JAPAN’S aging population may be bad for the economy but it is giving dealmakers a break. As more owners of small and medium-sized businesses reach their golden years without grooming a successor, some are turning to private equity (PE) firms for capital and management expertise.

    The number of older owners has been rising, and a low birth rate means that there are often precious few heirs to take over from them. Even when the owners have children, they often reject the idea of taking over from their parents, while some just don’t have the mojo for business, according to private equity investors and a government official who have studied the question.

    And with private equity firms increasingly scouring for value among small and medium-sized companies that may have great products but haven’t had access to the capital needed to fulfill their potential, there are an increasing number of matches being made. Sometimes the firms are sold outright, on other occasions the private equity firm will initially take a partial stake with a view to controlling the entire company at a later date.

    Katsukiyo Mizumoto, the president of bean sprouts producer GGC Group, is an example of an owner who responded positively when a major private equity firm — in this case the Washington, D.C.-based Carlyle Group — came knocking on his door.

    The 65-year-old said he had been unable to groom a successor from within his family or from inside the company, which has annual sales of about 8 billion yen (US$79.3 million). He said he had become such a dominant figure that his managers had not risen to prominence.

    “I am losing my strength each year. But because I had adopted a top-down management style, my staff only wait for my decisions,” said Mizumoto, who took over the company from a long-term business acquaintance more than a decade ago.

    Carlyle said it invested an undisclosed sum in GGC in March. And, according to Mizumoto, it is now helping him to find new executives and to expand the company’s sales area from western Japan to Southeast Asia and other parts of the region.

    Deals that revitalize such firms could be important in a nation in which small and medium-sized companies account for 99.7 percent of Japan’s 3.8 million firms and employ about 70 percent of the nation’s work force.

    Last year, 23.3 percent of company presidents in Japan were more than 70 years old, compared with 18.4 percent in 2010, according to research firm Tokyo Shoko Research. The average age of retirement of the heads of small firms was 70.5 years, a government survey showed.

    “Succession issues have become very urgent,” said Shinichiro Kawata, an official at Japan’s Small and Medium Enterprise Agency, adding that when there are children they are often deterred from getting involved because of weak corporate performance.

    The private equity world’s focus on small and medium-sized businesses is partly the result of a dearth of larger private equity opportunities in Japan as major businesses are often resistant to radical change. (SD-Agencies)