LP focus: DBJ Asset Management

The Development Bank of Japan, a wholly-owned government entity, is one of the country’s most active LPs. Its asset management arm manages around $10 billion in assets on behalf of DBJ and third-party clients. Managing director Yasuyuki Tomita and director Kazuaki Hatsugai, both in the organisation’s private equity and infrastructure division, tell PEI why domestic LPs’ appetite for PE is increasing.

What is the role and focus of DBJ Asset Management as it relates to alternatives?
DBJ AM gets discretionary mandates from the Development Bank of Japan for global private equity fund investments. We can invest in both Japanese and global private equity. For private equity and infrastructure fund investments, as well as co-investments, roughly, one-fourth goes to Japanese investments, around half goes to US and European funds and the remaining one-fourth goes to Asian funds.

What is the split between funds and co-investments?
Currently most of our investments are in funds because we recently started a co-investment programme [in 2015]. Our co-investments are only focused on Japan at the moment. Since most of our staff have experience in direct investments, we have the capability to do co-investments by ourselves, together with GPs.

What’s your average ticket size?
Annually, we receive a budget from DBJ which is a discretionary mandate. The investment scope ranges from buyout, growth, mezzanine to distressed funds. Sometimes we invest in secondaries funds. When we speak about DBJ’s LP fund investments, the ticket size is between $10 million and $30 million.Historically, DBJ has invested between $200 million to $300 million per year, regardless of the economic cycle.

On top of DBJ's capital, we also manage third-party mandates. Among our clients are regional banks in Japan, depending on the product we’re targeting, our investment size in aggregate is sometimes $30 million, sometimes $50 million. We’ve gone up to $100 million, depending on the product. Nearly half of our $10 billion in AUM is invested in private equity.

How has your clients’ appetite for private equity evolved over the last five years?
Most of our clients are financial institutions in Japan. Historically, Japanese investors have not been so active or aggressive in private equity investments because of the lack of liquidity. Also, private equity as an asset class is not so familiar to Japanese investors. The expected yield is now being compressed, especially in Japan, and we entered into a negative interest rate environment last year. Financial institutions are now under pressure to make higher returns. They’re now looking to private equity as a new asset class for them.

Many Japanese investors couldn’t compromise on the J-curve, because internal job rotations frequently happen in Japanese national institutions. Even if someone decides on an investment, they will move to another division in two to three years. That means they cannot enjoy the returns before they move on.

That’s a key point for many Japanese institutional investors, why they are reluctant to invest in PE. Now, given the negative interest rates and lower returns in traditional assets, their mindset is changing, so they're moving forward to private equity now.

What types of strategies do you look at?
We usually look to mid-cap. Occasionally we also talk with large-cap managers as well. Most Japanese investors are understaffed or less capable, in terms of language for example. In that sense, it is a little difficult for each investor to communicate directly with mid-cap managers in the US or in Europe.

Private equity as an asset class is relatively new for Japanese investors, so there’s a lack of resources in each institution.

Our clients, Japanese financial institutions, cannot access US mid-cap managers directly. Historically, DBJ focused on the mid-cap market because large-cap funds in general have had lower returns than the middle market. We frequently travel to the US and Europe. We have 20 people in private equity and infrastructure. Every month, our colleagues go on business trips to meet with GPs in Europe and the US.

What do you look for in Japan-focused managers?
We look for the same qualities as foreign managers. We select Japanese managers only on commercial reasons. We look at good track records, stable teams and deal sourcing ability.

Since we deal with top-quality managers overseas, we think we can deliver what we learn from our business with top-quality managers to Japanese general partners. Also, as a gatekeeper, we can explain to overseas investors about the overall trend of Japanese private equity market, some of the emerging managers, robust dealflow, and how and why global limited partners should take a closer look at Japanese GPs. We believe we can thus contribute to the Japanese private equity market.