The world’s largest pension fund, the $1.3 trillion Government Pension Fund of Japan, in April launched its first-ever call for applications from private equity, real estate and infrastructure fund managers as it looks to build its alternatives allocation.
GPIF is targeting a 5 percent allocation to alternatives, in which the pension fund had invested only about 0.06 percent of its portfolio as of March 2016.
In real estate, GPIF will be making investments through funds of funds. “I can imagine investing through funds of funds will require less human resources and workflows than direct investments to many funds,” said one Tokyo-based placement agent. “Considering GPIF’s large asset size and their small team [relative to their asset size], with a limited number of specialists at this point in time, I think it is a realistic [approach] at this stage.”
It is not only the size of GPIF’s team pushing the pension manager down the fund of funds route. The GPIF Act, which governs the investor’s investment protocol, limits the scope of GPIF so it is often legally required to work with gatekeepers to allocate its capital. By focusing on funds of funds, GPIF will be making its foray into global real estate with a limited investable universe. Just north of $17 billion has been raised by funds of funds since 2010 globally, peaking in 2011 at $3.23 billion and declining to $2.6 billion last year, according to PERE Research. In fact, only five funds of funds closed last year.
GPIF can invest in alternative asset classes by acquiring beneficiary units in investment trusts. But the dual structure of a fund of funds manager and an underlying manager, along with fees charged at two levels, could make such investing complicated for GPIF. This double layering of fees was one of the key incentives for GPIF to seek an amendment to the regulation so it could make direct investments into limited partnership funds, according to sources. As yet, that law has not been changed. Until it has, GPIF will be required to pay a higher cost for a limited pool of real estate opportunities.