Solutioning the Future with JIS

To start our conversation, I would like to discuss the Japanese private equity and M&A ecosystem, which we’ve observed growing significantly over the past three years. In 2023, the market hit record-breaking levels, followed by further growth in 2024, and we are anticipating continued expansion this year. This trend is particularly fascinating because, when compared with other Asian markets such as China, Japan stands out as the only major market showing robust growth, while others are facing considerable challenges. Yet, despite this momentum, the Japanese M&A and private equity market still lags far behind the US or UK in terms of deal volume and size. From your perspective, how do you explain the contrasts between Japan’s current ecosystem and those in other global markets?

To begin, I think it’s important to recognize that the underlying cause for many characteristics of the Japanese market is deeply rooted in the management systems of Japanese companies themselves. One major differentiating factor in Japan’s M&A environment is the persistently low interest rates. For instance, Japan’s 10-year government bond yield remains around 1.5%, whereas the US stands at approximately 4.23%, and Germany at 2.67%. The Bank of Japan, under Governor Ueda-san, has shown considerable reluctance to raise rates. This stance reflects the long-standing deflationary pressures Japan has faced for over two decades, and there remains a need for time to adjust not only the economy but also the collective mindset of management. This low-interest environment shapes corporate behavior and investment decisions in fundamental ways.

Another significant driver is regulatory pressure. For example, the Tokyo Stock Exchange (TSE) has sent a very clear and blunt message to companies whose Price-to-Book Ratio (PBR) falls below 1.0: essentially, “if you don’t meet this threshold, leave the market.” This is an exceptionally strong statement that has shocked many large Japanese corporations.

I recently spoke with the CEO of a major power company whose PBR is as low as 0.3%. He told me, “We must achieve net zero carbon emissions by 2050, yet we are still heavily reliant on traditional energy sources.” This starkly illustrates the disconnect between market expectations and the company’s current reality. When pressed, he noted that all power companies in Japan share similarly low valuations. It’s a classic example of what I call a “very Japanese-style discussion” — a mixture of resignation and acceptance without decisive action.

What I believe is at the heart of this challenge is that many Japanese CEOs find it difficult to introduce new, high-growth business lines while simultaneously struggling to divest from legacy, low-yield businesses established by their predecessors. This creates a paradox: Why don’t these companies aggressively divest underperforming units to improve corporate value? Yet the answer often lies in corporate culture and governance.

In another instance, a CEO told me his company’s shares were largely held by an activist fund demanding divestitures and increased dividends. When I suggested the ultimate protection might be to take the company private—to delist—it shocked him. He said, “I can’t make that kind of decision.” I asked, “Then who can?” This hesitation reflects a deeper issue about leadership authority and decision-making in Japan. Drawing from my 36 years at Mitsubishi Corporation, a similarly structured and traditional company, I recall when one of the CEOs was appointed CEO of Mitsubishi, he described himself as effectively the “fifth most important person” in the company hierarchy. This indicates the rigidity of leadership structures and succession systems here.

This brings me to a metaphor I often use—the Ekiden relay marathon. Have you heard of the Ekiden relay marathon?  Hakone Ekiden is an immensely popular long-distance relay race held every second New Year’s Day and the following day, where about 20 universities race from Otemachi in Tokyo to Hakone—covering just over 100 kilometers—and then back the next day. The race is divided into five sections, with runners passing a sash called a “tasuki” to the next runner.

This event is broadcast nationwide with viewership ratings consistently exceeding 30%, which is rare for TV programs. Along the route, crowds line the road cheering the runners on, motivating them to “keep running” and pass the sash without stopping. For me, Japanese CEOs resemble these Ekiden runners. They are not running for personal glory but for the pride of their “team” — the company, their predecessors, shareholders, and stakeholders. The essence is relentless continuity. They run their segment with great respect for the runners before them and strive not to disrupt the flow. Importantly, these CEOs don’t usually consider “changing the game”—they run on the established path, much like the runners on National Route 1. They don’t leap onto a bullet train or helicopter to speed things up. This loyalty and respect for legacy explain why divestment of low-performing businesses is so difficult—it’s a break in the chain, a deviation from tradition.

Furthermore, the decision to engage in M&A or strategic transformation is heavily influenced by the “head coaches”—the ex-CEOs, chairmen, and senior advisors—who remain influential in governance. This long-standing culture has contributed to the historically low levels of active M&A and private equity activity in Japan.

That is a fascinating analogy, and it really helps explain the deeply rooted cultural dynamics at play. But now, we’re seeing a new generation of leaders emerging in Japan—leaders who may be more willing to explore alternative paths, different from the traditional Ekiden route. How do you perceive the impact of these new leaders on the Japanese market’s momentum?

My earlier theory, which I formulated a couple of years ago, emphasized that regulatory bodies, rather than corporations themselves, are now changing the game. For example, the Tokyo Stock Exchange’s introduction of strict PBR rules and openness to hostile takeover bids (TOBs) reflect a government-led push for market reform.

When the TSE implemented the rule that companies with a PBR below 1.0 should exit the market, over 50% of listed companies fell under this threshold. After two years, the percentage improved to 43%, but that still means nearly half of listed companies are underperforming by this measure. Notably, many power companies are clustered at extremely low PBRs.

Last year marked a monumental shift: 94 companies voluntarily delisted—most family-owned or sponsored by private equity funds. This net reduction in listed firms was the first such decline in 40 years and signals a fundamental transformation underway. This trend is likely to continue over the coming decades. I believe we are witnessing a gradual departure from the loyalty and deference to predecessors and “head coaches” that defined Japanese corporate culture for decades.

Turning to your company, Japan Industrial Solutions, which was founded in 2010 with the backing of major Japanese banks, you have been instrumental in assisting companies to unlock their full potential and enhance their corporate value.. Could you share your company’s mission within this evolving private equity environment?

Our core mission is to support Japanese companies in various situations—primarily focusing on turnaround cases involving financially troubled firms. Our typical investment style is to inject capital into publicly traded firms facing financial difficulties through preferred shares which constitute a form of private equity. We usually keep such companies listed. Not all companies opting for delisting are in distress; some are confident they can thrive post-delisting. To date, our role as a sponsor in privatization or delisting scenarios remains limited, though it is a possibility we do not exclude in the future, particularly with bank-sponsored cases.

Japan Industrial Solutions

Regarding Fund 3, which was launched and closed in 2021 with a typical deal size from 3 billion to 20 billion yen, your focus has been on mid- to large-cap companies requiring operational improvements. Could you elaborate on the strategic goals of this fund?

Yes. We have already deployed approximately 70% of Fund 3’s investable capital, so our capacity to invest further is limited. Compared to prior funds, Fund 3 reflects a more refined strategy developed in close collaboration with our sponsor banks. We adhere to what I call the “Trinity Approach”—a unique tripartite structure involving the company, the lender, and Japan Industrial Solutions. Before we engage in rehabilitation or operational support, we formalize this tri-party agreement. Under it, the lender commits to maintaining financial support, either by preserving existing loan amounts or providing short-term borrowing capacity. The company agrees to comply with specific operational and governance conditions.

JIS holds contractual refusal rights over critical decisions such as executive personnel changes, capital expenditures, mid-term plans, and annual budgets. This approach is highly contractual and based on consensus, not unilateral control. Our investments take the form of non-voting shares convertible to ordinary shares, with voting rights withheld until conversion. We inject equity, and when necessary, we dispatch executives, including CEOs sourced externally from the market. Through 15 years of experience, we have learned that the CEO is a crucial driver of transformation.

From your perspective, what builds the trust between the companies, lenders, and JIS under this Trinity model?

Unlike some traditional buyers—often large US funds that may exert full voting control and demand business divestitures—our approach is rooted in ongoing dialogue and agreement. All decisions are made collaboratively, with prior consent from lenders and the company. This balanced governance is essential for building mutual trust.

As someone with a consulting background, I’m curious about the operational efficiencies you implement in your turnaround projects. What are the typical levers you use to improve profitability and performance?

Financially troubled companies we invest in often share common internal issues—lack of effective governance, weak leadership, and poor program visibility. These challenges are industry-agnostic. To address them, at times, we bring in new CEOs via executive search firms and headhunters, despite the associated costs. Leadership change is pivotal.

Among your numerous deals over the past 15 years, which one best exemplifies your capabilities and the impact you can achieve?

Sharp stands out as the largest and most impressive. We invested about JPY 25 billion, the largest in our history. Sharp was eventually acquired by Taiwan’s Foxconn. Before selling our shares to Foxconn, we engaged in discussion with not only Foxconn but also the Industrial Innovation Corporation of Japan (INCJ), a government-led fund. INCJ aimed to preserve critical Japanese technology and planed to merge the display business of Sharp with Japan Display Inc. (JDI) sponsed by INCJ. However, we recognized Sharp’s factories were far less efficient compared to Foxconn’s operations and we believed transferring Sharp to Foxconn was the right move, despite opposition from INCJ and government circles. Indeed, INCJ’s sponsorship of Japan Display Inc. (JDI) has since led to ongoing financial struggles due to intense competition from Chinese and Korean firms. This experience reinforced our conviction that operational excellence and market competitiveness must guide investment decisions, not merely technological legacy or government preferences.

Ekiden Relay Rally

You also acted as knowledge partners for Bain Capital in their acquisition of Hitachi Metals. Could you explain your role and how you supported that transaction?

Bain Capital came well-prepared, with extensive operational knowledge based on experience. Our contributions focused mainly on providing local insights and industrial expertise mostly in the automotive parts sector based on our experience. Under Bain’s leadership within the fund consortium, we engaged multiple management consulting and human resource firms at substantial fees, skillfully leveraging external resources to maximize returns. One notable difference is that firms like Bain Capital rely heavily on macroeconomic analysis and extensive market research, whereas we depend more on hands-on leadership changes and management system reforms.

Looking ahead, as more global investors enter Japan, do you foresee partnerships or co-investment structures with foreign players becoming more common?

The largest funds operating in Japan today, primarily from the US, may seek partnership with local funds, but the number of sizable local funds remains limited. To address this gap, we are open to partnerships or co-investments. However, speaking about our fund raising, our sponsor banks currently prefer to keep fundraising primarily domestic. I personally have experience raising capital internationally but recognize the banks’ reservations. We would consider foreign LPs only if they truly understand Japanese business dynamics and the nuances of relationships between lenders and equity holders.

One last question: Your company’s website states “JIS Creating the Future as a Partner to Maximize the Potential of Investing Companies.” Could you expand on the message behind this statement?

Many companies face deteriorating balance sheets due to poor management or excessive borrowing, despite producing quality products. Our first priority is to establish an accord—a “Trinity approach”—involving lenders to stabilize financing and support business restructuring.

By doing so, we unlock the latent potential of their technology and products. We also address structural inefficiencies like over-employment and low productivity, which are common problems. Through these initial remedies, companies generate cash flow, enabling capital investments necessary for future growth. This step-by-step reform process is conducted carefully, in a manner consistent with Japanese corporate culture, avoiding blunt divestitures or confrontational tactics.

Before we conclude, you mentioned that for Fund 3, you have deployed about 70% of the capital. Are you planning to launch a new fund soon?

Yes, we are currently considering the next fund as our investment period for Fund 3 approaches its end—about one year away. We will continue to refine and follow the Trinity approach, which we believe is a highly effective strategy.

Sakai Display Products (SDP) factory site in Sakai, Osaka

Will the new fund continue to be supported by your major Japanese bank sponsor? Are you also considering bringing in foreign LPs?

Our sponsor banks generally prefer domestic investors. Although I have experience raising funds internationally, the banks are cautious about involving foreign LPs, out of concern that the Trinity approach may not be fully understood. Conversely, foreign LPs may be cautious about potential conflicts of interest between lenders, our sposors banks in this case, and JIS as the equity investor. We may consider foreign partners only if they fully understand the Trinity approach and Japanese business realities.

Finally, from a personal perspective, if you had to describe your company in one sentence to global investors reading Bloomberg Business Report, how would you like Japan Industrial Solutions to be seen?

I would say we are a highly dedicated turnaround fund. We have poured immense effort and sweat into revitalizing companies, and we continue to do so with unwavering commitment.

As your company celebrates its 15th anniversary this year, how do you envision Japan Industrial Solutions evolving over the next five years?

Currently, we invest primarily in non-voting shares with lower targeted returns—typically 10-15%, compared to other buyout funds aiming for 20-25%. However, we are increasingly incorporating convertible features into our investments, allowing conversion to ordinary shares. This will enhance profitability and significantly improve IRRs for our investors. This is my vision for the future.

For more information, visit their website at: https://www.jis.co.jp/en/