How New Horizon Capital Is Revitalizing Japan’s SME Sector Through Private Equity

In recent years, Japan has stood out in the M&A market, recording a 20% increase in deal values in 2023 followed by another 8% jump last year. This stood in stark contrast to the broader Asia-Pacific region, which has seen deal values contract. However, Japan's M&A market remains relatively small—especially when compared to that of the U.S. and the U.K. What are your thoughts on this contrast?

One of the reasons why M&A activity in Japan has been gaining momentum recently, compared to the US, UK, and other advanced countries, is simply that Japan’s M&A landscape has historically lagged behind most of these nations.

In the 1990s, the annual number of M&A deals in Japan remained in the three-digit range until 1998, barely exceeding 1,000 in 1999—remarkably low for a country that was the world’s second-largest economy at the time. In contrast, the US reportedly saw over 600,000 M&A transactions in a single year.

Although the number of M&A deals in Japan reached 3,050 in 2017, there is still significant room for growth, considering the sheer number of companies in Japan—still over 3.68 million as of June 2021, according to METI.

In addition to the organic modernization of the economy and industries, the aging of society, which is leading to a shortage of successors, plays a significant role in the growing necessity for M&A. Furthermore, the increasing adoption of capital market-oriented corporate governance is pushing listed companies to accelerate the reorganization of conglomerates to enhance efficiency metrics, such as ROI and ROA. This, in turn, contributes to the rise in M&A activity.

Another reasons for the relatively small size of the PE market in Japan is the historically lower investment from public pensions and corporate pension funds compared to Europe and the United States. However, we are optimistic that this will change as government-led initiatives encourage more diversified investment strategies.

This contrast is also largely rooted in Japanese culture. As you may know, Japan has traditionally embraced a lifetime employment system, where people often choose a company, not just a job, with the expectation that they will stay there for their entire career. For example, someone who starts at Mitsubishi Bank would typically remain there until retirement.

M&A activity, by its nature, runs counter to that mindset. When a company is acquired, it disrupts the stability and continuity that many employees have come to expect. This cultural framework has been one of the biggest factors limiting the volume of M&A transactions in Japan.

The second major pillar driving transformation in Japan’s market has been corporate governance reform. The Abe administration played a pivotal role in introducing the Corporate Governance Code a decade ago, which has since been revised. More recently, the Tokyo Stock Exchange has increased pressure on companies to enhance their valuations, and we’ve also seen revisions to the guidelines for corporate takeovers. What impact have these reforms had over the past ten years?

Corporate governance reforms came to Japan relatively late, perhaps 10 to 15 years after countries like the UK. I recall being invited to speak on this topic back in 2013, and at the time, I had to push back against significant resistance from major companies, which were strongly opposed to these kinds of changes.

Initially, these reforms were adopted primarily by highly conscious companies rather than being embraced uniformly. Given the nature of these agendas, it naturally takes time for companies to adapt, especially those with long-established organizational cultures. The older and larger a company, the longer it typically takes to implement such changes.

A prime example is the Hitachi Group, often cited as "THE Japanese Company" due to its diverse business lines and once holding the largest number of employees in the country. Historically, Hitachi was not proactive in reforming its group structure and engaged in little, if any, M&A. Although the group began to consider capital and asset efficiency in the mid-2000s, it only cautiously regarded M&A as a means to streamline non-core assets and businesses. One such case was Hitachi Housetec, a household equipment manufacturer owned by Hitachi Chemical, which was acquired by New Horizon Capital in 2007. However, the group did not pursue many M&A transactions for several years.

As described in recent Bloomberg articles, the situation has since changed significantly. Hitachi has become an active player in Japan’s M&A landscape, acquiring companies like Bradken, an Australian mining product manufacturer, in 2019, and GlobalLogic, a US digital engineering service provider, in 2021—both leaders in their respective fields.

The Tokyo Stock Exchange’s recent initiatives, combined with ongoing corporate governance reforms, have prompted many large companies to divest non-core assets. At the same time, Japan is experiencing a generational shift, with many older companies facing succession challenges, creating significant activity in the M&A and private equity space. Do you believe we’ve reached the peak of this trend, or do you expect it to continue accelerating in the coming years?

The ongoing social trend of an aging population creates a pressing need for the integration of small and mid-sized enterprises. Since this demographic trend is expected to persist for a long time and further accelerate population decline, M&A cases aimed at addressing business succession challenges are likely to increase significantly in the coming years.

Additionally, the implementation of Japan’s Corporate Governance Code and Stewardship Code, introduced in 2015 and 2014 respectively, has had a substantial impact. Listed companies, and even unlisted ones, supported by investors such as private equity (PE) firms, venture capital (VC) funds, or large listed corporations seeking capital efficiency are increasingly viewing M&A as a strategic tool to divest low-efficiency businesses and acquire new growth opportunities to enhance enterprise value.

As these robust trends continue over the longer term, the number of M&A transactions is expected to keep rising, gradually narrowing the gap between Japan and other major economies.

The traditional way of doing business in Japan hasn’t changed significantly—especially among SMEs, whether they are listed or unlisted. I don’t expect to see a dramatic shift overnight. Instead, it will be a gradual process as more companies begin to adopt these governance principles over time.

As I mentioned earlier, even large companies were initially quite resistant to these reforms. But ironically, they’ve since embraced them quite strongly, one could even say aggressively. That shift was likely driven by investor pressure, and I believe SMEs will eventually follow suit. It will just take time.

For years, analysts and international media have criticized the lack of consolidation among Japanese SMEs, arguing that it prevents companies from reaching the scale needed to compete globally. Do you see this as a fundamental weakness in Japan’s competitive landscape?

The larger a company becomes, the more it is expected to follow corporate governance principles. The main reason SMEs struggle to adopt these standards is simply a lack of human resources. It’s not necessarily resistance to the principles themselves but also a matter of capacity.

If smaller companies were able to consolidate and form larger groups, they would likely have the resources to comply, including the ability to hire the necessary staff. So in that sense, consolidation could actually help SMEs meet governance expectations more effectively.

In your view, what is the core value that private equity firms bring to Japanese industries, particularly in the current economic and corporate landscape?

Private equity investors typically focus on companies with stable operating cash flows, which means their target companies are often older, well-established businesses. These companies usually have strong, long-term relationships with customers, suppliers, and other stakeholders. In Japan, this is exemplified by the concept of "Keiretsu"—a network of interlinked businesses under the leadership of a top-tier blue-chip manufacturer. Historically, this solid industrial and social system played a key role in Japan’s high economic growth during the latter half of the 20th century.

Small and mid-sized enterprises (SMEs) in Japan have traditionally depended on this social system, with their competitiveness largely rooted in the historically built “social complexity.” However, the landscape has changed dramatically due to several factors, including drastic demographic shifts within Japan; technological advancements, including the rise of the internet and artificial intelligence; and the globalization of the economy.

As a result, the business environment in Japan is evolving, and companies must adapt accordingly to survive. Local smaller companies, often positioned at the lower tiers of the supply chain beneath major blue-chip manufacturers, struggle with transformation. This difficulty is due to deeply ingrained cultural practices that have persisted for decades. Even when these companies recognize the need for change, they frequently lack the human resources and capable management necessary to implement new strategies effectively and on time.

Private equity can play a vital role in this transformation by providing not just financial support but also management expertise and human resources. With the assistance of private equity, these smaller businesses can revitalize their operations, adopt modern management practices, and establish governance suited to the 21st century. After undergoing such reforms, these investee companies can deliver improved financial and social performance, making them more attractive to subsequent investors who would then assign higher valuations.

An excellent example is the Hitachi Group, which, after a decade of persistent transformation, saw its stock price increase more than eightfold. This remarkable turnaround demonstrates the potential of private equity to unlock restrained value, helping companies evolve and thrive in today’s competitive landscape.

Now is the time for smaller businesses to break free from the constraints of historical systems and unlock their potential. Private equity can play a crucial role in this transformation, helping Japan generate substantial economic value once again.

In line with this philosophy, we see our role as interpreters of corporate governance principles for SMEs. Many of these companies face staffing shortages and simply don’t have the time or resources to fully engage with these frameworks. As a result, they often miss the broader picture.

Private equity firms can step in to help translate and implement these governance principles in a way that aligns with the company’s reality. When that’s done effectively, value emerges—whether through operational improvements or strategic mergers. In that sense, I believe this is one of the most important contributions we make to Japanese industry.

Since its establishment in 2002, New Horizon Capital (NHC) has grown to become one of the most trusted independent PE firms in Japan. How has NHC evolved since its inception? What were some of the key milestones and turning points that determined its direction?

Since its establishment in 2002, New Horizon Capital (NHC) has navigated numerous milestones and pivotal moments, establishing itself as a leading independent private equity (PE) firm in Japan. NHC was originally founded as Phoenix Capital Co., Ltd. by its current CEO, Ando, who played a key role as the representative director and "KEYMAN" in all managed funds.

At the time of its founding, Japan was grappling with a serious bad loan problem. Financial institutions were undergoing rehabilitation through the "Financial Revitalization Program," commonly known as the "Takenaka Plan." This economic climate created a demand for revitalization funds to assist financial institutions in disposing of bad loans, as well as to support companies struggling to raise capital due to lending dysfunction. Drawing from his frontline experience in handling bad loans at multinational banks in the UK, Ando established Phoenix Capital Co., Ltd. to address these challenges.

Between 2002 and 2006, Phoenix Capital managed more than 220 billion yen through two fund series: the Japan Recovery Fund (JRF), which primarily made equity investments for business revitalization, and the Nippon Revival Fund (NRF), which mainly targeted non-performing loans. Both funds achieved nearly double the investment return. In 2004, Phoenix Capital made a strategic investment in Mitsubishi Motors, which was then facing a management crisis related to a recall concealment issue. The firm acquired approximately 33% of the company’s shares, and Ando himself took on a leadership role as a director and chairman of the business revitalization committee.

NHC was officially established in October 2006 through a company split, driven by two key reasons. First, to adapt to the economic recovery that had continued since 2002 and to seize a broader range of investment opportunities, including not only turnaround investments but also industry restructuring, growth support, and business succession. Second, to build partnerships with various financial institutions rather than being tied to a single major entity.

Following its establishment, NHC launched NH1 in 2007, investing in Hitachi Housetec Co., Ltd., a carve-out from the Hitachi Group. Despite the Nikkei average declining by more than 40%, the investment delivered solid returns. However, the onset of the global financial crisis in 2008 made fundraising challenging, even with Phoenix Capital's strong track record.

NHC continued to diversify its investment strategies. NH2 employed a hybrid approach, combining turnaround investments, business succession investments, and carve-out deals. NH3, on the other hand, focused primarily on business succession investments and strategically implemented roll-up investments to enhance the corporate value of small and medium-sized enterprises, achieving strong results. The internal rate of return (IRR) for the previous fiscal year (ending June 2024) exceeded 40%.

In October 2023, NHC launched NH4, with a primary focus on business succession. Additionally, in July 2023, NHC established the Post-Coronavirus Recovery Fund (PCR), dedicated to revitalization investments aimed at supporting small and medium-sized enterprises burdened by debt due to the COVID-19 pandemic. NH4 has already invested in 10 companies, including three roll-up investments, while the PCR Fund has invested in four companies, both demonstrating steady progress.

New Horizon Capital has invested across a wide range of industries, from construction to IT. Given the current environment in 2025, which types of companies or sectors do you believe present the most attractive investment opportunities for New Horizon Capital?

That’s a difficult question to answer, simply because we pursue a broad range of deals across various sectors. Traditionally, our focus was on corporate rehabilitation, but over time, we’ve expanded into a much wider scope. We believe we can add value in any type of deal, so it really depends on the opportunities that arise.

What sets us apart is our hands-on approach. Depending on the size of the company, we often establish a cross-functional team made up of both management and frontline employees. We bring together voices from across the organization—salespeople, buyers, factory workers, after-sales support—and encourage open dialogue across departments.

In many Japanese companies, there are significant internal silos, and different sections rarely communicate effectively with one another. Our role is to break down those walls and facilitate real discussions that get to the root of the issues. Sometimes that means staying overnight with teams, digging into the details, and fostering stronger relationships. That level of engagement allows us to uncover challenges that might otherwise go unspoken and promote genuine change.

Trust plays a critical role in the Japanese SME landscape. It's not uncommon for sellers to choose a buyer based on trust, even if the financial offer is less competitive. How important is trust in your own deal execution strategy, and how do you build it throughout the process?

Trust is absolutely essential, and it ties directly into the importance of alignment between us, our investors, and the companies we invest in. This also connects to your earlier question about sector focus. While we don’t concentrate on any one industry, what we are doing is helping bring management into the current generation. But at the core of everything we do is interest alignment.

If our only goal were to align with investors, we could take a simplistic view: buy low, sell high. But that’s not our philosophy. Since New Horizon Capital was founded in 2002, our mission has been to contribute meaningfully to society. At the time, this was a somewhat unconventional goal in private equity, but today, it's more widely embraced.

With that mission in mind, we’ve found it easier to identify investee companies that align with our values and with the expectations of our investors. Today, our investor base is predominantly Japanese. In the past, we worked with some highly sophisticated investors, such as European pension funds, but that market has since slowed. Nonetheless, this values-based alignment continues to guide how we build trust and make long-term decisions in each deal.

Recent deals—such as Daiichi Machinery Works, Kantobi, and Jokoh—reflect your focus on construction and equipment, and seem to align with your strategy of forming sector-specific clusters. What are your expectations for these investments, and what kinds of synergies are you aiming to generate across these companies?

In recent years, roll-up investments have emerged as one of the key value creation strategies for NHC, playing a central role in many of our projects within the same or adjacent industries. In fact, nearly half of our recent new investment projects have incorporated roll-ups, reflecting our strategic focus on this approach.

Japan’s industrial structure presents unique challenges, particularly in domestic demand-oriented sectors where significant demand-side growth is not anticipated. Some industries are characterized by an excessive number of players, leading to intense competition. Many of these industries are concentrated in small commercial areas, where enhancing management capabilities and improving operational efficiency can significantly increase value. Horizontal integration—expanding into broader geographical areas and restructuring the industry—can be an effective way to strengthen competitiveness.

Moreover, many mid-market companies face difficulties in recruiting skilled personnel and adapting to digital transformation (DX) or green transformation (GX) due to limited experience and resources. Roll-up strategies help address these challenges by enabling companies to achieve economies of scale, thereby boosting their ability to innovate and remain competitive.

Regarding Daiichi Machinery Works, they are a major plant equipment company, and we see strong synergy with another one of our portfolio companies, Takafuji. Geographically, the two are well-positioned to collaborate, with Takafuji based in Oita City and Daiichi Machinery Works located in Nagasaki, about 400 kilometers apart. This proximity, combined with complementary business areas, creates a strong foundation for operational and strategic integration.

The value New Horizon Capital brings was clearly demonstrated in your deal with NITTO (infrat), where strong operational improvements led to a successful exit at a significantly higher valuation. What do you see as the key success factors in that deal, and how has it shaped your approach to future investments?

I believe the NITTO (infrat) exit demonstrated how private equity can play a meaningful role in addressing labor shortages within Japan’s industrial sector. NITTO (infrat), along with another company we invested in called Heisei Biso, is involved in specialized coatings for bridges and high-voltage cabling. Interestingly, the two companies were once competitors, but through our investments, they became part of the same capital group.

At the time, one of the most pressing management challenges was Japan’s labor shortage, particularly the decline in skilled workers due to the country's aging demographics. Through our support, NITTO (infrat) was able to strengthen its operational base and build a robust workforce of skilled professionals. As a result, the company emerged as a market leader in its segment. This deal highlighted how private equity can provide not only capital, but also strategic solutions to structural challenges.

What’s particularly surprising in the NITTO (infrat) case is that you were able to successfully merge two former competitors. How did you convince both parties that this was the right course of action? And do you believe this is a strategy you can replicate in future deals?

It was certainly a challenge, as both companies were long-time competitors, and building trust between the two management teams took considerable time. I focused on maintaining open and consistent communication with both sides, engaging in frequent discussions to foster alignment.

One of the turning points was that both companies shared a major client, Tokyo Electric Company, which helped establish common ground. From there, I worked to create tangible synergies between the two businesses, including joint procurement of paint materials and the sharing of construction technologies. These practical collaborations helped demonstrate the mutual benefits of working together.

Interestingly, in the market, Heisei Biso was the number one player and NITTO (infrat) was number two, yet we acquired NITTO (infrat) first. What made this even more notable was that NITTO (infrat)’s own management team recommended Heisei Biso as a potential investment target. That kind of endorsement from within the portfolio speaks volumes about the trust we were able to build and the shared vision we established between the two firms.

In your previous answer, two key factors stood out as drivers of the deal’s success: addressing labor shortages and realizing operational synergies. With these elements in mind, is there a particular industrial sector in the Japanese economy where you see the greatest potential to replicate similar deals?

Nearly all industries in Japan are highly fragmented. Automotive components, for example, are a clear case. In many of these sectors, companies are hesitant to engage with their competitors, which makes consolidation difficult. This is precisely where we believe we can add value by encouraging dialogue and building trust between firms.

Through our cluster approach, we can facilitate conversations that wouldn’t normally happen. By bringing SMEs together, we not only help them achieve scale, but also better prepare them to adopt and respond to new technologies. This collaborative structure can create long-term advantages in industries that might otherwise struggle to modernize or compete globally.

New Horizon Capital is recognized as being forward-thinking in its approach to ESG. Could you share how you incorporate ESG values into your investment strategy and the specific value you bring to your clients through this lens?

We believe we've been making ESG-aligned investments for at least the past 20 years. As I mentioned earlier, part of our role is helping companies adapt to new standards and expectations, and ESG, while largely common sense, is a fundamental part of that shift.

In 2024, we defined and publicized our materiality both internally and externally, highlighting key issues to be addressed through investment. This initiative reflects NHC’s commitment to meeting societal demands on investment funds and embodies our core values. Although materiality was formally announced in 2024, it is not a new concept for us. Rather, it is a formalization of an approach that has been integral to the company’s operations since its founding in 2002—an approach that can be considered part of NHC's DNA.

When engaging in investments, sellers typically meet and negotiate with multiple potential buyers. At NHC, we make it a point to explain our purpose, philosophy, and materiality during the very first meeting with the seller. Our aim is to collaborate with sellers who resonate with our values and share similar perspectives. In one particular case, despite NHC’s proposed bid being lower than those of other candidates, the seller chose NHC because they aligned with our materiality and philosophy. Additionally, sellers who appreciate NHC’s approach often express a desire to work with us, emphasizing the value they place on our commitment to responsible investment.

While many investment funds have been established in Japan, we take pride in the fact that NHC’s commitment to prioritizing social responsibility has earned strong support from numerous stakeholders. This focus on materiality and purpose sets us apart in the investment community and reinforces our dedication to sustainable and impactful business practices.

NHC became a signatory to the PRI in May 2016, marking a significant milestone as the only PRI signatory private equity fund management company (GP) at that time with solely Japanese domestic LP investors. This decision to voluntarily sign the PRI, without external pressure from major foreign institutional investors, underscores the deep conviction among NHC members that meaningful investment is fundamental to private equity.

As a signatory, NHC views the PRI’s annual evaluation as a vital assessment of progress in ESG investment. In its 2024 reporting, NHC received the highest rating in two out of the three categories of investment activities, reflecting the firm’s strong commitment to responsible investment practices.

We believe that our high ratings are a direct result of these ongoing efforts. As the urgency to address global and social challenges—such as climate change—continues to grow, we remain committed to strengthening our ESG initiatives. NHC will continue to promote meaningful investments, working collaboratively with our portfolio companies to create a brighter and more sustainable future for society.

One of the clearest examples of New Horizon Capital’s social value was your coronavirus response fund. How has your coronavirus fund performed so far, and what lessons have you taken from it in terms of balancing impact with profitability?

So far, we’ve invested in just a few companies through the coronavirus fund, and the majority of them are performing well. These were companies that carried heavy debt burdens but also had valuable technologies and specialized know-how. Once relieved of their debt, these businesses have been able to grow more naturally and sustainably.

Our original goal was to support around 20 companies over the course of the investment period. At this point, we’ve completed three years and have deployed almost half of the fund’s capital. The fund is structured to run for another three years, so there’s still time to reach our target.

One of the key reasons we haven’t progressed at the pace we initially expected is due to challenges working with local banks. In many cases, the banks were reluctant to sell the debt at a realistic price. They would claim the debt held full value, while we had to push back, pointing out that these were non-performing loans and needed to be treated as such.

Despite these challenges, we remain committed to the fund’s mission: balancing social contribution with sound investment logic.

We believe that realization of “meaningful investment” both economically and socially is our ultimate purpose. Since our inception, we have always valued social impact alongside economics whenever we discuss investment opportunities. Placing social meaning at the center of the funds is a natural way to align with our corporate purpose.

Mr. Ando has played a pioneering role in the development of Japanese private equity, particularly in the small-to-mid-cap space. Reflecting on your experience, is there one particular deal that stands out as especially meaningful to you, and why?

One of the most memorable and thrilling deals for me was with Hitachi Housetec, which we invested in about 18 years ago, just before the Lehman Shock. The company specialized in household equipment such as bathrooms, toilets, and kitchens. But when the financial crisis hit, the housing market collapsed, and the business faced serious challenges. We struggled for a period and had to seek additional support from both Hitachi Chemical, the previous parent company, and the banks. Despite the difficulties, we eventually made a successful exit and recovered our investment, which was a major relief and achievement given the circumstances.

If we’re talking about the biggest deal, it would have to be Mitsubishi Motors, which was handled during my time at Phoenix Capital in the early 2000s. It was, in many ways, one of the first large-scale M&A deals in Japan. The most difficult part was dealing with the old management structure, which was deeply rooted in traditional thinking. It took a lot of effort to push through a proper rehabilitation plan.

A turning point came when we facilitated the introduction of Nissan Motors to Mitsubishi Motors in 2005. This led to the two companies starting a joint production of small cars at Mitsubishi’s Mizushima (Okayama) plant—marking the beginning of a significant business relationship. Ultimately, the exit delivered 2.5 times the original investment, which was considered a major success at the time and a milestone in Japanese private equity history.

Is there a particular objective or ambition you would like to achieve during your time at New Horizon Capital?

I’m 67 this year, so I’m approaching the end of my tenure. My dream is for New Horizon Capital to continue well into the future by continuing to tackle the challenges facing Japanese companies. Through our investments and our guidance, I hope we can help shift the habits and mindsets of businesses that are struggling to adapt in today’s globalized world. In my view, it is only private equity that has the flexibility, perspective, and commitment needed to ensure their long-term survival.

Traditionally, Japan has operated as a bank governance society, where commercial banks wield significant influence. But banks are primarily focused on recovering their loans with interest, so they don’t have a stake in corporate value or in driving long-term growth. That’s why they are fundamentally limited in their ability to help companies truly thrive.

Private equity, on the other hand, is uniquely positioned to focus on corporate value—to think not only about a company’s immediate needs, but also about how it can grow and contribute to the broader economy. If Japan is to move forward, we must dismantle these outdated systems and break away from old customs that no longer serve us.

My hope is that my successor will carry on this mission—continuing the work we’ve committed to over many years, and leading New Horizon Capital into the next era of transformative impact.

For more information, please visit: https://www.newhorizon.jp/portfolio