In 2016, the Bank of Japan introduced the negative interest rate policy, which prompted domestic investors to shift away from traditional assets. Coupled with the ongoing issue of Japan’s fast-ageing demographic, institutional investors turn to investment opportunities within private equity for higher returns, expanding their exposure to alternative assets.
Preqin’s online platform tracks 223 Japan-based investors considering or actively investing in private equity funds. The chart above shows that corporate investors account for 34% of these LPs, followed by banks/investment banks (21%). Japanese banks are one of the top three investors in private equity, spurred to invest in riskier assets for higher potential returns due to the adoption of the negative interest rate policy.
Notably, pension funds make up 18% of the investors in private equity funds, responding to the growing demand for pensions for its ageing population. Although public pension funds account for only 1% of the investor pool, they have relatively larger assets under management (AUM) compared to their private sector counterparts – public pension funds hold an average of $528bn in AUM, whereas private sector pension funds manage an average $3bn. Two of the largest public pension funds in Japan, Government Pension Investment Fund, Japan (GPIF) and Pension Fund Association for Local Government Officials, made their maiden commitments to the asset class in 2015 and 2016 respectively. In addition, amendments were passed in 2018 by the Japanese Cabinet and Japan’s Ministry of Health, Labor and Welfare to allow GPIF to participate directly in limited partnerships for alternative assets.
Furthermore, investors in Japan look to contribute to the country’s economic growth and support small and medium-sized enterprise (SME) owners through their exposure to private equity. According to Tokyo Shoko Research, approximately 2.5 million SME owners will enter their seventies in the coming 10 years and exceed the country’s average retirement age, with many struggling to find business successors. Unsurprisingly, the majority (78%) of Japan-based investors in private equity favour investing closer to home in the Far East region; yet their interest extends beyond the onshore market, with 62% recording a preference for North America, followed by Asia-Pacific (excluding Far East, 52%) and Europe (38%).
Due to the economic and regulatory changes in recent years, private equity remains a significant part of Japan-based institutional investors’ portfolios. Ongoing population decline continues to cultivate an environment that triggers more investors to enter the alternative assets market for higher returns than traditional investments. Additionally, the ageing demographic provides opportunities for investors to contribute to the growth of private SMEs in Japan. The recent establishment of Japan Post Investment Corporation by Japan Post Bank and Japan Post Insurance to manage private equity funds may be reflective of Japan-based investors’ increased interest in the asset class.