AIC works with both foreign and domestic investors. What are the key differences you see between US and Japanese LPs?
Naturally the Japanese investors have assets denominated in Japanese Yen and the Japanese interest rate is quite low and has been for quite a long time. That is why the target rate of return that our Japanese investors are looking for is not actually that high. That is a fundamental difference.
It depends on the client, but in general, not many investors are actively looking for products that look for high returns such as private equity or venture capital. That’s not a sweet spot for Japanese investors.
There are quite sophisticated Japanese investors that are already engaged in private equity fund investment – they have a similar appetite and expectations as US LPs. [But], the majority of Japanese investors are not that [experienced], that’s why Japanese investors in funds are quite limited in number.
If it is a buyout fund, [sophisticated Japanese investors would expect] 20 to 25 percent [IRR], or for an infrastructure fund it would be low-teens or around that level.
If we talk about Japanese pension funds, for example a co-operative type pension fund meaning the fund is contributed to by different companies within the same [industry], those pension funds would target returns of around 5 percent. But corporate pension funds that do not receive support from government directly have quite realistic expected rates of return like 2 to 3 percent.
There aren’t many domestic fund of funds operating in the Japanese market – why is that the case?
It goes back to the first question – Japanese investors are not really looking for high return products. The LP base in Japan is quite small, typically it has been banks and insurance companies but after the global financial crisis there has been an enhancement of regulation on those industries. The banks and insurance companies are maintaining their exposure but they are not expanding.
Outside Japan in the West and even in Asian countries, the LP base is increasing, I believe. Most of the funding is coming from pension funds and sovereign wealth funds. In Japan, we are witnessing some changes in pension funds – they are still researching how they will invest. There are some encouraging movements. Once a leading organisation starts making private equity fund investments in a credible manner, I think most of the pension funds will use it as a good reference. We would really like to see such positive developments for the private equity industry.
AIC is active in Southeast Asia, but a lot of firms have rushed into the market pushing up valuations. Is it wise to start investing in the region now?
In Southeast Asia we started investing in specific funds about five years ago. Our initial investment started in the Asian regional funds that included Southeast Asia. We agree that many people have moved into Southeast Asia, but we still believe that after careful selection, we can find GPs that can invest at competitive valuations.
Typically, these GPs will use their network. In Asia, the sellers’ attitudes may be a little different to the West so if there is an established relationship with the key person leading the fund, then that fund can be in a better relative position in securing the appropriate [valuations] during discussions with the company.