TOKYO -- Japanese investment fund Polaris Capital Group is set, by the end of fiscal 2026 at the earliest, to launch a private credit fund that will be one of the largest in the country, aiming to raise about 100 billion yen ($630 million) in capital from institutional investors, including life insurers and pension funds, Nikkei has learned.

Polaris plans to expand into direct lending through a new subsidiary. The private equity firm at present focuses on acquiring and investing in companies.

In Japan, financing by nonbank lenders is emerging as a new source of funding for companies and more private credit funds are being launched. Even as an increase in mergers and acquisitions has raised demand for capital, major banks, Japan's traditional main lenders, face capacity constraints.

Japanese companies' M&A-related borrowing reached 6.6 trillion yen at the end of September 2023, 2.5 times the prepandemic level, with major banks accounting for 80% of the credit provided. This comes as higher interest rates heighten competition among banks for deposits, the primary source of funding for lending.

Topaz Capital, another investment fund, is also looking to start a private credit fund worth 70 billion yen to 100 billion yen and has already begun raising capital. It plans to allocate as much as 300 billion yen to corporate lending through new and existing funds.

Both Polaris and Topaz will primarily provide financing for M&A deals. Lending rates at major banks are around 3% to 4%, while private credit funds generally charge 4% to 6% because of higher funding costs.

Polaris will focus mainly on subordinated loans and is considering acquiring corporate loans held by megabanks. Topaz, meanwhile, will offer conventional corporate loans for purposes such as capital investment, as well as financing for real estate acquisitions.

M&A activity involving Japanese companies remains strong. According to research firm Recof Data, there were 3,883 M&A deals involving domestic companies between January and September, the highest number on record for the nine-month period. Large-scale acquisitions are increasing and business succession deals are also prominent. More sources of financing are needed to meet demand for funds, and to facilitate industrial and corporate restructuring.

Major banks are nearing the limits of their lending capacity. Their loan-to-deposit ratio reached 51% at the end of March 2026, an increase of 1.5 percentage points over five years and topping the 50% threshold.

Sumitomo Mitsui Financial Group's corporate lending increased nearly 10%, year on year, in September. "It is difficult to expand lending when deposits are not growing," said President Toru Nakashima.

Banks have also started setting up private credit funds. These raise money from institutional investors to finance acquisitions and other transactions. Unlike direct bank lending, financing through these funds is less likely to be subject to international capital adequacy and other requirements, making it easier for them to provide large-scale financing. Sumitomo Mitsui Banking Corp. established a fund in June in collaboration with U.S. asset manager Neuberger Berman. It aims to expand the fund's capital to 500 billion yen over the next five years. Mitsubishi UFJ Financial Group is also joining forces with U.S. asset management giant BlackRock and other asset managers.

Investment funds have traditionally focused on acquiring companies and making a profit by increasing their value. But as interest rates rise, lending is becoming increasingly attractive.

Private credit has become a major source of financing in the U.S. and Europe. North America had $1.5 trillion in assets under management as of the end of 2024, about 200 times as much as Japan, according to U.K. research specialist Preqin.