Japanese LPs gradually turning to private equity - AVCJ Forum

The Pension Fund Association (PFA) is a longstanding investor in private equity, which currently accounts for close to JPY600 billion ($5.7 billion) - including JPY250 billion in uncalled commitments - of its JPY11.5 trillion in assets under management. Shuzo Takahashi, the association's co-head of private equity, said that time is a key consideration for LPs when building an alternatives program.

"You start with a particular amount of capital but you have to make ongoing commitments and have diversification. You try to go by size, strategy, sector, and geography, and diversify the vintage years - and time is a major factor that might be a hurdle for institutional investors," he said. "You need to ask yourself whether your organization is able to be patient in reaping the harvest of your investments."

Given this concern about the j-curve effect, plus a relatively low target return of 3% of most pension funds, hedge funds were the initial focus of most LPs. However, this appears to be changing as a result of public market volatility and the introduction of negative interest rates earlier this year, which was wiped out the yield available on many bonds.

"Japanese pension funds need to generate a certain amount of expected returns and it is getting tougher. They can take the liquidity risk so they are going into private equity and infrastructure," said Tadasu Matsuo, general manager for alternative investment at Daido Life Insurance, who also advises other institutional LPs on their allocation strategies. "There is merit to going into alternative asset classes."

Denso Pension Fund is currently reviewing its private equity allocation with a view to increasing it to as much as 10%. When Kengo Torii was transferred from Denso's finance department to become a portfolio manager with the fund in 2013, one of his first tasks was selecting private equity fund-of-funds. Torii said he struggled to get good information on the industry from asset management consultants or private equity firms, the latter being understandably focused on selling their funds.

"I had difficulty getting the right advice," he noted, adding that Denso Pension Fund still only has one full-time professional and one part-time professional concentrating on alternatives, which makes this kind of long-term, heavy due diligence investment challenging.

According to Toru Masuda, general manager in the investment product development department and head of private equity at Sumitomo Mitsui Trust Bank (SMTB), input from experienced partners is crucial to understanding the asset class. He explained that many financial institutions struggle because they consider PE commitments in the context of lending - focusing on deposit and loan frameworks - rather than investment. "We try to force ourselves to use that logic and we get lost," he said.

SMTB makes its own private equity investments as well as facilitating investments by its institutional clients - with JPY250 billion invested across about 200 funds since 1990. Approximately 20 pension funds make commitments to the asset class through the group but only a handful do so on a consistent basis.

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