Japanese buyouts and Chinese venture capital transactions are expected to see increased activity in Asia in 2025, according to the global investment firm Cambridge Associates.
Despite private equity penetration in Japan being lower than in other developed markets, the country is emerging as a natural harbour for leveraged buyouts. As of September 30 this year, the number of buyout transactions in the country had reached 102, surpassing the total deal count for all of 2023.
Cambridge Associates, in its 2025 outlook, said it expects buyout activity to increase in 2025.
On the supply side, three primary sources of deal flow contributed to this growth. The first factor is family-owned SMEs in Japan, struggling to find successors, turning to private equity firms for continuity. The second is large conglomerates divesting non-core assets, thus creating opportunities for PE investors. And thirdly, there is the Tokyo Stock Exchange’s push for companies to improve book value and capital efficiency ratios.
On the demand side, investors are drawn to the country as unlike most other Asian markets, control is the norm in Japan. This allows investors to shape the company’s journey more effectively.
Entry multiples in Japan typically range from 6x to 10x EV/EBITDA, lower than the 10x+ multiples common in other buyout markets. The availability of low-cost debt with most managers securing financing at 40-60% of enterprise value, with all-in costs below 4%, is also a push factor.
Leverage terms in Japan are investor-friendly. Banks take a relationship-focused approach, especially when borrowers are dealing with struggling assets. Japan’s low economic growth drives companies toward inorganic growth, making strategic buys the preferred exit route for PE firms.
Japan’s appeal as an investment destination has grown as China’s attractiveness has declined
Additionally, Japan’s appeal as an investment destination has grown as China’s attractiveness has declined, offering pan-Asian funds a stable market for capital deployment.
Rebound in China
China’s USD-denominated venture capital fundraising and investment activity dropped to a decade low, primarily due to sluggish domestic economic growth and persistent US-China geopolitical tensions. However, fundraising and investment activities in China’s venture capital sector are expected to rebound in 2025 from the lows seen in 2024, although they are likely to remain at moderate levels.
More Chinese venture capital firms are expected to return to fundraising in 2025, following the trend of 2024 where they launched smaller funds with more reasonable terms, clearer strategies, and greater transparency. This approach, suited to the current market, will likely continue, requiring VCs to be more disciplined in their investment selection, believes the investment firm.
Geopolitical risks persist for US investors.
US LPs are expected to continue withdrawing from Chinese VC activities due to restrictive foreign investment rules, creating an opportunity for non-US LPs. However, these investors are unlikely to fully fill the gap left by US investors. Consequently, resulting in lower fundraising levels than the 2020–22 peak.
China’s stimulus packages are expected to stabilise economic sentiment, though resolving structural economic issues will take time. The CSRC’s new rules have eased M&A restrictions for listed companies, creating more exit opportunities for VC portfolios and supporting domestic listings. Combined with adjusted entry valuations, this creates a more favourable investing environment.
Talented experienced founders across sectors complement the supportive environment. Factors expected to drive an increase in VC fundraising and investment activity in 2025 include China’s emergence as a global innovation hub in life sciences, highlighted by recent global acquisitions of Chinese assets, as well as its growing prominence in AI, robotics, and smart manufacturing.
The increasing role of continuation vehicles
The report added that private investment performance is poised for improvement as the effects of overinvestment during 2021-22 begin to fade. The asset class’s long-term appeal continues to draw individual investors, with managers increasingly providing easier access to these opportunities. While M&A and IPO exits show signs of revival, continuation vehicles (CVs) are expected to grow in prominence as an exit strategy.
The firm anticipates that CV volumes will continue to rise, becoming an even more vital exit route for GPs, even as traditional exit paths may reopen in 2025.
This growth is fueled by rising investor interest and a deeper understanding and adoption of CVs by mid-market PE managers.
CVs allow managers to retain top assets while providing liquidity to LPs through a less complex process than traditional auctions. In the mid-market, smaller assets lead to more manageable CVs, making them easier to syndicate, according to the report.
CVs can pose challenges for LPs, as the timeframes to decide between staying invested or taking liquidity often don’t allow for a thorough evaluation.
Secondary buyers are increasingly raising funds targeting GP-led transactions, with many focusing solely on CVs, including single-asset CVs.
Traditional PE sponsors are also developing secondary buy-side strategies for CVs, recognising synergies with their core capabilities. These institutional fund managers are successfully raising increasing amounts of capital from LPs, drawn by the potential for better risk-adjusted returns and shorter holding periods.
According to Cambridge Associates, given the benefits that CVs offer LPs, fund managers, investors, and underlying companies, its importance as an exit path for PE sponsors is expected to grow, reaching a new record percentage of total sponsor-backed exit volume in 2025.
