The $1.9 trillion Japan Post Bank has been investing in private equity since April 2016 and has around 0.3 percent of its total assets in alternatives. Tokihiko Shimizu, its managing director and head of private markets, talks to Private Equity International about the bank’s approach to ramping up domestic co-investments and how it plans to build its in-house investment team.
What’s attracting Japan Post Bank to alternatives?
Tokihiko Shimizu: The main purpose for Japan Post Bank to start investing in the alternatives space, especially in private markets, is to diversify our portfolio, to create new investment opportunities and also to establish a core investment strategy which will produce a stable cashflow. We expect our private equity portfolio to be a stable cashflow generator as it matures.
How does alternatives fit in your overall investment strategy?
TS: The bank tries to allocate roughly $60 billion dollars out of its $1.9 trillion [assets under management] to alternative investments, which includes private equity, hedge funds, infrastructure and real estate, in the next several years.
Unlike a public pension like Government Pension Investment Fund, which enjoys long-term investing due to its long duration of liabilities, Japan Post Bank has a shorter duration of liabilities of roughly three years, so our exposure into alternatives should be smaller than that of GPIF’s 5 percent. At the moment we are in discussions to re-calculate and re-optimise our portfolio given that Japanese banks are navigating through an era of negative interest rates. The result may change a bit, but this hasn’t been decided.
How much of your private equity programme is in primaries, secondaries and other strategies?
TS: First of all, we cannot invest directly because we are a bank, and that means fund investment is our core private equity strategy. Our current private equity programme consists of primary investing, secondaries and co-investments. An important thing for us in the first three years of our alternatives programme, which we started in fiscal year 2017, is to allocate more in the secondaries space in order to mitigate the J-curve effect better. We expect to allocate 20-30 percent of our private equity programme to secondaries in its first three years, while more than 70 percent of its programme will be allocated to primary investments with the rest to co-investments.
International LPs have been taking note of opportunities in Japanese private equity. What are you seeing in the domestic market and how do you intend to capture these opportunities?
TS: We expect to see more and more dealflow in Japanese private equity, especially because of homegrown private equity firms focused on the mid-cap and small-cap space. We’d like to capture these opportunities in the domestic market and will look closely at more co-investment or club deals with GPs.
Japanese society has not produced a lot of big opportunities in private equity for a long time. However, Abenomics has shone a light on the problem – that the lack of dealflow came from a lack of good corporate management. In addition, the implementation of the Stewardship Code in 2014 by the Japan Financial Services Agency, and the Corporate Governance Code, which took effect in 2015, will significantly improve the return on equity of Japanese-listed companies. We expect companies will be selling down their non-core business or real estate in order to improve their return on equity. Succession issues in small and medium enterprises as well as opportunities in the service sector, which contributes around 70 percent to Japan’s GDP, also offer attractive investment opportunities for both Japanese and foreign investors.
What is the bank’s criteria when selecting a fund manager?
TS: To respond to your question I would cite the case of US pension funds, who focus more on well-established large-cap firms such as KKR or Blackstone and mid-market firms, because they cannot have a lot of relationships with funds. I understand they are also focused on doing more co-investments in order to reduce fees. For us, we typically invest in overseas large-cap funds. However, we expect to create a more diversified private equity portfolio focused on mid-cap or small-cap funds globally.
Have you had any challenges in building your in-house investment team?
TS: We now have about 15 investment professionals in our private markets team and expect to hire several professionals within the next year. Hiring investment professionals from outside the bank is not too difficult for us because we are the first mover in alternative investments in Japan and that attracts highly qualified and talented investment professionals. We don’t see disparity in hiring external professionals. But at the same time, we also have to educate the people inside Japan Post Bank to become investment professionals.