Japan GPIF moves toward private-equity investment -sources

October 18, 2013

By Chikafumi Hodo

TOKYO, Oct 18 (Reuters) - Japan's Government Pension Investment Fund (GPIF) is making initial moves toward investing in private equity, sources say, a potentially big step in the world's biggest public pension fund's strategy of shifting some of its $1.2 trillion in assets towards riskier investments.

GPIF has hired a veteran private-equity manager from Sony Life Insurance Co and moved several internal staff into its investment group to focus on private equity, people familiar with the process told Reuters on Friday.

Putting even a sliver of Japan's $2 trillion public funds into private equity - typically nimble private companies that invest in promising startups and turnarounds - would be a notable advance in Prime Minister Shinzo Abe's push for higher returns from public funds and greater risk-taking in the economy at large.

GPIF posted record annual investment gains of 11.2 trillion yen ($114.56 billion) in the fiscal year through March but in recent years it has underperformed major foreign public pension funds that are more heavily weighted towards stocks and other risk assets.

In June, GPIF, which faces rising payout obligations for the rapidly ageing population, made its biggest asset allocation shift since its birth in 2001, boosting its target share for stocks while lowering the government bond weighting.

The fund last year expanded its investment beyond its core conventional asset classes by investing in emerging markets equities.

Abe, who took office in December, has had early success with his aggressive economic policies of massive monetary easing, big government spending and promises of longer-term strategies to promote growth.

"Abenomics" has buoyed sentiment with a weaker yen and stronger stocks and seen a gradual increase to capital spending, but it has yet to see a wholesale shift of funds out of bank deposits and government bonds into riskier investments.

The Japanese private equity industry has been struggling since the Lehman crisis. The private equity market is dominated by deals in the United States. The market's total portfolio is about $3 trillion and the United States accounts for about 60 percent of that.

'ALTER EMPHASIS, DIVERSIFY'

Investment manager Noriko Hayashi joined GPIF on Oct. 1 from Sony Life and will be focusing on potential investments in private equity with the other investment managers tasked with such investments, the sources said.

A GPIF spokesman declined to confirm Hayashi's hire, citing privacy concerns, or to discuss the potential for private equity investment by the fund. Hayashi could not be reached for comment.

It is not clear when GPIF might begin investing in private equity. Such investment may be included in a medium-term strategy plan expected to be hammered out in the fiscal year from April 2014 for implementation the following year, a source said.

Investment strategy may depend on a November report by an Abe-appointed panel examining public funds' investments. The seven-member panel is looking into improving governance of public funds and beefing up returns on investments by raising exposure to equities and foreign assets.

The panel said in September that public funds, including GPIF, should alter their emphasis on Japanese government bonds and diversify to investments including infrastructure and private equity.

GPIF started looking into alternative assets in November of last year, when it selected four companies to conduct feasibility studies for possible future investments in assets including private equity and infrastructure.

GPIF has selected Japanese law firm Atsumi & Sakai, Swiss private equity fund firm Capital Dynamics, Japanese life insurer-backed asset firm T&D Asset Management and Tokyo-based independent private equity consultant firm Brightrust PE Japan for the feasibility studies.

The results of the feasibility studies, which were completed in March, were presented to members of GPIF's 10-person investment committee in July.

In the April-June quarter, GPIF posted an investment gain of 1.9 percent, but returns were hurt by a record quarterly loss from its investment in Japanese bonds, the largest share of its portfolio.

As of the end of June, GPIF was 57.7 percent invested in yen bonds, 15.2 percent in Japanese equities, 9.7 percent in foreign bonds and 12.4 percent in foreign equities, with 5 percent in cash and other short-term assets.