- Why should I care about investing in Japan? That sounds risky!
- What is shareholder activism?
- How is the opportunity in Japan like Private Equity in the U.S. in the 1980’s?
“I am delighted to have Berkshire Hathaway participate in the future of Japan.”
– Warren Buffett
I made my first investment in a Japanese stock in 2009 and have been closely following the country for the past 14 years. I can understand how investing outside the U.S. can seem “risky,” but Japan offers a few key attributes to lower the possibility of permanent impairment of capital (our definition of risk).
- There are approximately 1,600 public companies in Japan with a market capitalization less than $3 billion in USD. Of these, approximately 700 have a valuation of less than 6x EV/EBITDA while the U.S. market trades at over 12x EV/EBITDA. Smaller companies are cheap in Japan. Cheaper valuation results in lower risk, all else equal.
- The Japan corporate sector has a net cash position (no net debt!) while the U.S. corporate sector has net debt that equates to 35% of GDP. Further, 40% of the Topix index, excluding financials, have net cash > 20% of equity. Lower debt results in lower risk.
Shareholder activism is the practice of shareholders using their ownership stakes to influence decision making and advocate for changes to create long term value. Smaller companies in Japan are ripe for shareholder activism due to cheap valuations, bloated cash balances and regulatory agencies coalescing around corporate reform. The positive sentiment towards reform has been building for the past decade.
Private equity is broadly regarded as one of the most attractive investment opportunities of the past 40 years. Perhaps paradoxically, Japan shareholder activism today shares several of the characteristics of private equity in its early days of the 1980’s but NOT private equity in the U.S. in 2022. Japan-focused private equity funds have more than doubled over the past 6 years. Consider the table below.
Essential Partners invests a portion of our client partners’ capital opportunistically in strategies that will benefit from Japan shareholder activism.
Investment advisory services offered through Essential Partners, an SEC registered investment advisor. The information contained herein should not be construed as personalized investment advice. Past performance is no guarantee of future results. Investing in financial markets involves gains and losses and may not be suitable for all investors. Information presented herein is subject to change without notice and should not be considered as a solicitation to buy or sell any security.