Tell me about Nissay Asset Management
Nissay Asset Management has two private equity businesses: managing the portfolio of our parent company, Nippon Life Insurance, and creating portfolios for third-party clients, including Japanese pensions and financial companies. Nippon Life Insurance has invested in the PE industry for more than 20 years and NAM is supporting their Japan and Asian mandates. NAM also has 10-15 outside clients representing around $7 billion-$8 billion of capital for private equity mandates. We have a variety of mandates, including developed market small and midsized buyouts, as well as emerging markets which deploys more than $1 billion annually.
How do Japanese LPs invest in private equity?
LP appetites in Japan are diverse because there’s a real mix of old and new. You have very large players like public pensions or banks that are relatively new to private equity and tend to favour things like secondaries funds of funds to mitigate the J-curve, as well as large buyout funds to cover the global market. On the other hand, there are more experienced LPs looking at some non-traditional strategies like GP stakes, impact/environmental, social and governance and long-hold funds.
Some Japanese private pensions tend to invest on a smaller scale and are often more comfortable with stable, lower-returning strategies like infrastructure and private credit. The more experienced financial institution clients seek higher returns and prefer strategies like venture capital.
Some financial players take a different view and want to pursue strategies with potential synergies, such as being able to provide loans to the underlying portfolio companies or deal leverage. Other clients have an interest in emerging markets, but a couple saw it cautiously after the Abraaj Group incident. It can be challenging to serve Japanese LPs because their motivations for investing in private equity are very diverse, so you need to cover a wide range of strategies knowledge.
What are the biggest threats to PE returns?
High valuations are probably one of the biggest concerns in private equity right now. We’ve seen some co-investment opportunities where recently the price seemed quite high. Strategies like early stage venture seem relatively unaffected by high valuations globally, so we’ve been also spending time with some managers in this space.
Some clients are increasing their allocation to the domestic market because Japan has interesting opportunities and, while valuations are getting high, they’re still good relative to other markets. The large-cap space is getting competitive in Japan, so many players are shifting their focus on small and mid-cap funds.
What impact have new entrants had?
Large carve-out transactions are becoming competitive because more players are bidding against strategic buyers, so valuations are increasing. There are pros and cons to global firms entering the Japanese market. On one hand, we’re worried about retention of staff in GPs, but more people coming into the industry will make Japanese private equity more sophisticated in the long term, we believe.