Japan’s pension funds seek liquidity

The preference of pension funds for income-generating investments, as well as some cultural differences, shape their allocations to private equity.

Japanese pension funds’ requirement for liquid investments limits their capital commitment to private equity, according to Yoshi Kiguchi, chief investment officer at Okayama Metal & Machinery pension fund.

Kiguchi explained that Japan’s population is aging rapidly and most pension funds are not at the accumulation stage. “The benefit out-payment is much bigger than the [incoming] contribution amount, so the funds have a strong liquidity focus.”

In addition, “Liability is tightly related to interest rates and most corporate pension funds want to have an interest rate-linked type of product.”

Tomohiko Komada, head of private equity at Sumitomo Mitsui Trust, Japan’s largest trust bank with a total AUM of $770 billion, added that pension funds tend to prefer income-generating investments. 

“In 2013, we will focus on more investments in infrastructure, private credit and debt because it is an income-generating investment that many Japanese investors are now looking for,” Komada said. 

SuMi Trust, which has a $2.9 billion private equity allocation, has also noted the emergence of invest-able country managers in some Asian markets, he added. “We are shifting from pan-Asian to country funds, for example in China and India.”

The firm has Southeast Asia exposure through regional funds, but the region still needs to mature before SuMi considers country funds, he said. 

“First-time [country] fund managers deliver a better-than-average return, though there are concerns about the stability of a new organisation are therefore [invest-able first time managers] are hard to find.” 

Okayama Metal & Machinery’s total funds under management is $500 million, with $170 million of that in capital call type of products, which is mainly private equity, Kiguchi said. Okayama’s investment strategy is to look at the trade balance, GDP growth, current account and savings of a country or region.

“What’s important is not only the country’s balance sheet but if internally the people and the government save for the future.”

In 2013, we will focus on more investments in infrastructure, private credit and debt because it is an income-generating investment that many Japanese investors are now looking for

Tomohiko Komada, head of private equity at Sumitomo Mitsui Trust

Based on that criteria, Okayama is interested in Malaysia and Indonesia, as well as three countries in South America. “The trade balance is positive and Malaysia and Indonesia have natural resources and a growing middle class. We’d like to have longterm exposure to these countries.”

Kiguchi said that Okayama’s offshore private equity investments have performed well. Investments in US funds and European secondary funds, for example, have already brought the pension fund desirable returns.

However, only a small number of Japanese pension funds invest with foreign GPs, he added. The majority are hesitant to do so because they face language and cultural barriers, and simply don’t have enough institutional knowledge about private equity. This holds true even though the country's pension funds are required to go through a licensed agent such as a bank or asset manager in order to invest in private equity.

Japan has some strong domestic fund managers, Kiguchi said. But the country is outside his fund’s investment thesis due to a negative trade balance, near zero GDP growth and a diminishing savings rate.

Pensions funds view domestic private equity differently because on average, over the past twenty years, domestic funds have cumulatively delivered a negative performance, he said. Private company valuations were linked to public equities (with a bit of a discount for illiquidity) and in the last two decades the equity markets declined, creating a history of underperformance.

“Pension funds still remember those 20 years,” Kiguchi said.

Join us at the Global Alternative Investment Forum: Japan on 17 April in Tokyo to hear from leading Japanese investors and LPs on their increasing appetite for outbound investments.