Japanese infrastructure has been the subject of renewed focus for many infrastructure investors in 2024.
Buoyed by more favourable government policy, the Long-term Decarbonization Power Source Auction process that concluded in April saw a host of infrastructure’s biggest names among the winning bidders, including Actis, Equis, I Squared Capital and Stonepeak.
And while the biggest infrastructure investor of all, Macquarie Asset Management, wasn’t on the list, the firm has been active in the country for many years.
Its previous activity includes the acquisition of a 100 percent stake in CTT, the largest independent petrochemicals storage operator in the country, in 2016 through its first Macquarie Asia-Pacific Infrastructure Fund, while MAIF2 acquired an 88 percent stake in data centre platform AirTrunk (which proved to be a very successful investment), operator and developer of three data centres in Japan.
The firm is now maintaining a very close watch on new opportunities to deploy capital.
This was illustrated very clearly with the announcement in August that a Macquarie-led consortium would invest around $1-2 billion for the sale and leaseback of a portion of the mobile network assets owned by Rakuten Mobile, a subsidiary of conglomerate Rakuten Group. Part of the capital came from MAM’s flagship regional vehicle, the $4.2 billion-plus MAIF3.
Leading MAM’s activities in the country is Toru Inoue, in the role of head of Japan, real assets. He joined the firm in June 2023 after a short stint at financial services company Orix, which itself followed a near-16-year stint at Goldman Sachs that saw him serve as the firm’s head of infrastructure and structured finance for Japan.
“I’ve been in the Japan market for a long time, but these last two years have been pretty phenomenal in the way that Japan has actually changed – and not only talking about change, but real activity,” he tells Infrastructure Investor.
Takeovers no longer taboo
The change has come from the top, with the Japanese government issuing new guidelines through its Ministry of Economy, Trade and Industry in 2023 that stated companies should consider unsolicited takeover proposals in good faith, and not rapidly knock them back as has often been the case historically.
While there are not necessarily major penalties associated with not following these guidelines, Inoue says that, generally, statements from the government like this “are still taken seriously” by firms. This in turn “has really changed the mindset” of corporate CEOs, CFOs and bankers.
“A couple of years ago unsolicited takeover offers were unheard of. It was taboo. But now the government is saying that it’s acceptable, all of a sudden, it’s changed,” he says.
And it isn’t just international players taking advantage of this. Japanese companies and investors are also making more unsolicited takeover bids, leading to quite a different landscape for corporate M&A in Japan.
This has had a particularly visible effect on listed markets, with name-and-shame provisions in place for those companies that ignore the guidelines.
“If you have a well-known company name that’s named within a list of companies that do not meet the guidelines of the Tokyo Stock Exchange, being shamed in front of everybody is a huge pressure,” Inoue says.
“So now all these companies are asking themselves: should I spin off this non-core asset? Or should I carve out this part of my business in order to get more efficiency?”
And this, of course, is where opportunities for infrastructure investors may increase, with carve-outs and take-privates a rich source of dealflow for the sector in the past.
“Infrastructure is more traditional and more conservative than the other industries or sectors,” Inoue says, tempering the enthusiasm somewhat.
“So all this activity hasn’t quite spilled over to the infrastructure sector yet, but the mindset of infrastructure companies or infrastructure-adjacent companies has changed. You don’t have dealflow yet, and you don’t have bankers running around trying to originate processes in the infrastructure world yet (with the exception of offshore wind and some renewables), but it is getting ready.”
‘Positively surprised’
The Rakuten deal is a good example of the new environment, with Rakuten Mobile’s parent company Rakuten Group being a significant listed conglomerate on the Tokyo Stock Exchange.
The transaction is large by Japanese infrastructure standards, with MAIF3 and its partners (including British Columbia Investment Management Corporation), investing around $1-2 billion to purchase a portion of Rakuten’s mobile tower assets and lease them back to the group. Rakuten will continue to manage and operate the assets.
Inoue says MAM’s LP base has been interested in what the Japan market has to offer.
“Our international LPs didn’t expect something of the size of the Rakuten deal to come out of Japan, so there was a lot of excitement. I sense that a lot of international LPs, especially in the infrastructure space, were waiting anxiously for opportunities to come out of Japan. To the extent that we can keep bringing those type of deals, I think it will be very much appreciated,” he says.
Meanwhile, Japanese LPs have been more focused on opportunities in offshore wind and digital infrastructure, with interest in transport assets like airports as well, but they are also “being positively surprised” by the chance to gain exposure to other sectors in Japan as well, Inoue says.
Japan has also suffered in some investors’ eyes in recent years due to a perception that investments there would offer low yield, because interest rates have been at or below zero for so long. This meant that the absolute yield that has been accepted or even targeted in Japan has been low compared to other markets.
“But our funds and strategies require a certain level of target return, so we needed to make sure that gap is taken care of,” Inoue says.
“There has always been an argument that Japan is more stable, and you need some diversity in a portfolio, so from a portfolio perspective certain levels of lower returns from exposure in Japan could be justified. That argument only gets you so far, though – and with lower interest rates, investors in asset classes such as real estate have been able to add leverage and boost returns.
“We have used a certain level of financial engineering in infrastructure, too, to create higher yields, thanks to the low interest rate environment in Japan. You do need to be a little creative – if you can do that then the low-yield environment is surmountable.”
On whether MAM might consider a Japan-focused infrastructure fund, Inoue declined to comment specifically, only saying: “We believe that geographical diversification is important – particularly in a fast-changing region like Asia. The MAIF series is intended to provide flexibility to seek out the best opportunities instead of being confined to one market.”
It is clear, though, that Inoue and MAM see further activity in Japan on the horizon.
The market is “not yet crowded”, he says: “If you play this right, if you set up the right team, you could do very interesting and large deals without too much competition.”
And the combination of a changing corporate mindset with the secular tailwinds that are powering allocations to infrastructure in most markets worldwide is a potentially potent one.
“In Japan there are opportunistic and other interesting opportunities around the general trend of corporates trying to become more efficient, with proper, robust governance. And you also have the global trend, that is also present in Japan, of green transition and digital investments – so we’re looking at both opportunities, he says.
Rakuten, he says, demonstrates this perfectly.
“We recently did a huge transaction in the telecom space, where it’s both digital and, to a certain extent, opportunistic. We think that, so far, our strategy has been vindicated, and we’re planning to move forward even more robustly.”