GPIF ends its alternatives wait

Japan's $1.3 trillion Government Pension Investment Fund kicked off a search for private equity, real estate and infrastructure asset managers to establish separately managed accounts for the pension in April, a clear sign it is on a path to becoming one of the largest investors in the industry.

GPIF embarked on a dramatic change of strategy in 2014, opening the door to alternatives for the first time. The pension set out plans to move from a fund primarily invested in government bonds to a diversified one holding a heavier weighting in foreign and domestic equities, and the option to invest as much as 5 percent – a massive $65 billion – of its total portfolio in alternatives.

In 2015, the pension introduced a performance-based fee structure for external managers, and joined the Principles for Responsible Investment network. 

GPIF is currently revamping its governance structure, and is also discussing its underweighting to alternatives with investment consultants. In February, the pension expanded its in-house portfolio management team and hired former Mitsui Fudosan managing director Hideto Yamada as its first head of real estate. GPIF has also earmarked $2.7 billion to invest in infrastructure alongside the Development Bank of Japan and the Ontario Municipal Employees Retirement System.

The 5 percent earmarked for alternatives will be invested in private equity, real estate and infrastructure, GPIF president Norihiro Takahashi wrote to Private Equity International in April, and added that GPIF's goal is to develop these three strategies in the same way and at the same speed.

Despite this progress, industry watchers often remark that GPIF's move into alternatives has been painfully slow. So far just 0.07 percent has been allocated to alternatives. 

A managing director of a foreign private equity firm in Japan laments that decision-making in GPIF is slow because it needs to get approval from the health ministry, which oversees the pension giant. He adds, “Japan Post Bank is fast and they have been successful building their in-house team. They are the first player and will probably be larger than GPIF.”

The $1.8 trillion Japan Post Bank has moved significantly ahead of its peer, establishing a private equity division composed of an all-star investment team. Its current chief investment officer was the ex-president of Goldman Sachs Japan; its head of private equity was formerly at Nippon Life Insurance; and the present managing director led the research and investment policy unit at GPIF for more than seven years. In September, Japan Post's chief executive announced it has started investing in private equity.

Jun Tsusaka, managing partner and founder of Tokyo-based firm Nippon Sangyo Suishin Kiko, explains that GPIF taking things slowly is a positive.

“You cannot rush the process of building an investment programme of this magnitude. It has to be executed on a methodical and well thought-out basis taking into consideration all stakeholders. When you are dealing with over a trillion dollars, the effective management of that capital will have a significant impact on Japan over the next 30 years.”

He adds the more orderly and careful the pension is, the better. “GPIF will need to operate under certain governmental constraints. A re-examination of these constraints and potential changes will likely be required to enable the government to build a successful model that starts with hiring the right team of professional managers that can set the right priorities and execute against a strategy. You have seen this with sovereign wealth funds around the world (in Asia, Europe, the Middle East and Canada) and with endowments.”

Mounir Guen, founder and CEO of placement and advisory firm MVision, points out there's a lot to learn from the early private equity programmes of US public pensions.

“Technically when you run a programme, you won't get returns for 10 years unless you start incorporating co-investments and secondaries, that would shorten the J-curve dramatically and reduce that to half the timeframe,” Guen says. 

“As you establish the programme you also need to decide how quickly it develops and the type of development that could take place. That's a lot of complexity for a new investor in the asset class.”

Guen adds GPIF seems to be on a similar path to public pensions and sovereign wealth funds when they first moved into alternatives, which requires a consciousness of reporting requirements; careful decision-making on the mix of assets, regional and size considerations; the risk and underlying position illiquidity; and stress-checking the portfolio in extreme markets.

Asked how GPIF would deploy its capital, Takahashi says the pension would like to invest in funds of funds. However, he emphasises that before investing the staff would have to explain the details of the investment to the media and public.

“We would like to make Japanese people understand the details of our investment style and how we are investing in alternative assets. That is my priority this year.”

With such a large portfolio, GPIF will no doubt face outside scrutiny, as well as pressure to raise returns, as it continues to diversify its holdings. The pension attracted media attention last year when it suffered a $52 billion loss in fiscal 2015, driven by disappointing returns from its domestic equities holdings. It has, however, bounced back and posted gains of $20.9 billion as of the end of September 2016, buoyed by returns in global equity.

Takahashi asserts that although the private equity market in Japan is very competitive, it will be GPIF's priority to diversify its asset allocation and not just invest in domestic managers.

PEI understands European fund of funds LGT Capital Partners is working with the pension, although both declined to comment.

The pension has about 100 external managers across its portfolio, Takahashi adds. “One hot issue right now is fees but we don't want to force these managers to change their fee structures. It's important for us to have a conversation with them and to create a win-win situation. This, however, takes time.”

GPIF's decision to allocate to private equity has prompted other Japanese LPs to follow suit. The $185 billion Pension Fund Association for Local Government Officials, or Chikyoren, revealed last month it can invest up to 5 percent of its holdings in alternative assets. In September, Japan Post Group's insurance unit, which manages around $800 billion in assets, launched an alternatives division.

 A Tokyo-based fund of funds manager points out Japanese LPs' interest in private equity has soared after GPIF and Japan Post Bank announced they will invest in alternatives. That has had a knock-on effect for local GPs, and led to a busy fundraising period, particularly for mid-market firms.