Japan’s private equity market: The LP perspective

LPs can understandably take differing views on Japan. And, fundraising appetite within the country remains low due to the adverse effects of the financial crisis. Japan saw only $1.3 billion raised for locally-focused private equity in 2009, versus over $4 billion in 2008 and $7.5 billion in 2006, according to AVCJ figures.

“In Japan, the large buyout market has been difficult recently, as competition for a few deals has been fierce,” says Sebastiaan van den Berg, Principal at HarbourVest Partners (Asia) Ltd. “However, we see attractive opportunities in the mid-market space, where significantly more investment opportunities are available.”

Japanese LPs have specific needs that bear considerably on the country’s recent economic and demographic story. “Key requirements of Japanese investors are preservation of capital and growth (increase in AUM) of portfolio returns, in line with life expectancy, which has grown in excess of what was envisaged at the time the pensions and insurance funds were set up,” notes Akhil Awasthi, Managing Partner at the Tata Capital Growth Fund.

“Japanese pension funds are starting to shift from their largely domestic public equity exposure to other asset classes, such as alternative investments,” confirms van den Berg. That may not be a quick change, however. “While some early market participants started investing into this asset class from as early as 2000, the majority of pension funds are still watching the market without participating in alternative investments.”

This naturally raises the question of whether private equity can meet the needs of Japanese LPs, and if so, through which avenues and which strategies.

“We believe private equity continues to offer attractive investment opportunities to Japanese and international LPs,” observes van den Berg. “However, manager selection and appropriate stage and vintage year diversification will be critical.”

Those Japanese LPs who already have private equity programs have long looked to developed markets funds with strong brands as preferred GPs. However, the GFC may have changed that as they look to places like China and India. “Private equity investments should be able to provide the increase in AUM desired by them, especially those in economies such as India and China where a long-term sustainable growth cycle is visible,” Awasthi believes.

As with the country’s corporates, Japan’s LPs are also starting to look at their Asia Pacific backyard as their source of growth.

“Growth is an essential component of portfolios for Japanese investors, since it has proven to be resilient in spite of financial crises, and creates a virtuous cycle where incremental investment generates gains which fuel investments,” observes Awasthi, whose fund specializes in delivering the proceeds of Indian growth to Japanese investors.

“In the current environment, we recommend that LPs invest broadly across all markets – US, Europe, Asia, and other ROW – and all stages,” counsels van den Berg. However, he also cautions that, “given the very long-term nature of private equity, it is very difficult to predict which strategy will outperform over the long term.”

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• Topics
• North Asia
• LPs
• Performance
• HarbourVest Partners