Japan has long been a tough nut to crack for US and European private equity firms.

Back in 2012, when I began a stint covering Japan's PE market, one of the first deals I reported on was KKR's attempt to buy chipmaker Renesas.

Loath to see a US buyer take control, an investor group that included the government-backed Innovation Network Corporation of Japan swooped in to buy the loss-making company. At the time, that outcome painted a bleak picture of Japan's buyout market for foreign investors.

Nearly a decade later, deals by KKR and other PE investors represent a sign that recent changes in Japan's corporate landscape are beginning to produce rewards for foreign firms in a market renowned for its limitations.

This week, a group led by Bain Capital secured a deal to take control of Japanese industrial conglomerate Hitachi's metals unit for 817 billion yen (around $7.5 billion). Wins like these hint at the potential for more buyout activity.

Bain is now reported to have its eye on yet another Japanese giant: Toshiba. KKR and CVC Capital Partners—the latter of which was recently rebuffed—are also said to be circling the Tokyo-listed asset. If a deal is reached, it could be worth around $20 billion, making it Japan's largest PE-led buyout to date, according to PitchBook data.

It has been a while since Japan has seen PE-backed buyouts on this scale. Such deals peaked in 2017, driven by a combination of shareholder activism and corporate governance reform. In both 2017 and 2018, PE buyouts featuring foreign investors accounted for a large share of deal value, PitchBook data shows. Among the biggest was Bain's $18 billion acquisition of Toshiba's memory business, now rebranded as Kioxia, in 2018.   The deals involving Hitachi Metals and Toshiba are driven by many factors. Hitachi has been restructuring its business for the past decade, pivoting away from electronics hardware toward digital services. Corporate divestitures have long been a prominent feature of Japanese PE buyout activity. But according to The Carlyle Group's Japan head, Kazuhiro Yamada, in a March interview with Reuters, recent deals still represent "the tip of the iceberg."

The Toshiba deal comes as Japan's activist shareholders gain more boardroom power, partly a result of government reforms to improve corporate transparency and protection of minority investors. Toshiba was recently forced to investigate alleged misconduct on shareholder vote tallies amid pressure from activist investors Effissimo and Farallon Capital.

With Japanese opportunities opening up for foreign investors, more PE firms are beefing up their presence on the ground. Among them is Swedish PE giant EQT, which recently opened a Tokyo office as part of its broader efforts to expand in the Asia-Pacific market. Hong Kong-based PAG, meanwhile, recently named two new Japanese co-heads in an effort to further accelerate its investments in the region.

This demonstrates a growing recognition by the industry that those who have found the most success in Japan have already established deep roots there.

Bain, KKR and Carlyle have all built long track records in the market, with local offices, Japanese-speaking country heads and local investment partners.

For all the potential that new conditions are creating in this market, even today Japan still stands apart as a uniquely challenging territory for the PE industry. Many foreign firms are concluding that they'll only make progress by going native and showing patience.

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