In Japan, regulatory factors, such as the adoption of the negative interest rate policy in 2016, and slow economic growth, are changing the country’s investment landscape. More and more institutional investors are moving into alternative assets from traditional investments in search of yield.
Although Japan-based institutions have demonstrated interest in outbound alternative investments in recent years to expand and diversify their portfolios, the Far East remains the preferred investment destination for private capital. Among investors in hedge funds, however, the majority (79%) take a global approach when accessing the asset class.
Across most alternative asset classes, investors are primarily looking to gain exposure to the North American market when considering overseas investment. The majority (61%) of Japan-based private equity investors target North America-focused funds when making fund commitments, while 45% and 44% of real estate and infrastructure investors respectively hold a preference for assets in the region.
Private equity investors in Japan favour venture capital, gaining access to emerging sectors, such as new technology, through these investments. More than 130 investors, including corporate investors and regional banks in Japan, committed to SBI AI & Blockchain Fund which raised JPY 60bn when it reached a final close in January 2019. Growth and buyout vehicles are also favoured by large proportions of Japan-based private equity investors.
When seeking exposure to real estate, Japan-based institutions primarily target less risky equity strategies: 74% and 50% of investors have a preference for core and core-plus assets respectively. This may reflect the cautious approach towards real estate investing that investors have employed since the real estate bubble burst of the 1990s.
Typically characterized by low correlation to traditional asset classes and a stable income flow, infrastructure investments are attractive to institutions with longer investment horizons, such as pension funds and insurance companies. The majority of Japan-based investors in infrastructure prefer to access the asset class through single-manager funds, with 77% favouring primary strategy vehicles and 62% interested in debt/mezzanine funds.
Similarly, mezzanine (62%) and distressed debt (56%) are the most targeted fund types among Japan-based investors active in the private debt market. Pension Fund Association for Local Government Officials is one of the domestic institutional investors moving into private debt. The JPY 23tn public pension fund released its first request for proposal in July 2018 seeking offshore private debt fund managers.
This blog is an extract from the newly-released Preqin Investor Outlook: Alternatives in Japan, which examines the key trends surrounding Japan-based investors’ growing activity in alternative assets.
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