Japanese investors to triple private equity allocations

Japanese investors are starting to see the attractions of private equity, with allocations expected to treble in the next five years, according to a new report.

Japanese institutional investors plan to triple their allocations to private equity in the next two to five years, according to a new report.

The report, by European fund-of-funds manager Adveq, found that Japanese investors currently have about 0.4 percent of their assets under management allocated to private equity. However, they expect this figure to rise to about 1.3 percent in the next two to five years.

Adveq managing director Bruno Raschle said: “This study confirms that Japanese institutions are increasingly focusing on private equity as a component of their equity portfolios.”

The figures suggest the Japanese private equity market is at a much less mature stage than in Europe and the US. Almost three quarters of Japanese investors still have no exposure at all to private equity, while most of the 25 percent that do have only started investing in the last few years.

However, those that have invested in the asset class seem to be glad they did. Investors are expecting the asset class to out-perform the public markets by 670 basis points, with an absolute return of 13.3 percent. As a result, the proportion of existing investors allocating at least 5 percent of their assets to private equity is expected to double, from 14.3 percent to 28.6 percent, while the proportion investing more than 10 percent of their assets will almost treble, from 2.9 percent to 8.6 percent.

Japanese investors still have a fairly domestic focus, with more than two thirds of private equity commitments directed toward the Japanese market. This figure is expected to drop slightly over the next few years, with Asia likely to be the main beneficiary in terms of increased allocations.

The majority of investments – 63.6 percent – are currently made through direct fund commitments, though this is expected to drop slightly. Happily for the likes of Adveq, the one area expecting to see an increase is fund-of-funds investment, which is expected to rise from 16 percent to 21 percent of commitments.

Adveq’s research, which was carried out in association with Kyoto University, was based on a survey of 171 institutional investors in Japan. It is the latest in a series of similar studies by the fund-of-funds manager, with previous examples including Australia, Germany and the UK.