Japan Special: The biggest challenge for Japan’s private equity industry

A shrinking workforce and lack of experienced investment professionals are threatening the future of institutional investor capital in the country.

In Japan, the size and growth of the working population has been a key challenge for companies. This issue is also being felt by the investor community as it looks to increase allocations to alternatives.

According to Yasuyuki Tomita, managing director and co-head of the global investment management department of Development Bank of Japan Asset Management, limited human resources is a main challenge for the firm. DBJ AM employs 30 investment professionals who invest and manage assets for the firm across private equity and infrastructure.

Although DBJ AM plans to hire more, what makes it tougher, said Tomita, is that there are few people in Japan who are experienced in fund investments. “Staff can learn an investment process for one to two years, but the most important thing for manager selection is to understand how the market behaves in a downcycle like in the past. It is difficult to teach this given the good market conditions that we have now.”

Japan shrinking workforce

DBJ AM started investing in private equity in 2002, consistently deploying between $200 million and $300 million annually regardless of the cycle, Tomita told Private Equity International. The investor’s AUM as of March 2019 stood at ¥900 billion ($8.1 billion; €7.1 billion).

Its private equity portfolio allocation plan is roughly 60 percent in buyouts, 20 percent in mezzanine and distressed situations, and 20 percent in growth capital. DBJ AM also allocates about 20 percent into the Japanese market and manages separate accounts on behalf of domestic investors.

The Pension Fund Association of Japan is another giant investor struggling to deploy hundreds of millions in the asset class annually with limited resources. PFA, which has ¥11.9 trillion of assets, has an investment team of just three people, according to Shuzo Takahashi, head of private equity. PFA set up its private equity programme in 2002 and has consistently deployed about $600 million every year across fund commitments and co-investments.

Outsourcing administrative work and due diligence has been the preferred solution for them. “In Japan, asset management companies and trust banks extend the work of our team, and it works well. On the other hand, we ourselves create the blueprint or long-term plan for our private equity programme.”

Quicker fundraising cycles have added another layer of complexity to investors’ staffing issue. “Nowadays, the gap between the capital allocations and the start of the investment period has gotten longer. It is challenging to manage actual vintage year diversification in the current fundraising environment,” Takahashi noted.