PEI: How does GPIF view investment in private equity?
TM: Compared to listed equities, the risk in private equity investments is higher, though it can attain a higher return if it’s successful. It will be very important to select a good [fund manager] and investment target. Depending on those factors, private equity could be attractive.
Is the fund considering secondary investment?
In the context of private equity investment, secondary investments can reduce the J-curve; therefore this type of investment has merit and has attracted our attention. But we are not considering exclusively primary or secondary investments.
Is there a preference for offshore or domestic investment?
There have been voices in Japan that say domestic investment will help to reinvigorate the economy. However, currently the way GPIF views private equity is that there is no distinction between overseas and domestic.
Is there an existing pension fund that could serve as a model for GPIF?
GPIF has been in contact with peer pension funds that do alternative asset investment, gathering information and studying how each pension fund operates. But there is no specific pension fund which we are considering as a model for GPIF. It is possible that when investment begins, GPIF will consider joining associations [such as the Institutional Limited Partners Association].
One proposal is to enter new asset classes through “baby funds”.
The ‘baby fund’ concept can be one idea for a vehicle to make alternative investments. We don’t have a fixed percentage in mind to allocate to alternatives if we invest in them. However, without past experience of investing in these asset classes, the amount cannot be too large on day one. Separate accounts via gatekeepers are [also] possibilities, but we are not limiting options. There is no conclusion yet. Under the current law, GPIF needs to go through a discretionary investment manager or through an investment trust in order to invest. Therefore GPIF is not allowed to own stocks directly.
What’s the biggest challenge for the fund?
GPIF does not have accumulated expertise in alternative investments. Therefore, how to bring experts into the institution will be very important and that will affect the investment strategy as well as risk management. Given this situation, GPIF needs due caution when moving forward.
What’s the timeframe?
It is possible to come to some decisions on alternative investments in 2014, but it is hard to say whether this will actually be the case. There have been several recommendations in the advisory panel report that GPIF needs to examine. Some recommendations would have high hurdles to implement. There has also been the [government] study group about basic pension issues, as well as the panel regarding consolidation of private sector employees’ pensions reserve together with the public employees’ pensions reserve mutual aid association. These are the factors GPIF needs to take into account when contemplating the next step.