How would you characterise Japanese LPs’ appetite for domestic private equity funds?
When we talk about Japanese LPs we separate them into two different classes – financial institutions and pension funds.
Financial institutions are still looking at traditional buyouts, but in Japan it’s usually small- to mid-market buyouts. You barely have billions of dollars deals here. They are reducing their budget to domestic private equity at the moment, and rather investing into foreign funds who tend to be actively investing and simply performing well.
For pension funds, they’re sort of the new comer into the private equity space. They’re looking at managers who can provide shorter J-curve. So I would say funds like distressed or secondaries would be the right way for them. That doesn’t mean they don’t look at buyouts, it’s just that they still lack confidence in longer term products.
What about their desire to invest in international private equity funds?
Financial institutions have been investors for quite some time and most of them have experienced the Lehman crisis, so they were sort of revisiting their portfolio allocation and a bit slow in investment for the last couple of years. But they’re now coming back to the market, and I would say most of them are focused on the relationships they have formed previously.
These financial institutions are more into US- or Europe-oriented funds, but some of them are starting to look at emerging markets like Latin America. But I haven’t really seen much heavy activity going on in that space. There is slightly more risk appetite for financial institutions, but they’re just looking and researching at the moment.
For pension funds, they’re rather new in private equity investing. So they’re starting out with funds offering diversification benefits, like global funds or multi-sector funds, or even funds of funds. Most importantly they’re inclining toward strategies with quick cash distribution. They probably won’t need a big type of returns like 20 percent to 30 percent, they’d rather like stable returns around low to mid-teens.
Also, I would say pension funds prefer infrastructure funds owing to their defensive nature, but not so much in the emerging markets.
Why are Japan’s pension funds late comers?
The history of private equity here is relatively short and has been an unfamiliar asset class in general. On the investor side, typically the investment of pension funds is covered by a small number of people, and they cover both pension benefits and investment. They’re not necessarily professional investors from that standpoint. I would say they could hardly cover the traditional asset classes and that’s more than enough for them on the plate. But the listed market hasn’t really performed well in recent years, so that’s why they’re starting to look at private equity.
What do fund managers need to do to attract Japanese LPs?
I think it’s similar to other countries. A GP really needs to understand the investors are entrusting a large amount of money for a long period of time, and it requires an additional layer of confidence as opposed to other types of fund. And the confidence can be felt by frequent communications including on-site visits, emails or even on-the-ground local professionals speaking Japanese.
Also because we don’t really have many of those professional private equity investors with 20 years-plus experience in Japan, they tend to be more of a generalist rather than specialist at this stage. So GPs would probably need to speak to them in a language that they can understand.
What are some of the trends you see in Japan’s private equity industry?
We’re having an excessive amount of GPs in the market at the moment, so we’ll probably see in the next couple of years some consolidation. The next two to three years are going to be very critical here. The ones who would survive may not necessarily be the US or European-style buyouts, but those who really understand the Japanese business culture and can implement that into their investment strategy.