GPIF calls for alternative managers, with caveats
Japan’s Government Pension Investment Fund is inviting pitches from alternative asset managers to help shepherd its slow shift into private equity, infrastructure and real estate, as it looks to boost returns.
The ¥144.8 trillion ($1.31 trillion) fund will brief applicants at its Tokyo office on April 17 and start winnowing down the list from June 1.
The request for proposals, announced on GPIF’s website on April 11, was scant on details such as the size of the mandates on offer or the amount of assets to be deployed. GPIF can shift up to 5% of its AUM into alternatives, but the asset class only accounted for 0.07% of its portfolio as of the end of December.
The move is part of a multi-pronged, several-year effort by GPIF to invest in higher-yielding products to help support Japan’s ageing workforce against a backdrop of a stagnant economy and negative interest rates. It is mandated by the Ministry of Health, Labour & Welfare to return at least 1.7% annually on top of nominal wage increases.
GPIF’s RFP did, however, come with a caveat: applicants must be registered as an ‘investment management business’ under Japan’s Financial Instrument and Exchange Act.
This would exclude many global funds of funds based outside Japan and favours local players such as Nissay Asset Management, Tokio Marine and Sumitomo Mitsui Trust. Those who are not registered must apply jointly with a qualified local asset manager.
Normally one angle that gatekeepers can use to compete is their ability to help pension funds source direct private equity investments, but that skill is irrelevant in the case of GPIF. The fund is in a unique position in Japan; it is prohibited from investing directly in the equity of companies or influencing management.
GPIF has hired consultant Mercer to help it make the mandate choices, people familiar with the matter told AsianInvestor previously.
Winner's curse?
A mandate from GPIF would be a marketing coup for any asset manager, given the institution’s huge size and high profile in the Japanese investment community.
However one industry insider questioned how profitable such a mandate would be, as GPIF has traditionally paid wafer-thin fees to managers of traditional asset classes such as equities and bonds.
Hiroshi Komori, the fund’s senior director in the stewardship and ESG division, took issue with that characterisation at a recent AsianInvestor conference.
“GPIF was aiming to pay the lowest fee on this planet, but we’ve completely changed our policy,” he noted. “Experienced researchers are required for engagement, so asset managers will have to train them – we are aware that that is going to incur cost.”
A few more details emerged about how GPIF wants to invest in alternatives. It will look to invest via fund-of-fund products, and it wants its capital to be held in a separately managed accounts. It also specified diversified investments in private equity funds across various strategies around the world.
Looking west
Given the relatively small size of the Japanese private equity market and the track record of other Japanese institutional investors, GPIF will likely start by deploying the bulk of its capital in mature private equity markets such as the US and Europe.
The fund has taken small steps into private equity before. It has committed capital to the International Finance Corporation, the private-sector arm of the World Bank, said a person familiar with GPIF’s mandates.
In infrastructure, GPIF is being relatively conservative. It wants diversified investments in core and brown field infrastructure funds in mainly developed countries. The fund has previously made a foray into infrastructure by joining a co-investment agreement with the Development Bank of Japan and Ontario Municipal Employees Retirement System.
In real estate it wants diversified investments in mainly core-type property funds in Japan and overseas.
Slow moves
Moreover, the world’s largest retirement fund started buying more equities in 2014, marking a dramatic policy shift in search of better performance. And it issued an RFP for passive managers of domestic equities in March and last year it rejigged its mandates for global fixed income mandates.
However, the shift into alternatives has been a slow one for GPIF, even compared with other Japanese institutional investors such as Japan Post and the Pension Fund Association.
People familiar with GPIF’s decision-making process said the government was heavily involved and was also keen to make sure that the pension fund supports the Japanese economy.
Still, the intention to shift into alternatives is clearly there. GPIF hired Hiromichi Mizuno as its chief investment officer in 2015 from Coller Capital, a London-based private equity firm.
To support its push for stronger corporate governance in Japan, GPIF is also mulling launching an index of domestic companies during the next few months based on their environmental, social and governance (ESG) awareness.
GPIF is already anticipating a rush of applicants for its alternatives mandates and said on its website that it would limit the number of people from each company, in case GPIF’s conference room cannot accommodate all the candidates.