ASIAVIEW: Reacting to Japan’s giant


When Takahiro Mitani, the president of Japan’s Government Pension Investment Fund (GPIF), told Reuters in an interview last month that it would select advisors to present it with alternative investment strategies, a predictable media furore followed. With ¥108.2 trillion (€1.04 trillion; $1.35 trillion) in its kitty, it’s easy to see why any potential for addition to GPIF’s traditional devotion to stocks and bonds would cause a stir. We’re talking about the world’s largest institutional investor after all.

Predicting what will transpire from this tender for advisors, beyond another white paper, is a taller order altogether. The response to the news from within Japanese private equity real estate was muted for one. For some of these guys, the coming of GPIF is like the coming of the Messiah. Everyone wants it to happen, but few expect it during their careers.

“We’ve all been hoping for it for years, and it never happened. Maybe this time it will – and that would be incredible – I just wouldn’t bet my future on it,” said one GP. Media excitement runs high, but industry cynicism runs deep.

Still, there are a couple of important factors to consider. First, this tender for advisors is about how to implement an alternative asset strategy and not another request for market data, like previous tenders. Second, this tender is moving quickly. According to one private equity firm among the dozen or so that have been long-listed, a winner is expected any day now. In fact, GPIF originally was supposed to have decided at the end of September.

Of course, selecting the advisor is one small step, and there are plenty more stages to go before commitments are made to managers. Politically, GPIF is something of a hot potato and therefore has been run conservatively. That’s understandable when you consider the majority of Japanese people have something between 30 percent and 100 percent of their pensions invested through it. The stakes are so high that you can see why decision-making is somewhat glacial.

We’ve all been hoping for it for years, and it never happened. Maybe this time it will – and that would be incredible – I just wouldn’t bet my future on it

That said, allocation change at GPIF does happen. That was evidenced by its first investments in emerging markets equities earlier this year. However, it took at least two years from the conclusion of a similar study before requests for proposals were sent to investment managers. It took a further two years before it precipitated actual investments. In the interview, Mitani admitted that the introduction of alternative assets might not happen while he is president.

Of course, the wait is worth it. How much GPIF could allocate to alternative assets has yet to be determined, but certain firms have reasoned it could be 1 percent initially. That is still more than ¥1 trillion.

That GPIF should expand its portfolio to include alternative investments is obvious. It goes without repeating that the Japanese government has an aging population whose demand for benefits is increasing unsustainably. Government figures show the population will contract by 30 percent to less than 90 million by 2060. By then, those 65 years and older are expected to have doubled from today.

Meanwhile, GPIF’s assets, weighted so heavily to domestic bonds, are producing a disproportionately low return to what the government requires to meet the increasing demand for payouts. The pension has produced a 2.42 percent annualised return over the past nine years (its latest filing for Q1 showed a -1.85 percent return), and that is not enough. Something additional must boost returns.

Anticipating GPIF’s first property investments is somewhat reminiscent of the recent wait for the first dollars of the NOK3.7 trillion (€505.8 billion; $655.7 billion) Norwegian Government Pension Fund Global to touch the asset class. Norway’s decision arrived in 2010 but was eagerly awaited for years beforehand and went through multiple approvals before Karsten Kallevig was hired as chief investment officer of steward Norges Bank Investment Management (NBIM). Coincidentally, he was leading the Japan office for Grove International Partners at the time.

When NBIM started investing, it occurred locally in core markets and in assets with long-term, recurring revenue streams. If GPIF started today, it could well operate similarly. Of course, that will be determined partly by how the market is looking. The long-listed private equity firm predicted that, if there’s a green light to invest, domestic investments will play a part. For Japanese real estate, now is arguably as good a time as any to plough in. There’s money to be made in the five central wards of Tokyo, where prime rents and yields are showing tangible signs of bottoming out.

Still, let’s temper our enthusiasm for now. A green light is needed first, and we’re assuming real estate will be a meaningful part of the plan. One sector association executive suggested there might be a bias towards infrastructure investments anyway. And, whatever the outcome, no money is likely to leave the world’s biggest institutional investor for alternative assets for years yet.