Global GPs and Japanese LPs: Stirring the pot

When Vertex Venture Holdings closes its newest fund later this year, it will be the first vehicle managed by the Temasek Holdings-owned VC investor to feature significant involvement by Japanese LPs. The firm has been looking to bring Japanese institutional capital on board for some time, but from the beginning it knew the courtship process would be anything but quick.

“We started researching the Japan market ourselves almost three years ago, going there regularly to meet all kinds of advisors to get a feel for the market trends,” says Kee Lock Chua, CEO of Vertex. “Then a year ago we started working on a more specific target audience and identifying the potential partners from Japan that we could accept.”

The team’s patient approach has paid off, with Aozora Bank and local investment firm Risa Partners making commitments of $20 million and $50 million, respectively. Vertex expects Japanese LPs to account for about 20% of the fund’s $770 million corpus, which will be invested in growth-stage technology businesses in the US, China, India and Southeast Asia, and Israel. Along with financial services players, the GP hopes to attract investors from other sectors seeking exposure to the next generation of disruptive technology start-ups.

For Vertex, attracting its first Japanese investors validates its view of the country as an increasingly fertile ground for LP relationships. Many others feel the same way, as evidenced by the emerging wave of international GPs passing through Tokyo.

Despite these positive trends, Japan is still a challenging market and likely to remain so, particularly for those without previous exposure to the country. GPs hoping to land a commitment must put in the time to build relationships, find a way to differentiate themselves from their competitors, and be prepared to see the process through, no matter how long it takes.

Money talks

For many investment professionals in the region, the last few years have been marked by a flood of interest in Japan from managers anxious to do business in a country they dismissed less than a decade earlier. “It used to be I’d have to sell clients on coming to Asia, and Japan in particular,” says Chris Lerner, head of Asia at placement agent Eaton Partners. “Now every client asks me about what the market for institutional limited partners is like in Japan, and when they should be preparing to come.”

The obvious draw for GPs is the vast pools of capital held by the country’s public pension funds, led by Government Pension Investment Fund (GPIF) with JPY151.4 trillion ($1.4 trillion) in assets under management as of December 2018. Only 0.21% of the total was invested in alternatives, a small fraction of the 5% target. Meanwhile, Japan Post Bank (JPB) and Japan Post Insurance (JPI) have both launched PE programs in recent years and are ramping up exposure. JPB aims to invest JPY8.5 trillion in alternatives by 2021, and JPI plans to commit JPY1 trillion over the same time period.

“We’ve seen a real paradigm shift, to acknowledge and embrace the fact that they need to get higher returns,” says a partner with a global PE firm. “And to do that you need to look at private equity in particular, because PE can deploy large sums of capital, it’s long-term, and it’s patient.”

GPIF is seen as the key to unlocking commitments from Japan’s other government pension, but local industry participants describe them as just part of the show. Investors across the board are rebalancing their portfolios, having recognized that more risk is required if they are to hit their return targets. Tuck Furuya, CEO of local placement agent Ark Totan Alternative, expects the greatest effects to be felt downstream of the relative newcomers, among LPs that have historically been more open to private equity but drawn relatively little interest from global GPs.

“With these three players [GPIF, JPB and JPI] coming to the market, it’s a big enough reason to fly to Japan for a meeting,” he says. “But three meetings isn’t going to be worth the time, so they’ll meet with a few more players while they’re there. With all these GPs coming to Japan to build relationships, that’s definitely helping the LPs learn more about the global market and make better choices.”

The education of Japanese LPs has also led to an evolution among those with longer exposure to private equity. Increasingly, a commitment to a PE or VC fund may be motivated by the business opportunities that may accompany the investment. One example of this shift is Japan’s large financial institutions, which in recent years have gravitated toward large global buyout funds. Allocations tend to be relatively small, typically less than $50 million, as the goal is about achieving financial returns than securing opportunities to provide financing for leveraged buyout deals.

“We have observed that it’s not necessary to be the best – even second best is great, and the difference between best and second best often is not so big,” says Shunsuke Tanahashi, head of the Tokyo office for Partners Group. “If they can get a good enough return no matter what, then they can also think about the additional benefits that can come with the relationship.”

Even experienced investors are routinely asterisked as tempting targets for new managers. While these LPs have historically focused on re-ups with existing portfolio GPs, some are thought to be interested in moving away from the safer global firms that typify this strategy. There can be an openness to geographies and strategies that have previously passed over due to perceptions of risk. Asian PE and VC investors could benefit from this trend, as LPs recognize the growth prospects they represent perhaps start to reach out proactively.

“Japanese investors in general are very familiar with US assets, and they know all the players in that space,” says Vertex’s Chua. “But they also know about the growth in Asia, so we’re seeing a lot more interest in that space. We get a lot of questions about how our China fund is doing, how the Southeast Asia fund is doing, and what is our focus for some of these growth opportunities.”

Time and effort

This emerging interest is encouraging, but getting to the finish line with a Japanese investor is far from guaranteed. They have large amounts of capital to invest and many more products to choose from, which means pitches can blend together. GPs must therefore clearly differentiate their offerings from those of their rivals.

Having on-the-ground relationships in Japan is the first step in this process. This can be accomplished through a full-time office in Japan, though those without a local office must go through with a local intermediary, which can be a blessing or a curse. Despite this wrinkle, many managers remain reluctant to commit to the expense of an office and a local license – particularly since most LPs prefer to watch a GP’s performance for at least one fund cycle before considering a commitment.

“There’s one manager that keeps coming to Japan, but they haven’t gotten a single mandate yet,” says Ark Totan’s Furuya. “I told them it’s not a chicken and egg situation: you need an office first, then you get to grow the numbers. But they want to see a mandate to justify the Tokyo presence. We’ve been having this discussion for five years, and they’re still complaining about how difficult the market is.”

The opacity of the country’s investors also complicates efforts to reach out, with most Japanese institutions operate through various gatekeepers. Understanding the networks and decision-making structures can be difficult, though it is time well spent. Maintaining relationships with existing LPs may also involve far more outreach in Japan than in other markets, due to the tendency in financial institutions to rotate personnel between posts. Some LPs – most notably JPB – have abandoned this practice, at least to an extent, but for most, it remains in effect. Managers are sometimes surprised at how quickly they can lose vital contacts.

“Quite often I’ll have GPs argue that they have a good relationship with this or that Japanese institution, but when I ask who is in charge there, their records are very outdated,” says Hiroshi Nonomiya, a partner at Tokyo-based Crosspoint Advisors. “Staying connected and keeping track of people and what’s going on is very important – even if you’ve had a good relationship over the last 10 years, the critical thing is what’s happened in the last two years.”

Despite these challenges, observers encourage GPs that have overlooked Japan in the past to give it another chance. The maturing strategies of experienced LPs mean managers that can make a case for their firms will generate healthy interest, while those hoping to profit from the long-awaited expansion of newer entrants need to start establishing ties today. Even in the best-case scenario, patience will continue to be the watchword.

“I think it would be a misperception to say that institutional investors in Japan aren’t also high-conviction investors – it’s just that the way in which they develop that conviction, and in certain cases the institutional constraints within which they have to operate, are different,” says Eaton’s Lerner. “We’ve had success getting commitments from Japanese institutions within a fund cycle, but it’s definitely more the exception than the norm.”

• Tweet  
• Facebook  
• LinkedIn  
• Google plus  
• Save this article  
• Send to  

• Topics
• North Asia
• Fundraising
• GPs
• LPs
• Japan
• Eaton Partners
• Japan Post Bank
• Japan Post Insurance
• Government Pension Investment Fund (Japan)
• Partners Group
• Vertex Management (II)