Exclusive: GPIF carefully moves toward PE

Takahiro Mitani, head of the world’s largest pension fund, speaks to PEI.

Japan’s $1.2 trillion Government Pension Investment Fund sees private equity as an attractive asset class, but much depends on fund manager selection, Takahiro Mitani, president of GPIF, told Private Equity International in an exclusive interview.

“Compared to listed equities, the risk in private equity investments is higher, though it can attain a higher return if it's successful,” Mitani said. “It will be very important to select a good [fund manager] and investment target. Depending on those factors, private equity could be attractive.”

GPIF is the world’s largest pension fund, managing 121 trillion yen (€870 billion; $1.2 trillion) in retirement savings. It currently has no investments in alternative asset classes, but has been moving in that direction in order to increase returns as a large proportion of Japan’s population ages. 

Last month, a government advisory panel said GPIF should move into new asset classes “including real estate investment trusts, real estate, infrastructure, venture capital, private equity and commodities”, something the fund now is assessing. However, the panel set investments in illiquid assets as a “goal to be achieved” without a proposed timeframe. 

Mitani emphasised that GPIF has not made specific decisions regarding alternatives, but he did provide a broad picture of the fund’s views and approach. 

The fund has been studying the operations of peer pension funds that are investing in alternatives, but no specific pension fund serves as a model to emulate, he said. By law, GPIF must go through a discretionary investment manager or through an investment trust in order to invest, therefore it cannot make direct investments. Separate accounts via gatekeepers is a possible investment route, but the fund has not made any conclusions, he said.

Overseas offices will not be established, but the fund isn’t tied to domestic investment in alternatives.

“There have been voices in Japan that say domestic investment will help to reinvigorate the economy. However, currently the way GPIF views private equity is that there is no distinction between overseas and domestic.”

GPIF will not exclusively make primary or secondary investments, but it is studying secondaries.

“In the context of private equity investment, secondary investments can reduce the J curve, therefore this type of investment has merit and has attracted our attention,” he said.

Mitani emphasised that GPIF will start cautiously and there is no fixed percentage for alternatives in mind. “However, without past experience of investing in these asset classes, the amount cannot be too large on day one.”

For entering new asset classes, the advisory report proposed setting up “baby funds”, which it describes as a small fund within GPIF’s assets, either managed in-house or outsourced “which is invested in an independent and flexible manner”. 

Mitani said the baby fund concept “can be one idea for a vehicle to make alternative investments”. 

However, the pension fund has several big challenges, which include building up internal resources to make investment decisions, he said.

“GPIF does not have accumulated expertise in alternative investments. Therefore, how to bring experts into the institution will be very important and that will affect the investment strategy as well as risk management. Given this situation, GPIF needs due caution when moving forward.”

In addition, the advisory panel recommendations are being studied to determine the difficulty in implementation. GPIF also needs to assess other issues, including the possible consolidation of some public and private sector employees’ pension reserves.

“These are the factors GPIF needs to take into account when contemplating the next step,” Mitani said. 

“It is possible to come to some decisions on alternative investments in 2014, but it is hard to say whether this will actually be the case.”