1, or risk being delisted. There’s also growing momentum from activist investors pushing in the same direction. While it will take time, I believe we’re seeing the beginning of a gradual and sustained trend toward a more robust private market in Japan.

Given these dynamics, do you think we’ve reached a peak in take-private, succession- and carve-out-related deals? Or do you believe this segment of the market will continue to grow in the coming years?

I expect deal activity to continue rising, but much of the current momentum is still being driven by external pressures. Companies are being pushed to take new directions, primarily due to TSE reforms and other structural changes, but the fact that private equity funds are now being seen as a viable option by corporate management is a very positive development.

Mindsets are also evolving, particularly among younger leaders at small and medium-sized enterprises. These leaders are increasingly using private equity to scale their businesses. In contrast, many major Japanese companies are still led by older executives. While their wealth of experience provides stability and continuity, it can sometimes make it challenging for them to adopt new approaches. Unless that generation—and their companies—embrace a new way of thinking, we won’t see a dramatic transformation. Even when presidents and senior managers are younger, if the chairman or key decision-makers still hold onto traditional mindsets, change will be limited. In that sense, I believe the most important driver for the future will be a shift in management mindset at the top levels of Japan’s major corporations.

What economic value can a large private equity market unlock for the Japanese economy?

Private equity originated in the U.S. and Europe, and it has traditionally reflected business practices in those regions. In Japan, that model has been adapted to fit local sensibilities, perhaps in a more measured and cooperative manner. However, with recent changes in corporate governance and the reforms introduced by the Tokyo Stock Exchange, the mindset within the Japanese market has gradually evolved. People are now more receptive to this Western-style approach, and today there’s little difference in how domestic and foreign private equity firms operate in Japan.

The main distinction lies in the scale of deals. Japanese private equity firms tend to focus on mid-sized transactions, while foreign firms are more active in large-scale deals involving major corporations. I hope to see Japanese firms eventually grow into handling larger deals as well, but at this stage, the presence of overseas players remains essential to the market's overall development.

Your company was established in 2002 as a pioneer in Japan’s fund of funds space and has since evolved into a strategic partner for GPs and a provider of tailored investment solutions. Could you walk us through some of the key milestones in AIC’s journey?

Our history spans over 20 years, and we generally divide it into four key stages. In the first stage, we began as a fund of funds with Mitsubishi Corporation, Daido Life Insurance, and Mitsubishi UFJ Trust as our shareholders. These entities effectively served as our limited partners (LPs), and fund sales were managed through the Mitsubishi Group. As a result, our activities were fairly limited—we had a narrow LP base and no exposure to pension fund investors at that time.

The turning point came in the second stage, when we secured a discretionary mandate from a major pension fund. By 2012, this helped us double our assets under management (AUM). We then continued to grow by expanding our relationships with corporate pension funds, steadily increasing our AUM.

What I might call our “AIC 2.5” phase began when I became president in 2017. I was the first leader to come from outside the parent company. Around the same time, our parent company shifted from Mitsubishi Corporation to Sumitomo Mitsui Banking Corporation (SMBC), which gave us greater independence and strategic freedom.

As president, I made private equity and venture capital a top strategic priority to differentiate AIC in the Japanese market. Today, we position ourselves as a leading player in Japan in terms of private equity and venture capital coverage.

We’re now in our “AIC 3.0” phase. We've expanded our strategy to include secondaries and co-investments, and we are broadening our investor base to include high-net-worth individuals and endowments. In many ways, we’re incorporating international best practices into the Japanese market.

To provide a truly distinctive service and stand out in the market, it’s essential that we continue enhancing the value we offer to both LPs and GPs. One example of this is our exploration of GP-led investments—and potentially offering capital solutions to support GPs’ long-term development in the future. Our goal is to move beyond the traditional role of a gatekeeper and deliver differentiated, high-impact solutions that create value across the investment ecosystem.

You spoke about the evolution of AIC’s structure, and today you maintain a close relationship with SMBC, Daido Life Insurance, and Mitsubishi UFJ Trust—three institutions that play a vital role in Japan’s economy due to their scale and reach. What would you say are the key advantages of having access to the ecosystems of these major players?

On a day-to-day basis, we operate quite independently, to the extent that many LPs and GPs often forget we’re affiliated with these large institutions. However, having SMBC, Daido Life Insurance, and Mitsubishi UFJ Trust as parent companies provides us with significant credibility and fosters trust, both of which are critical in the Japanese business environment.

The fact that all three are involved, rather than AIC being a wholly owned subsidiary of a single entity, gives us a more balanced and well-rounded structure. That diversity of backing is an advantage in itself. All three institutions are very supportive and actively contribute to our growth, for instance, by introducing their clients to us and helping to broaden our network.

While fund-of-funds structures are often recognized for offering diversification and access to top-tier private equity managers, they are sometimes viewed as expensive due to the layered fee structure, particularly in cost-sensitive institutional settings. In an increasingly competitive market where direct access to global funds is expanding, what enables AIC to deliver strong performance and sustained relevance? 

The fund of funds and gatekeeping models have become increasingly commoditized, with many new entrants and growing competition. That’s why it’s essential for us to differentiate ourselves by delivering what we call “alpha plus” to both LPs and GPs through the quality of our services.

By “alpha plus,” we’re referring not just to investment performance, but also to the added value we provide in areas such as monitoring, operations, and overall fund management. Strengthening this unique positioning is critical to our continued success. In fact, we’re currently the only firm in Japan offering both co-investment and secondary investment capabilities: a key point of differentiation.

While fee competition certainly exists, we aim to be selected based on the strength and depth of our services. With the growing sophistication of our institutional LP base, we are seeing higher expectations across areas such as our investment proposals, monitoring reports, and overall communication standards. Meeting their high standards acts as a kind of quality certification for our operations. We intend to build on this accumulated experience and leverage it as we explore new opportunities with other financial institutions.

What key criteria do you look for when making primary vs secondary investments?

While primary and secondary investments may appear similar on the surface, the criteria used to evaluate them are actually quite different. In secondary investments, the two key factors are the quality of the GP and the quality of the portfolio. Ultimately, the degree to which the investment is undervalued plays a major role in determining success.

In the U.S., secondary advisory has become a well-established and widely adopted part of the private equity ecosystem., but that’s not typically the case in Japan. Japanese LPs are still not fully accustomed to secondary sales. As a result, our strategy focuses on the Japanese style of deal-making, prioritizing exclusive, relationship-based transactions. One-on-one communication is critical, as is providing advisory support on how to navigate internal corporate approvals.

It’s also important not to push for excessive discounts. Doing so can damage trust and harm our reputation in the market. Our goal is to maintain a strong, respected presence within the industry while still achieving solid investment outcomes.

It’s interesting to hear about your work in the secondary market, which has seen notable growth in recent years. In 2021, you launched the Japan Private Equity Opportunity 2021 Limited Partnership, followed by another fund in 2024. What’s particularly notable is that both were open to Japanese and international private equity funds. What impact do you believe these two initiatives have had on the development and growth of the secondary market in Japan?

When we launched our first fund in 2021, it was around JPY 10 billion, so its immediate market impact was relatively modest. It’s important to understand that the secondary market typically lags the primary market by about six to seven years. In Japan, the primary market experienced a resurgence around 2016 and 2017, so I anticipated that secondary market growth would follow around 2022 to 2023.

That first fund was fully deployed within three years, which confirmed for us that there is indeed real demand for secondary transactions in Japan. Encouraged by that success, we launched a second fund in 2024. While our initial target was JPY 20 billion, the fund is now exceeding that figure, reflecting growing interest from Japanese investors.

Fund size matters. With a fund two to three times the size of the original, we now have greater flexibility and access to opportunities that were previously out of reach. This expansion also enables us to lead or co-lead in larger deals, creating more meaningful co-investment opportunities and enhancing our visibility and influence among both LPs and GPs.

A key advantage for AIC is our strong foundation in the primary market. We’ve built a solid backbone there, and we’re now leveraging that experience to create value in the secondary market as well.

In 2025 you launched the AIC Rising Stars Japan 1 Investment Limited Partnership, your first fund focused on investing in emerging private equity and venture capital managers in Japan. What motivated this move, and what needs or gaps were you aiming to address?

When analyzing the U.S. market, we saw a clear pattern: as the market matures and becomes saturated, established fund managers often spin out to launch their own independent funds. We’re seeing a similar trend in Japan. As Japanese private equity funds grow in popularity, gaining access to their second or third funds is becoming increasingly difficult.

In response, we decided to make small-scale investments into emerging fund managers using our own balance sheet. Initially, these were minimal investments, and we didn’t expect much interest from GPs. However, we quickly realized that our extensive network of GPs and funds positioned us uniquely as we could offer best practices and strategic support, which proved to be a meaningful value-add.

At the same time, the Japanese Financial Services Agency was encouraging financial institutions to engage with emerging fund managers. SMBC, which was involved in those discussions, asked us to take the lead by establishing a dedicated emerging PE fund. That’s what ultimately prompted us to move forward with the initiative in 2025.

You mentioned the growing popularity of Japanese private equity funds, and this is something we've consistently observed in our interviews—particularly increasing interest from foreign LPs. Have you seen this trend firsthand in recent years, and what kinds of services do you offer to help international LPs effectively access and navigate the Japanese market?

There’s definitely growing interest in the Japanese market from foreign LPs. At AI Capital, we’ve been receiving an increasing number of information requests—particularly from family offices and sovereign wealth funds. 

Attracting international investors is one of our key mid- to long-term goals. We see strong potential in building those relationships as global interest in Japanese private equity continues to rise.

How do you plan to better reach high-net-worth individuals?

We’re currently researching and considering how best to leverage technology to serve high-net-worth individuals. This investor segment represents a valuable source of capital, and the broader democratization of alternative investments is something we view as increasingly important.

That said, we don’t plan to lead the technological development ourselves. Instead, we intend to partner with FinTech firms that specialize in these solutions. SMBC shares a similar approach, so our strategy will be aligned with theirs moving forward.

You mentioned that you became president in 2017. Looking back over the past eight years, what accomplishment are you most proud of? And as you look ahead, what is the next milestone you hope to achieve?

Looking back on my personal journey, I’m proud to have been a pioneer in opening up Japan’s secondary market. Twenty years ago, I was at Ant Capital Partners, where I led the secondary division. At the time, we launched a secondary LP fund with just JPY 3 billion. It was a small start, but a meaningful one. That experience shaped my long-term vision, and since becoming president of AIC in 2017, advancing the secondary business has been a key focus.

In 2021, we achieved a major milestone by successfully launching our own secondary fund. Today, AI Capital is recognized as a leading player in Japan’s secondary market, and I take pride in having helped lead the development of that space. You could say I’m very much a “secondary guy!”

Looking ahead, beyond growing the size of the company, I want to build on AI Capital’s deep experience in fund monitoring. We currently monitor over 600 funds daily, and I believe there’s an opportunity to leverage that capability to offer new services that directly address the challenges faced by LPs. Finding the right partner to help us bring that vision to life is my next goal.

For more information, please visit:

https://www.aicapital.co.jp/en/about.html