Three things to know about Japan Post Bank’s $78bn alternatives investment target

The $1.9trn Japanese investor is expanding its exposure to alternatives investments, including direct lending funds and real estate debt funds.

Japan Post Bank is set to rev up investments in “strategic investment areas” over the next three years to as much as 4 percent or 8.5 trillion yen ($78 billion; €67 billion) of total assets, up from 1.6 trillion yen in fiscal year 2018, according to its medium-term management plan revealed earlier this month.

Strategic investment areas include the investor’s existing alternatives programme, which comprises private equity, hedge funds and real estate equity. In addition, Japan Post Bank is planning to expand the remit to include direct lending funds, real estate debt funds and commercial mortgage-backed securities, the investor said in a report.

According to the report, Japan Post Bank will invest roughly 2.2 trillion yen in private equity, 3 trillion yen in real estate, 2 trillion yen in hedge funds and 1.3 trillion yen in private debt assets. The bank’s specific targets for each asset class were not indicated.

Private Equity International caught up with Taiichi Hoshino, senior managing director at Japan Post Bank, to discuss what this expanded purview means for private equity. Here are three things we learned.

1. Higher yield is a key motive

The Tokyo-headquartered investor, which manages 210.6 trillion yen in assets through the fiscal year ended 31 March 2018, has approximately one percent exposure totalling 1.6 trillion yen to strategic investments.

The estimated 6.9-trillion-yen boost to strategic investments by 2021 is a move to secure stable earnings for the bank, as it expects declining returns in its holdings of Japanese government bonds. It will lower its allocation to JGBs from 61 percent to 55 percent over the three-year period.

Hoshino noted that Japan Post Bank will keep increasing its allocation to these strategic investments as mapped out in its medium-tern plan. “We will steadily continue to follow that plan, and carefully and continuously increase the investment amount amid market volatility globally.”

The bank expects its strategic investments to deliver 11 percent in net interest income by FY2021, it said in the medium-term plan.

2. Japan Post Bank will continue to invest outside of Japan Post Investment Corporation

In February this year, Japan Post Bank and Japan Post Insurance teamed up to launch their private equity investment company, Japan Post Investment Corporation. JPIC will have up to 120 billion yen in investible capital that will target a mix of overseas and domestic deals of between $10 million and $100 million.

According to Hoshino, Japan Post Bank will continue to act as an LP investing through primary and secondary strategies. Meanwhile JPIC will act as its GP and make investments directly.

“Since we are under certain restrictions not to make any direct investment larger than a 5 percent stake of the target company, we launched JPIC to make direct investments on behalf Japan Post Bank, Japan Post Insurance and eventually other external investors,” he explained further.

Hoshino declined to provide further details on its private equity investments, but noted that these are fairly diversified in terms of strategy and regions.

3. US and Europe’s direct lending market will play a part in its three-year plan

Investing in direct lending and real estate debt is a relatively new programme for Japan Post Bank, Hoshino noted. The bank currently has a globally diversified liquid credit portfolio that includes investment grade, high yield bonds and bank loans. It has continued investing in this space over the course of several years through its in-house trading capacity as well as third-party investment managers.

Hoshino added: “We will focus on the US and European direct lending market since these are effectively the only two regions with established middle market opportunity where there are still meaningful liquidity premium for the risk. The real estate debt investments are and will continue to be fairly diversified across the globe in line with the market opportunity.”

The investor’s expansion into this space over the next three years is a bid to improve its risk-return profile over the coming cycles.

“As the US Federal Reserve keeps increasing interest rates, global credit investments face headwinds due to increasing hedge costs for many Japanese financial institutions including ourselves, while credit spreads remain tight and show much higher levels of spread volatility,” he explained. “There are certain things the bank will be able to do within the credit space to improve the risk-return of our portfolio in the coming cycles. However, we cannot really disclose the exact plans to avoid misinterpretation of the market.”

Japan Post Bank expects its credit holdings by FY2021 to contribute 63 percent of net interest income.