Giant pension wants more variety in Japan PE

Japan needs a greater variety of managers – which means larger and global firms – in its predominantly mid-market focused private equity market, according to one of the country’s largest public pension funds.

“We like small and mid-market private equity opportunities. However, in Japan private equity, we also need large players. After all, Japan is still the third largest economy in the world,” Shuzo Takahashi, head of private equity at the $107 billion Pension Fund Association, told Private Equity International.

“I don’t mean that bigger is better. But almost every general partner plays in the same stage and similar strategy so far, [and] I don’t think it’s that healthy. For the domestic industry to grow, we need a variety of players in the market.”

Global firms Blackstone, KKR and CVC, for example, have in the last three years built up their investment teams and ramped up dealmaking. Meanwhile, Apollo Global Management is reportedly establishing an office in Tokyo and is on a hiring spree, while Swedish firm EQT Partners is also considering an outpost in the capital.

While activity on the foreign manager front has been on the rise, Japan’s buyout market is mainly focused on the small and mid-sized segment. According to Bain & Company’s 2018 Asia private equity report, Japan may have represented more than 10 percent of deal value for the region in 2017, but large transactions are still few and far between.

According to Takahashi, investors are expecting Japan to catch up with US and European private equity markets. He wouldn’t be surprised, he added, to see the emergence of sector-specific players in the near future, as well as the increased use of a buy-and-build strategy as a key value creation tool.

“Local GPs are perhaps doing very well generating organic growth only, so I think there’s a lot of upside potential or room for improvement,” he said.

PFA was established in 1967 and manages assets of corporate pension plans in the country. It has been investing in private equity since 2002, consistently deploying between $600 million and $700 million annually to the asset class via fund commitments and co-investments. Private equity makes up 4 percent of its total assets under management, or more than $4 billion in net asset valuations.

Takahashi said he expects to continue this investment pace, even as a market downturn is looming.

In terms of geographic exposure, PFA has approximately 60 percent of its private equity investments in the US, 20 percent in Europe, 10 percent in Japan, and 10 percent Asia and the rest of the world.

The investor has backed funds managed by mid-market firm The Longreach Group and Tokyo-based fund of funds manager Alternative Investment Capital, according to PEI data.