The fastest-growing large investment opportunity you’ve never heard of

Japan has quietly become the second-largest market on Earth for shareholder activism – funds that push for companies to take measures to improve their valuation. What is the opportunity, why does it exist, who is already participating, and what is the best way to play it today?

Jamie Halse is the founder and Chief Investment Officer of Senjin Capital, a Sydney-based manager specialising in deep-value activism in Japanese small-cap equities. This article is general in nature and does not constitute financial advice.

Corporate Japan spent three decades hoarding cash and treating its shareholders as an afterthought. The government has now spent more than a decade pushing to revitalise Japan’s economy through harnessing the power of shareholder capitalism to drive productivity growth via its corporate governance reform program.

The result has been bonanza-type returns for shareholder activist strategies and private equity, taking advantage of conditions like those that existed when the market for corporate control developed in the US in the early 1980s.

This is an opportunity most Australian investors have not been aware of. This article aims to change that.

Why does the opportunity exist?

Japan has world-class manufacturers, global champions that are household names like Toyota and Nintendo, and companies critical to the AI boom like Tokyo Electron, Advantest, and DISCO. The problem when looking at the broader market, particularly amongst more traditional companies, is a management culture that, for most of the postwar era, was simply never asked to think about shareholders. Companies were run for the benefit of employees, customers, and a nebulous concept of society as a whole, rather than for profitability and cash distributions.

With the bursting of the bubble in 1989, risk aversion amongst salaryman executives watching demand collapse, but with no incentive to restructure underperforming businesses, led to huge amounts of excess capital accumulating on balance sheets. Cash piled up in bank deposits or was deployed into “safe” investment properties, cross-shareholdings propped up the management teams of suppliers and customers but absorbed shareholders’ funds, and half-used factories occupied land bought decades prior and now worth many multiples of its stated book value.

Where acquisitions were completed, they were generally not integrated, because integration meant redundancies, and redundancies meant breaking the social contract with employees in a “job-for-life” system.

The numbers are startling even today. More than one third of Japan’s ~3,700 public companies still trade below their often understanded book value. Close to half of all companies, even in the better-governed Prime market earn a return on equity below their cost of capital.[i]

These below-book companies are generally badly run with poor capital allocation. They are cheap for a reason. However, they represent a huge value opportunity that can be unlocked should management gain religion on reform, or should management be replaced by the shareholders.

Thanks to the corporate governance reform and shareholder pressure, management teams are evolving, capital is being allocated more efficiently and companies are being restructured, but outside of limited pockets, progress is slow. Shareholder activism provides the impetus that is lacking, to hasten the reform.

The money has already arrived

This is no longer a contrarian secret - except maybe to Australian investors.

Japan is now the second-largest market for shareholder activism in the world, behind only the US. Almost US$100bn has been allocated to the space,[ii] and the number of activist & engagement funds working the market has grown from roughly 10 a decade ago to around 75 today.[iii]

This is reflected in the public campaign activity. A record 139 shareholder proposals were filed for companies’ 2026 AGMs, calling not just for measures such as dividend increases and buybacks, but in 19 cases – for the dismissal of an existing director or the appointment of a new one.[iv]

Australian institutional money is already there. In early 2025, the Future Fund – Australia’s A$337 billion sovereign wealth fund - appointed Singapore-based Effissimo Capital Management, to its equities roster, joining backers such as the Canada Pension Plan and a string of US endowments. Other major Australian investors such as Qantas Super (now ART) and Sydney University Endowment have participated for even longer. When sovereign and pension money allocates to a niche strategy, it is no longer niche.

The big names - and why size is a handicap

The heavyweight activist managers are a blend of global and Asia-based specialists. Managers do not disclose their AUM publicly, but Singapore-based Effissimo is estimated to run more than A$20bn, Hong Kong-based Oasis is similar, followed by the Murakami family’s holdings, 3D Investment Partners (Singapore), Elliott (US), and Dalton (US), all of which likely manage A$5-$10bn or more in Japan activist exposures.

With the rapid growth of recent years, the major players have been forced to target ever larger companies. Elliott successfully took on Toyota Industries and is engaged with Daikin and Mitsui Fudosan among others. Oasis is taking on Kyocera and Kao. The market capitalisation of each of these companies is tens of billions of dollars.

A fund growing to over $5 billion AUM must either write bigger cheques to move its own needle (Oasis’ approach), or become a lot more diversified (Dalton’s approach). Bigger cheques push the activist into the large cap space – better covered by broker research, and where the corporate governance reform is much more advanced. Many of Oasis’ major successes (for example, Fujitec and Sun Corporation) came from companies valued at around $1bn or less when Oasis started buying.

Activists are typically concentrated, running no more than 3-4 public campaigns at a time, and maybe 5-10 large positions. Greater diversification means dilution of the returns generated by focused campaigns – a Chief Investment Officer cannot stay on top of a dozen or more intensive campaigns even if the team is well-resourced.

That is not to say that the large funds cannot deliver strong returns, or to say that the opportunity at the larger end is fully played out – it is not. It is just to say that it becomes more difficult to produce the returns that we experienced when the funds were at a smaller scale.

The deepest mispricing is found amongst small companies with no broker research, trading at a fraction of the cash and other hard assets on their books. These stocks are too small for the big players to bother with, but together comprise a very large opportunity set.

The history of the opportunity

Before the war, a handful of family conglomerates - the zaibatsu - controlled around half of Japan's economy. The US occupation stripped the families of their assets and broke up the ownership relationship between the conglomerate subsidiaries. However, business relationships survived and reorganised.

When postwar corporate raiders emerged to take advantage of the freestanding listings without zaibatsu support, the old networks defended themselves by buying shares in one another, clustered around a main bank: you hold my stock, I hold yours, and we vote for each other's management at the AGM. This became the keiretsu cross-shareholding system, and it neutralised outside shareholders by design.

Compounding this dynamic, the domestic asset managers who ran the nation's savings were mostly owned by those same banks, and so practically never voted against the companies their parents relied on for business. A foreigner could build a stake and file a sensible proposal, but without domestic support it died.

The opening came when the 1980s bubble burst. The banks at the heart of the keiretsu, buried in bad loans, were forced to recapitalise. They funded this in part by selling down their cross-shareholdings. As those holdings unwound, activism became possible.

The early-2000s activists made great returns but soon provoked a backlash. A hit television drama, Hagetaka ("Vultures"), cast foreign investors as scavengers picking over Japanese corporate carcasses; Yoshiaki Murakami, the era's most prominent home-grown activist, was prosecuted and convicted for insider trading under rules that had previously sat almost entirely unenforced; and in 2007 the Supreme Court upheld Bull-Dog Sauce's poison-pill defence against America's Steel Partners. The establishment had circled the wagons. Capital retreated, and the Global Financial Crisis finished the job. Japan’s cheap stocks became ridiculously so.

The turning point was Shinzo Abe's appointment as Prime Minister in 2012, with corporate governance at the heart of his agenda. His diagnosis was that the lost decades owed much to how companies were run, with capital trapped and labour marooned in businesses management would not restructure.

The pivotal reform arrived in 2014: the Stewardship Code. Voluntary, but every major domestic asset manager signed, because not signing would have been conspicuous - and having signed, they were bound to act for their clients rather than their parent banks' relationships, and to disclose how they voted. A large shareholder bloc was now required to evaluate AGM proposals on their merits.

A Corporate Governance Code followed in 2015, again near-universally adopted, pushing companies to appoint independent directors (a rare presence prior to this), and to set return-on-equity targets. From the late 2010’s, Warren Buffett, who had once said he could find nothing worth doing in Japan, built his now-famous stakes in the great trading houses, citing the improvement in governance and capital allocation.

Then came the two blunt interventions of 2023. The TSE publicly called out every company trading below book value and published a list of those who released plans to fix their low valuation – shaming those who did not appear on the list. Then, METI's takeover guidelines told boards to engage seriously with credible offers and justify any rejection to shareholders, handing activists a government-sanctioned argument.

Take-private transactions have more than doubled since. Management teams increasingly choose to delist at a premium, funded by private equity. Unsolicited buyout offers – almost non-existent previously, have become commonplace. Even fully hostile bids have seen success.

How activists actually create value

Most activist engagement begins behind closed doors but may then escalate to public campaigns involving shareholder AGM proposals that are binding on the company if passed. One or more activists may buy 20-30% of the company’s voting shares or greater and ultimately seek to add to and/or replace the board of directors.

Activist targets typically have overcapitalised balance sheets, unprofitable or weakly profitable non-core businesses that could be sold or closed down, and core businesses that have note been operated to maximise long-term profitability. Changing management’s approach to how such companies are run can deliver huge upside – a dividend payout ratio that goes from 30% to 60% creates a share price response. Similarly, the sale of low return assets and redeployment of that capital into more productive uses increases the company’s return on equity, which can also drive a re-rating.

Ultimately if a management team is not willing to change in the public markets, activists can push for a sale to private equity. Restructuring can then take place privately, generally under new management.

The private-equity endgame

One of the most powerful tailwinds for activists is the explosion in take-private deals. Private-equity-led buyouts of Japanese companies reached US$27.6 billion by August 2025 - nearly triple a year earlier - and were on track to beat the 2023 record of US$40.3 billion. Japan-related M&A hit US$385.9 billion in 2025.[v]

Private equity capital has flooded into Japan, chasing the low-hanging fruit in overcapitalised balance sheets, unoptimized P&L’s, and cheap leverage. Henry Kravis, co-founder of KKR, has said that if he and his partner George Roberts were 30 and spoke Japanese, they would be moving to Tokyo.[vi] Anecdotally, returns have been phenomenal, with Tokyo being the most profitable office globally for both Bain and KKR – the two biggest players in Japan.

There is a symbiosis between activism and private equity in all markets, but this is especially pronounced in Japan, where PE firms have too much capital and not enough deal flow. An activist takes a stake in an undervalued, undermanaged, cash and real estate rich company and agitates for change. Management often tires of the fight and opts for a sale to private equity at a premium. In Japan, there is practically always a buyer when a public asset comes to market.

KKR's US$3.8 billion take-private of Fuji Soft following a bidding war with Bain Capital, was the result of a campaign by 3D Investment Partners. Fujitec’s sale to EQT came after Oasis replaced Fujitec’s board of directors. Topcon, Hogy Medical and T&K Toka were all privatised as a result of activism, delivering fantastic returns for investors. Private equity funds cannot buy stakes on market and force a sale, and do not wish to tarnish their reputations in Japan by utilising a public “bear hug”. So they are, to some extent, reliant on activists.

Sometimes the activist is large enough on the shareholder register to act as kingmaker, and gains the opportunity to reinvest alongside the PE fund in the privatised entity, retaining highly levered upside to major balance sheet restructuring and operational improvement.

What is the best way to play this opportunity?

ASX-listed Japan ETFs, covering indices dominated by large-cap stocks, are raising record amounts as investors chase Japan’s bull run. The easy money here has been made though, and investors risk disappointment. The TOPIX banks index is up almost 5-fold over the last five years as interest rates have increased,[vii] with the megabanks re-rating from as low as 0.3x price/book to now 1.5x or more in the process.[viii] The insurers have responded similarly, and so have Buffett’s trading companies, which have rerated well ahead of profit growth – increasing three to five-fold over five years. Flash memory company Kioxia was perceived as a basket-case, and is now a champion – appreciating more than 50-fold from IPO, and rerating from 1.5x price/book to 35x.[ix]

When you buy the index, you are no longer buying the governance reform and activism story – it is mostly priced in, even ahead of management teams fully changing. You are buying hopes about the AI boom, and the future path of growth and interest rates.

Similarly, it is the largest activist funds that have continued to attract the lion’s share of capital. Investors seeking to replicate the consistent outsized returns that supported the major activists’ growth, are likely to be disappointed unless they look to smaller emerging managers that currently invest where the large funds formerly focused but now cannot.

While deep value used to be present across the market, now it only remains prevalent at the small end. This is where you still find the classic setup: a profitable, unglamorous manufacturer with, say, a $200 million market capitalisation sitting on $120 million of net cash, $20 million of listed securities, land & buildings worth another $100m or more carried on the books at a fraction of that amount, excess working capital accounting for even more value. The cash generative business is thrown in for “free”.

These stocks typically trade on dividend yield unless an activist arrives, because shareholders never expect to see any change to how the company operates. There is no research coverage, the companies are unknown. Activists uncover them by turning over many metaphorical rocks.

To give a sense of the types of opportunities on offer, I have included overviews of Senjin’s top three individual investment opportunities:

Company One: a manufacturer of niche industrial products used for infrastructure and utility related equipment with consistent replacement demand and roll-up M&A growth opportunity:

Company Two: The #1 player in a specialty contracting business exposed to the repair & replacement of aging infrastructure, with roll-up growth opportunity:

Company Three: A general contractor with roll-up growth opportunity and stable profitability thanks to cost-plus contracts and industry capacity shortages:

The combination of bloated balance sheets and severely undermanaged P&L’s, plus a governance regime pressuring companies to reform, and a take-private bid as a backstop, with little competition from large funds or passive money, is why small cap activism is, in our view, the most compelling corner of the Japan opportunity and one of the best, perhaps the best, we have seen globally during our careers.

In conclusion

The opportunity from shareholder activism in response to Japan’s corporate governance reform is quite apparent. It is already proven through strong returns generated by the early-mover managers who have attracted large swathes of capital. But, they are now precluded from participating in the most prospectively lucrative area of the market by virtue of their sheer size.

Australian investors looking to benefit from Japan’s ongoing reform and cheap valuations should consider looking into small-cap activism.

Capital is trickling into this space also, and as it continues to flow valuations are likely to move up, reducing prospective returns. The current environment may look like an anomaly in a few years’ time.

That is not to say that opportunities to deliver strong returns will not persist, just that the returns are unlikely to be as strong a few years from now, while also being more difficult to generate.

The US is the largest market for shareholder activism globally, and it has been a phenomenon there for more than forty years. Japan still has a long way to go to approach even European levels of shareholder focus, never mind US levels, so there is a path ahead continues to look lucrative.

The market is moving forward, however, and investors chasing the highest probability of the best returns may wish to look into the opportunity sooner rather than later.