Side Letter: Japan’s denominator disruption; Hawaii’s PE hike; GPs’ moreish multi-assets

Japanese institutions aren't exempt from the denominator woes facing their US peers. Plus: Hawaii's state pension is hungry for more private equity; and GPs are embracing multi-asset secondaries. Here’s today's brief, for our valued subscribers only.

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Tokyo thrift
It’s no secret that US public pensions have struggled with the denominator effect over the past year; what’s received less attention, however, is that some of their Japanese peers have been experiencing similar headaches. The yen’s decline relative to the US dollar last year, coupled with soaring private markets valuations, inflated the scale of Japanese LP portfolios with large exposures to Western markets. What’s more, these currency fluctuations meant that their annual budgets – typically set early in the calendar year – were greatly reduced in US dollar terms, leaving them with tough decisions to make about their commitment pacing.

“Some of our clients have been strongly impacted by the denominator effect and exceeded their internal limits for alternative assets,” one senior executive at a gatekeeper for Japanese LPs told Side Letter on condition of anonymity. “As a result, they’ve slowed their activity to get back to compliance. Some have seriously considered selling [fund stakes on the secondaries market], though pricing doesn’t incentivise them to sell currently.”

The result? Many Japanese LPs have become extremely selective over the past 12 months. Some have reduced their ticket sizes and others have declined certain re-ups in favour of others. GPs with exceptional performance, no evidence of style drift, limited exposure to volatile tech markets and the ability to offer co-investments will likely emerge as winners in this scenario, industry sources note.

Japan’s heightened selectivity and new sources of LP capital are just some of the issues that will be explored in depth in Private Equity International‘s Japan Special Report next month. Keep your eyes on PEI for the full coverage.

Hawaii says aloha to PE
Employees’ Retirement System of the State of Hawaii will boost its planned commitments in private equity in 2023, our colleagues at Buyouts report (registration required). At the system’s board meeting on 13 March, a presentation by the pension’s consultant, Hamilton Lane, stated that Hawaii will invest between $600 million and $700 million in PE this year. The system committed $600 million to private equity through Hamilton Lane in 2022, which was in the midpoint of its $550 million to $650 million pace plan; Hawaii’s staff committed an additional $95 million across three funds in 2022.

Hawaii has a 6.17 percent actual allocation to PE against a 7 percent target, according to PEI data. The state pension’s increased appetite for the asset class stands out from its peers. Due to uncertainties and overallocation issues, many public pensions systems have been reducing their commitment pacing plans, but according to Hawaii’s board meeting minutes, its increased appetite was approved last July. Hamilton Lane is also considering placing commitments over $50 million to the system’s top performing managers, according to the presentation.

In the fourth quarter of 2022, the system committed to Vistria Fund V, TorQuest Partners VI, GTCR XIV, and Hellman & Friedman Capital Partners XI. Distributions, meanwhile, were down 57 percent from the same quarter in the prior year, the presentation stated.


Moreish multi-assets
A slowdown in PE distributions to LPs is driving managers towards more complex secondaries transactions, a team of Kirkland & Ellis partners tells our colleagues at Secondaries Investor (registration required). Multi-asset continuation funds were, for a time, largely the exception rather than the rule and there is now growing interest from GPs eager to use these processes to crystallise returns for their investors.

If managers can find companies that are ready to exit and that have appropriate debt packages that aren’t maturing in the next three to four years, “you can lift those assets out across two [or] three funds and create a transaction at the right kind of sweet spot where you can get traction in the secondaries market to provide liquidity at a fair value to your LPs”, Kirkland partner Ted Cardos notes.

Such transactions aren’t straightforward. “Take the regular Rubik’s Cube and you make it… a 12 by 12,” adds Sean Hill of Kirkland’s Boston office. “It’s the same issues, but now you’ve got even more conflicts.”

Portfolio construction is a key consideration. One of the largest multi-asset transactions Kirkland has advised on was a 27-company deal across 14 funds. “From a fiduciary perspective, you can’t have one fund subsidising another fund,” Cardos says, giving an example where another buyer may be willing to make a higher offer for one company within a fund in a standalone transaction. “You have to make sure that the whole portfolio of everything that’s being sold is being sold at top pricing for everything.”

Blue Ocean at high tide
Sustainable investment firm SWEN Capital Partners has taken the plunge into biodiversity-focused investments with the final close of its Blue Ocean Fund on €170 million. The fund, which sought €120 million, will focus on protecting marine biodiversity via three major themes: overfishing, ocean pollution and climate change, our colleagues at New Private Markets report (registration required).

The fact the that fund has managed to close above target in an environment marred by overallocated LPs and extended fundraises is evidence of rising appetites for climate-related strategies. “We had a number of LPs saying to us, ‘We want to invest in biodiversity’,” Olivier Raybaud, a managing director at SWEN, told NPM. Being a first-time fund in this market is an especially large hurdle to overcome, and Raybaud said many of its investors were “ready to take the risk of backing a first-time fund”. He added: “The focus on the ocean is something that really generates a lot of emotion and interest.”

Launched in 2021, Blue Ocean will make between 20 and 25 Series A investments and is targeting returns of 20 percent IRR, NPM reports. Fully 86 percent of the capital has been committed by institutional investors, with the remainder coming from the likes of France’s National Institute for Ocean Science, IFREMER.

Dig deeper

Institution: Cathay Life Insurance
Headquarters: Taipei, Taiwan
AUM: NT$7.10 trillion ($232.30 billion; €217.82 billion)

Cathay Life Insurance has agreed to commit $80 million to Insight Partners XIII.

The Taiwanese insurer’s recent private equity commitments have focused on the buyout and venture capital strategies in North America and Asia-Pacific regions.

Platinum subscribers may click here for the investor’s full profile, including key contacts, allocation strategy and fund investments. For more information on Cathay Life Insurance, as well as more than 5,900 other institutions, check out the PEI database.

Today’s letter was prepared by Alex Lynn with Helen de Beer, Madeleine Farman and Katrina Lau