Japan's GPIF targets 5-10% alts allocation

The world’s largest pension fund has set up an alternatives unit and is now focused on private equity.

Japan’s $1.3 trillion Government Pension Investment Fund is considering a target allocation to alternatives between 5 and 10 percent of total assets, Tokihiko Shimizu, GPIF’s director-general in its research department, said in his closing keynote speech at PEI’s Global Alternative Investment Forum: Japan 2014 in Tokyo.

“At the minimum, 5 percent of $1.3 trillion ($6.5 billion) is a huge amount. We can’t rush in to investments, but at the same time we must make steady progress.”

And the fund has been making progress. In March, GPIF made its first allocation to alternative assets through a co-investment arrangement with the Development Bank of Japan and the Ontario Municipal Employees Retirement System (OMERS), Private Equity International reported earlier. 

The group will jointly invest in infrastructure assets in developed countries. GPIF has allocated up to $2.7 billion (¥280 billion) for infrastructure over the next five years.

Shimizu, who sat down with PEI during a free moment at the forum, said private equity is next.

“After infrastructure, we are now focusing on private equity and real estate,” he said. “Currently we are in talks with institutional investors about joint investment in private equity. [An investment] will come sometime in the next 12 months.”

Diversification across geographies, sectors and scale is crucial, he said. “Our important task now is to construct a private equity strategy in light of these broad aspects.”

“Given our fund size, investing in a fund of funds does not make sense. The efficient way is to invest through a separate account arrangement. We have meetings with many gatekeepers, but it won’t be only one we choose.  We’ll hire several.”

GPIF this year created a division of strategic investments to focus on alternatives, which Shimizu strictly defines as infrastructure, private equity and real estate. The division was launched with four professionals, but the fund intends to hire more so that the division will have “more than ten”, he said.

In December 2013, budget restrictions were removed for remuneration within the pension fund. “We can now offer [an outside hire] something close to a standard remuneration package,” Shimizu said.

Currently the world’s largest pension fund has only 75 employees.

Shimizu also dispelled some misconceptions. 

GPIF has no plan to invest in emerging market greenfield infrastructure deals with IFC, as was reported in some media outlets, he said. 

In addition, the OMERS-DBJ agreement “created a misperception that GPIF will only do co-investment. It’s not true. Every option is open.”

He then named several approaches to alternative investment, including single funds, gatekeepers, separate accounts, club deals and direct investments.

Shimizu acknowledged that GPIF’s moves into alternatives will likely spark similar investments from a multitude of Japanese pension funds, who will follow the leader.

“Therefore we have to move carefully. If we choose a specific fund to invest in, others may follow us in. We have a very heavy responsibility – not only our own but the impact we will have on other pension funds.”