This is a financial promotion for The First Sentier Japan Strategy. This information is for professional clients only in the UK and Switzerland and elsewhere where lawful. Investing involves certain risks including:
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As we continue to dispel some of the most common myths and misconceptions of investing in Japan and highlight the opportunities for sustainable growth, today we explore how an aging population is no barrier to growth.
Part 5: An ageing population is no barrier to growth
It is no secret that Japan has one of the oldest populations in the world, as defined by the proportion of people aged 65 and over. In 2019, the United Nations published a report that predicted that Japan’s over-65 year olds would rise to 38% of the total population by 2050, up from 28% today1. This will have wide-ranging implications on the labour force and productivity, healthcare resources and costs, as well as savings and investments.
Japan’s demographic “time bomb” has been well signalled for some time, which has allowed the government and the private sector to plan for a future with fewer workers and more retirees. Moreover, this is happening not only in Japan; the challenges associated with an ageing population are being confronted all over the world and Japan’s experience may well prove useful to other countries in the future.
Although an ageing population could be considered detrimental to economic growth and productivity (all things being equal), sectors that tackle the issues head on can be a good hunting ground for sustainable investment returns. Automation and technology firms have been obvious beneficiaries, as companies seek to automate processes and replace labour-intensive functions with machines.
In fact, Japan is among the leading countries for automation – Japanese companies make more than 50% of all industrial robots and computer-controlled systems globally. Companies like Keyence and SMC Corp have been at the forefront of the industry, with high levels of profitability, superior returns on invested capital and healthy balance sheets. Over the past 10 years, Keyence and SMC Corp have delivered total returns of 23% and 15% compounded annual growth respectively.
Nihon M&A Center, a specialist corporate finance intermediary that facilitates the sale of small to medium-sized enterprises/companies (SMEs) to third parties, is another example of how Japan’s ageing population can provide attractive and sustainable investment returns.
Historically, as SME owners neared retirement age, the usual succession route was to pass the business on to family members or relatives. However, as the younger generation have increasingly chosen to pursue other interests, it has become common to find a third party to take over the reins instead – thus, demand for specialist consultants such as Nihon M&A began to grow.
According to Nihon M&A, the potential market size is substantial. There are around 600,000 SMEs (excluding micro-enterprises with less than 10 employees) in Japan. Of these, around 30% are profitable and 65% of those do not have a successor – which implies that 120,000 business owners might want to sell their business when they retire in the future.
Nihon M&A is the absolute leader in this niche area, with 19% estimated market share based on deal volume, followed by M&A Capital Partners, Strike and Yamada Consulting (with 6%, 5% and 2% market share respectively). The remaining 68% of the market consists of numerous unlisted players handling much smaller deals (which means that there is no customer overlap with the four main listed M&A intermediaries).
Investment banks have not entered the SME market, given the smaller deal size; and Japanese security companies and mega banks have found it marginally more cost effective to refer SME deals to specialist consultants such as Nihon M&A. As a result, Nihon M&A has little competition in this space; and sales have compounded by 20-25% over the last 10 years.
We believe the SME M&A market should prove to be resilient in an economic downturn, as SME owners tend to focus on securing a buyer that will take care of their legacy and employees, rather than on obtaining the highest valuations; therefore, we believe Nihon M&A should continue to find a steady market for their services.
You can see parts 1-4 of this six part series here, and look out for part 6: The mythical correlation between Japan equities and a weak JPY.
1 World Population Prospects 2019, United Nations
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