GPIF activates PE investment unit

Japanese private equity players haven’t had a lot to celebrate in the last few years. But the market seems to be finally picking up, as Prime Minister Shinzo Abe’s radical ‘Abenomics’ stimulus package begins to trickle through. And there was more good news for managers in April: Japan’s $1.3 trillion Government Pension Investment Fund, the world’s largest public pension fund, said it might allocate as much as $13 billion to alternatives – and it’s actively targeting private equity.

In his closing keynote address at PEI’s Global Alternative Investment Forum: Japan 2014 in Tokyo, Tokihiko Shimizu, director-general of GPIF’s research department, said the giant pension fund was considering a target allocation to alternatives of between 5 and 10 percent of its total assets.

Of course, he recognises that this will be easier said than done. “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.”

There’s definitely some evidence of that. 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 at the time.

The group will jointly invest in infrastructure assets in developed countries, as part of GPIF’s stated strategy to allocate allocated up to $2.7 billion (¥280 billion) to infrastructure investment over the next five years.

And Shimizu says private equity is next. “After infrastructure, we are now focusing on private equity and real estate,” he told PEI on the sidelines of the event. “Currently we are in talks with institutional investors about joint investments in private equity. [An investment] will come some time in the next 12 months.”

According to Shimizu, GPIF’s main priority will be to achieve diversification across geographies, sectors and scale.

“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 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 ultimately have “more than ten”, he said. That’s a big investment given the fund currently only has 75 employees in total.

It helps that in December 2013, budget restrictions were removed for remuneration within the pension fund – giving the fund more leeway to hire experienced staff. “We can now offer [an outside hire] something close to a standard remuneration package,” Shimizu said.

Shimizu was also keen to dispel the “misperception” arising from the OMERS-DBJ agreement that GPIF is only interested in co-investment. “It’s not true,” he insists. “Every option is open.” That includes single fund investments, gatekeepers, separate accounts, club deals and direct investing, he says.

The other exciting prospect is that any move by the GPIF into alternatives would probably prompt similar moves by other Japanese pension funds. That would be great news for managers – although it heightens the pressure on GPIF to tread wisely.

“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.”