Japanese LPs: The long walk

Four years ago, AVCJ wrote about Ark Totan Alternative’s advocacy drive. The Japanese placement had spent the 12 months conducting 1,300 meetings with a stable of 300 domestic pension funds to explain the virtues of private equity. It wasn’t the only group on this kind of mission. Every asset manager hoping to secure private equity separate accounts or advisory mandates out of Japan has plowed this furrow. In an asset class known for long-term commitments, cracking the Japanese LP could be the longest game of all.

Investor interest in alternatives is growing. Largely driven by negative interest rates, Japanese financial institutions – led by the likes of Japan Post Bank – have upped their commitments to private equity as they take on more risk in the expectation of greater returns. Fundraisers are also focusing on corporate pension funds and regional banks, while the Government Pension Investment Fund (GPIF) is seen as the key to unlocking capital from state-linked pension plans.

Should they succeed, the payoff could be enormous. “We go to Japan and it can be very frustrating, but we have to keep plugging away to open up the market, it’s such a big savings pool,” one Asia-based GP observes. Once the private equity story has been sold to Japanese institutional investors, though, the issue becomes who deploys the capital for them.

In Coller Capital’s most recent Global Private Equity Barometer, LPs were asked about the biggest obstacles to improving their returns. Limited resources was the top answer, with 63%, followed by a lack of high-quality talent and not getting large enough allocations to funds, on 58% and 52%, respectively. Look at the responses from Asia-based LPs in isolation and a different picture emerges. Talent shortages were identified as the biggest challenge by 86% of respondents; limited resources was second on 68%.

While Japan isn’t the only market in the region that struggles to find qualified people to run private equity programs, industry participants make two observations. First, Japan stands out as a jurisdiction in which marketing is made very difficult because LPs don’t have the experience to make informed decisions. Second, the progress China has made in this area in recent years far outstrips Japan.

Blame for these deficiencies is attributed to rotation programs within institutions – investment professionals cannot develop the specialist skills required in private equity if they must switch roles every five years – an inability to compete for the top talent on price, and Japanese business culture in general. What the industry doesn’t have is a near-term solution, unless more overseas-trained Japanese can be tempted into LP investment roles.

As a result, these institutional players will probably be very reliant on gatekeepers as they build up their alternatives exposure. And it will take time to achieve scale. One placement agent recalls making 12 visits to a pension fund before securing a commitment to a US fund through a gatekeeper. The check size was $5 million.

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• Topics
• North Asia
• Fundraising
• LPs
• Japan
• Appointments
• Japan Post Bank
• Government Pension Investment Fund (Japan)