Japanese LPs: Building consensus

Japan Post Bank’s journey into alternative assets began with a set of people moves. Katsunori Sago, former executive vice chairman of Goldman Sachs Japan, joined in June 2015 as CIO. Over the next few months, he was joined by fellow Goldman alumnus Naohide Une, who was appointed head of the strategic investment department, and Tokihiko Shimizu, previously of the Government Pension Investment Fund (GPIF), who became head of private markets.

By April of the following year, Japan Post Bank had established a private equity investment department and made its first fund commitments. As of March of this year, the bank had JPY120 billion ($1 billion) deployed in private equity – a small drop in a bucket that holds JPY209.6 trillion, but one that was squeezed from the tap relatively quickly by the standards of most Japanese institutional investors.

Speaking at the AVCJ Japan Forum, Hideya Sadanaga, head of Japan Post Bank’s private equity investment department, outlined some of the goals for the second year of the program: coverage of domestic PE has now been taken fully in-house; the venture capital allocation has been increased so investments can be made in a wider variety of managers; domestic venture capital is on the agenda; and initiatives ranging from co-investment to buying ownership stakes in GPs are under discussion.

The surprise introduction of negative interest rates gave all Japanese financial institutions greater reason to look to alternatives for returns, but there are important contextual reasons as to why not all Japanese LPs should be considered equal. Japan Post Bank’s push into alternatives followed the listings of the various Japan Post Group entities, and the recognition that consistent cash flow would be required to generate dividends for shareholders.

By contrast, the country’s pension funds, for example, arguably have less impetus to act. Conservatism is ingrained within their cultures and there have been no calls for change – although GPIF’s decision to invest in alternatives, after more than four years of discussion and review, is expected to encourage new approaches across the industry, albeit gradually.

“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?’” said Kengo Torii, a portfolio manager at the Denso Pension Fund. “We had to educate these people from the beginning. It was not easy for us.”

Denso, which has JPY510 billion in assets under management, was restricted to making alternative investments on an experimental basis – with a 3% allocation – until earlier this year when it finally 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. Explaining how the asset class works to skeptical stakeholders who don’t fully grasp how investment performance should be assessed is a challenge.

Japan Post Insurance is also in the process of creating an alternatives program. The description of the decision-making process that led the firm there, given by Tadasu Matsuo, the head of alternative investment, offered a clear picture of why it takes domestic investors so long to move from might do, to have permission to do, and ready to do. Building a strong foundation of internal support is perhaps the most key step in this journey.

As such, the importance of the senior appointments made by Japan Post Bank in 2015 – and the contribution they made to a shift in corporate culture – should not be underestimated. Japanese institutions need strong senior leadership that believe in the long-term benefits of alternatives exposure, as well as experienced executives capable of implementing these programs. It remains to be seen whether there is enough domestic talent to satisfy this demand.

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