When Katsunori Sago joined Japan Post Bank in June 2015, there wasn’t a single investment professional in the 144-year-old institution who was focused on private equity and alternative investments.
The bank was also facing pressure from the public to increase returns and to diversify its Japanese government bonds-heavy portfolio.
Sago, hired as the bank’s head of asset management and chief investment officer, had previously worked at Goldman Sachs Group in Japan across various roles including deputy president, vice-chairman and advisor. When he joined, Japan Post Bank had only loosely framed ideas of getting into private equity. “There was some description of starting private equity investments in our previous three-year medium-term plan, but quite frankly, no one was talking about it during those introductory meetings,” Sago told Private Equity International.
He said his impression then was that “there was no real plan of starting alternatives and private equity investments, although at the very high level of the organisation there was very good understanding and broad awareness that the bank need[ed] to improve its investment activity and enhance the returns of its investment portfolio”.
“They knew that if we didn’t act soon, our returns would decrease dramatically and eventually we would lose our source of income,” he added.
Three years on, Sago is ending his time at Japan Post Bank and on his way to SoftBank Group as its chief strategy officer.
Sago’s many achievements in those three years include building a 15-strong private equity investment team. Tokihiko Shimizu, ex-head of research at the Government Pension Investment Fund, is its managing director and Hideya Sadanaga, former head of product development at Nissay Asset Management is head of private equity.
Sago told us he wanted to “start everything at the fastest possible speed” and the bank was “fortunate to identify and hire talented investment professionals, which enabled him to build a strong team and start a broad range of alternative investment programmes”.
Building an in-house investment team from scratch is of course not without challenges. Sago told PEI the bank had to change its compensation programme and make it more performance-based and market-competitive.
He also said he looked to Singapore’s GIC and Canada Pension Plan Investment Board as role models because “they have much more flexibility compared to US pensions, who are always under intense public scrutiny and have less flexibility in their compensation programmes”.
Under Sago, the bank diversified into riskier but higher returning investments such as private equity, real estate and hedge funds. In 2016 the bank said that alternative investments would account for 3 percent of its total portfolio. It also set up a private equity division and a real assets division in the same year.
In February, the $1.9 trillion investor teamed up with Japan Post Insurance to establish a private equity investment company, Japan Post Investment Corporation, which will have as much as ¥120 billion ($1.1 billion; €880 million) in investible capital. Seventy percent of the capital is earmarked for Japanese companies, while the remaining 30 percent will be invested overseas, with Asia as a favoured market.
Sago said the only thing that keeps him up at night is the future. “If we look at the current investment environment, we have been stressed by high valuations and so the investment has not been easy for private equity and many other asset classes. But at the same time it’s been a favourable environment to start new things and get people’s consent on starting new investments. In much more challenging market conditions, people become scared and become less aggressive on starting new things.”
The challenge Japan Post Bank faces is whether it can keep up the current pace of investment as the global downturn may just be around the corner, Sago added.
“If we … stop investing at that point, then all the efforts we have made so far will be wasted. We need to take advantage of the most attractive timing to invest, and we cannot do this if we are too scared, or we lose courage to continue investing.”
Over the next three years, Japan Post Bank expects to ramp up its alternative investments from the current 1 percent exposure to up to 4 percent or roughly ¥8.5 trillion. It will also expand the remit to include direct lending funds, real estate debt funds and commercial mortgage-backed securities, it said in its latest medium-term plan.