Tapping Japan’s $3trn war chest

There are enormous pools of money in Japan just waiting to be deployed into alternative assets, and the secondaries market is the logical place for institutional investors there to start.

There are enormous pools of money in Japan just waiting to be deployed into alternative assets, and the secondaries market is the logical place for institutional investors there to start.

I’ve spent the last week speaking to Japanese private equity participants for sister publication Private Equity International’s upcoming Japan supplement and one thing’s clear: everyone is excited about the potential game-changer that two of the nation’s leading institutional investors will bring to the market – especially for secondaries.

The world’s largest pension, Japan’s Government Pension Investment Fund (GPIF), has allocated up to 5 percent of its $1.2 trillion in assets to alternatives. Japan Post Bank, which holds $1.8 trillion on behalf of Japan’s depositors, is also allocating a similar percentage.

Industry participants I spoke to said secondaries was the logical place for Japanese institutions looking to invest in alternatives.

To give a sense of the potential boom for secondaries, the California Public Employees’ Retirement System, one of the biggest institutional investors in secondaries, is a quarter the size of GPIF, with a mere $287 billion in assets.

“The amount of money that has to be deployed is enormous,” one Tokyo-based private equity participant told me. J-curve mitigation and the ability to evaluate managers before deciding to commit to their primary vehicles or through co-investments make secondaries the ideal starting point.

At least two sources I spoke to agreed on a few ways secondaries firms – and primary ones – can position themselves to take a slice of the $150 billion from GPIF and Japan Post when the floodgates open. Using effective placement agents who listen to the needs of LPs and can build the right relationships in Tokyo is crucial. Having a local presence is also vital. But even then, it will likely start with a handful of players, namely the mega-funds.

“If you’re not a KKR, a Pantheon or a Lexington, you’ll have a hard time getting your foot in the door,” the same source told me.

I asked a mega-fund why it might make sense for Japanese institutional investors to start with secondaries. Alex Wilmerding, a principal in Pantheon’s Asia investment team in Hong Kong, said secondaries were attractive because Japanese institutions prefer to have a high degree of visibility into their portfolios.

“In our experience, they are generally highly focused on understanding what drives returns,” Wilmerding said. Secondaries could allow Japanese institutions to achieve their allocation targets more quickly, while giving them more control over the pace and profile of those allocations, he added.

There are a couple of obstacles, however. With the exception of a few key employees, including GPIF’s current chief investment officer (a former Coller Capital partner) and Japan Post’s recently appointed head of private equity (well-known for his knowledge of alternatives), these institutions are in dire need of Tokyo-based staff with the knowledge of and international experience in putting money to work, particularly in secondaries.

Another issue is the concern within the internal teams at GPIF and Japan Post about the deal sourcing pipelines for some of the biggest secondaries funds amid record levels of dry powder, according to one industry insider.

On the GP side, there are even worries among local Japanese managers that flooding the market with capital from GPIF and Japan Post will result in supply and demand issues and skyrocketing prices.

But from a fundraising standpoint, industry participants remain excited about capital from Japan, and it’s not just for Japan-focused strategies.

“GPIF is going to have to allocate to the US and Europe as well,” one Hong Kong-based placement agent who works on secondaries fundraising told me. “Everybody’s going to want to raise from GPIF.”

What will the opening up of Japanese institutional investment mean for secondaries firms? Send me your thoughts at adam.l@peimedia.com