Japanese LPs' PE programs slowed by internal resistance - AVCJ Forum

"Japanese people are good savers, but not so good as asset managers. That is why internally we get a lot of questions, like ‘Do we have to do it?' and ‘Why can't we just hold cash because it doesn't lose value?'" Kengo Torii, a portfolio manager at the Denso Pension Fund, told the AVCJ Japan Forum. "We had to educate these people from the beginning. It was not easy for us."

Denso has JPY510 billion ($4.6 billion) in assets under management but alternative investments have so far been made on an experimental basis with an allocation of no more than 3%. However, earlier this year, the pension fund won approval for a formal program. Over the next 15 years, alternatives exposure is expected to rise to 20%, of which 10% will be in private equity.

Japan Post Insurance is also in the process of creating an alternatives program; it is looking to get involved in private equity towards the end of this year. The change in strategy was prompted by the Japan Post Group entities going public – higher investment returns are needed to satisfy shareholders – and it became a greater priority when the government introduced negative interest rates in 2016.

Japan Post Bank, which had JPY209.6 trillion in assets as of March compared to Japan Post Insurance's JPY81.5 trillion, established its PE department in December 2015 and has already deployed JPY120 billion in the asset class, 90% of it overseas. Hideya Sadanaga, head of the private equity investment department, noted that his 10-strong team was now strong enough to take coverage of domestic PE fully in-house. Gatekeepers are still relied on for overseas commitments.

Japan Post Insurance started later and Tadasu Matsuo, head of alternative investment, offered a snapshot of a considered and conservative decision-making process. "We cannot drive at full speed with one wheel; risk management has to be taken into consideration," he said. "We've had detailed discussions about investment criteria, monitoring and risk management."

However, building internal support for private equity is essential if a program is to succeed, not least because distributions will not come immediately. "Being in charge of PE investment you have to learn lessons from the past and gain consensus within your organization," said Shuzo Takahashi, head of the private equity group at the Pension Fund Association (PFA).

The PFA made its first PE commitment in 2002 and the asset class now accounts for JPY350 billion of its overall holdings of JPY11 trillion. But Takahashi observed that PE returns are still misunderstood among Japanese institutions. Matsuo added that there is a tendency to measure performance based on annual profit and loss accounts rather than distributions to paid-in capital, IRR and investment multiples.

Torii places some of the blame for these communication problems on the GPs themselves. When making the case for increasing Denso's PE allocation, his team struggled to come up with criteria through which to offer a clear assessment of the asset class. GPs and consultants did not prove to be much help. "PE investment should be easy but the level of communication between the industry and people like us seems insufficient," he said. "That is the difficulty we had last year."

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• Topics
• North Asia
• LPs
• Fundraising
• Japan
• AVCJ Events
• Japan Post Bank
• Japan Post Insurance
• Denso Pension Fund
• Pension Fund Association