What is Sumitomo’s strategy in terms of its private equity portfolio?
Sumitomo has two programmes – one is our balance sheet money investments and the other is [acting] as an advisor to corporate pension funds on investing in private equity and infrastructure. The number of managers we have a relationship with is almost 100. Mainly, [they are] offshore. We have relationships with domestic managers as well, but most of the allocation has been offshore, especially with the US and Europe. Our balance sheet consists of roughly 40 percent US [managers], 25 to 30 percent in Europe, and nowadays 15 to 20 percent in Asia including Japan. The rest will be special situations or global allocations. We mainly invest in country-focused rather than regional managers. We are investing in smaller [GPs] because managers have to establish a local network. In that sense, country-focused managers make more sense for us.
Now that Japan’s $1.3 trillion Government Pension Investment Fund is considering investing in alternatives, do you think other Japanese investors are likely to follow?
If GPIF enters the private equity market it will have quite a big impact because of their size, but at the moment I am not sure whether other pension funds will follow or not. Other public pensions, such as Government Officials Pension Fund or Public School Teachers’ Pension Fund, could follow GPIF, and those are also quite big funds so it may have quite a big impact on private equity. However, for the private sector side – corporate pensions – they have a different agenda. They are now suffering with a cashing out [problem], rather than cash [coming] in. Most of the employees have [reached] retirement age so their balance sheets on the liabilities side are [paying] out. So now we see there is more difficulty for them to invest in illiquid assets such as private equity. So while the public side might follow, the private side [probably] will not.
Why do you think Japanese LPs should be investing in alternatives and are you happy with the returns from your private equity commitments?
Japan is a low interest-rate country so if investors are just focusing on traditional assets it is difficult for them to reach their target returns, even though their target returns are much lower than in other countries – such as 3 to 4 percent. Even with such low target returns it is very difficult if they are focusing on traditional asset classes, they have to go to alternative asset classes. Over the last five years, we have [been satisfied] with private equity returns [and have hit] our target return, which is around 10 to 15 percent across our entire private equity portfolio. Reaching our target returns is partially thanks to the special situations side – so distressed or secondaries – and those have been the boosters of our overall returns. But if we look at the buyout side, now returns are getting lower than before. There is more competition and it is very difficult to identify the very unique transactions globally, especially the big ones in the US and Europe. Before, a large buyout player would set their target returns at 2.5x, but now they say 2x for individual transactions. If an individual transaction gets you 2x, overall returns may be even lower. I personally don’t think that is good enough for us. I don’t intend to kick out large buyout players [from our portfolio], but with only having large buyout players we can’t meet our target returns so we are now including more small- to mid-sized players.