An inside look at Japan Post’s PE blueprint

With $1.1bn to invest, Japan Post Investment Corporation will look overseas and 'not compete' with domestic GPs, Japan Post Bank’s Tokihiko Shimizu tells PEI.

Japan Post Bank and Japan Post Insurance are due to set up their private equity investment company, Japan Post Investment Corporation (JPIC) on 9 February, which will have as much as ¥120 billion ($1.1 billion; €880 million) in investible capital.

Tokihiko Shimizu

The move has come as a welcome surprise to some industry observers who are questioning how JPIC would go about deploying so much capital, especially at a time when there is too much competition chasing fewer deals in Japan. Twelve funds closed on their hard-cap or were oversubscribed in 2017, compared to six funds in 2016, according to PEI data.

The average size of funds raised in Japan last year was around $380 million, about one-third the size of JPIC’s ¥120 billion fund.

In an exclusive conversation with Private Equity International, Tokihiko Shimizu, Japan Post Bank’s senior managing director, responds to some of these concerns and gives an insight into JPIC’s ambitious investment roadmap. Here are some key takeaways:

It will not solely focus on domestic investments

The rest of Asia will be a core investment target for JPIC. Shimizu told PEI that 30 percent of the $1.1 billion fund will be invested overseas, with Asia as a favoured market. The remaining 70 percent will be used to back Japanese companies.

“The Asian investment opportunity is a core target of JPIC’s overseas deals, however this doesn’t mean we don’t want to invest in the US or Europe. When executing the direct deals, the distance from Japan is very crucial, therefore potential markets like China, Singapore and Hong Kong are attractive,” Shimizu said. He added that JPIC has an eye on China because of its growth story and its stable political situation.

JPIC’s overseas investing push will also be good news for the Japanese investment managers, a Tokyo-based GP noted, as JPIC may increase its LP commitments or increase the number of GP relationships to get access to more deal flow.

It will shake up the local deal scene

According to Shimizu, JPIC’s investment strategy consists of three buckets: buyouts will make up 60 percent of investments; late to growth-stage space or technology-related investments will account for 30 percent; and the remaining 10 percent will be in special situations, turnaround transactions as well “revitalisation of the Japanese economy”.

JPIC plans to take minority stakes in companies, ranging from about $10 million to $20 million on the smaller end and between $100 million and $150 million for larger deals, depending on the strategy and opportunity of the investment alongside GPs and other co-investors.

A Tokyo-based managing partner of a fund of funds, however, noted that there are already “too many big funds chasing too small a market”. With roughly $700 million to invest domestically, JPIC will stand among the likes of Unison Capital, Polaris Capital and Integral, as well as regional players such as KKR, MBK Partners and Bain Capital who have been active in the market in the last one year.

According to PEI data, 12 Japan-focused funds raised a combined $4.6 billion in 2017, on the back of strong economic fundamentals post-Abenomics. Add roughly $700 million from JPIC and another ¥100 billion from Nomura’s re-launched private equity unit and that’s a large amount of dry powder for a market where private equity penetration is still less than one percent of GDP, according to a Bain & Company study.

Reacting to some of these concerns, Shimizu, however, stressed that an important policy for the investment fund is “not to compete with another GP”.

“For Japan Post Bank as a whole our core private equity strategy still remains fund investing. We’ve only just set up our direct investment strategy, which we think is complementary to fund investing, and do not want to compete with another GP for acquisition targets.”

Expect more Japanese LPs to participate in the fund

The total investible capital for JPIC amounts to ¥120 billion, of which ¥60 billion comes from Japan Post Bank, ¥30 billion from Japan Post Insurance and another ¥30 billion is set to be raised from third-party investors.

Shimizu noted that the firm has yet to decide who to tap among the LP community, but discussions have already started with potential investors.

Meanwhile, industry watchers tell PEI that JPIC is likely to make its first move within the home market and approach pension funds, insurance companies, trust banks and funds of funds.

More hiring on the cards for JPIC

JPIC is in the process of hiring investment professionals outside of Japan Post that have buyout and venture investing experience. Shimizu and two unnamed investment professionals are moving from Japan Post Bank to the new investment company and Shimizu expects “several people who have strong experience on the GP side” to join the team in the next few months as it seeks to build its know-how in private equity investing.