Private equity: the next big seller in Japan?

Japanese institutions have embraced funds of hedge funds, but some fund managers think PE may be the next trend.

Global fund managers in Japan are preparing to introduce their institutional clients to private equity funds in the expectation that this asset class will become an important alternative.

Upcoming liberalization expected to pass in December will let the Financial Services Agency recognize limited partnerships as a security. This means licensed investment advisory companies (i.e. fund managers) will be able to offer such products to Japanese corporate pension fund clients. Other investors such as insurance companies and banks are already allowed to access these products via fund houses.

The FSA is still adding the final details to the regulations, but several global firms say they are now holding seminars and other events to educate institutional investors about private equity.

Investors are keen because their normal vehicle for alternative investments, the fund of hedge fund, has suffered from mediocre performance this year. "Hedge fund performance is poor so clients are looking at other asset classes such as Japanese or Asian equities," says one manager. "We want to be ready to provide them with private equity funds as well."

One such firm is JPMorgan Fleming Asset Management, which wants to introduce its funds of private equity funds managed out of New York to its pension fund clients in Japan. Nobuaki Inomata, managing director and head of institutional business in Tokyo, says global fund houses can help local investors access the closed, secretive world of private equity. "It's not a world that is easy to access," he says.

JPMorgan is developing a global PE fund out of New York that will invest in PE companies around the world, rather like a fund of funds, providing a diversified structure that should appeal to Japanese clients. Once the FSA rewrites its regulations, a number of global fund houses are expected to market similar products to Japanese pension funds.

Some executives are sceptical, however, that PE will prove a big seller. "Management turnover at plan sponsors is two or three years," says one. "They just care about short-term performance, and don't want to risk locking their money away for 10 years."

Another executive argues that while PE does have a future among sophisticated Japanese corporate funds, it doesn't really address their need to seek alpha returns (ie from manager skill) versus taking almost wholly beta (market) risk. "PE is a solid beta risk," he argues, "it is purely a value-added version of the public equities market."