Japanese asset owners are turning to private debt within the alternatives space in order to match their return targets, while their investment strategies are shifting and altering preferred fund structures with asset managers, or general partners (GPs) — endowment funds, especially, will be increasing alternatives allocations.
Japan-based investors, or limited partners (LPs), are anticipated to add private debt to their portfolios in the next 12 months, and 60% already had allocation plans in the first quarter of 2024, according to a global investor survey by alternatives data provider Preqin.
Gerard Minjoot
Preqin
“Investors’ return targets have generally become more conservative, particularly given the current macroeconomic environment. However, Japan-based investors have set lower return targets than investors globally, due to comparatively low domestic interest rates,” Gerard Minjoot, analyst, research insights at Preqin, told AsianInvestor.
Over 46% of Japan-based investors seek returns of 8% or less on private debt, compared to 25% of investors globally, according to Preqin’s investor survey highlighted in the newly released report “Fundraising from Japan 2024: A guide to raising capital”.
Since Japanese investors are content with lower target returns, their expectations for private debt over the next 12 months are most favourable, with 90% of respondents expecting the asset class to perform similarly or better than the previous year.
DIFFERENT PREFERENCES
When it comes to the preferred fund structure and strategy for alternative investments, Japan-based investors are more inclined to consider funds of funds for private equity and venture capital, because this structure outsources more of the decision-making process.
However, Japanese investors are becoming more interested in co-investment structures, particularly in private equity, as more investors develop experience and are ready to take a more active role.
“Japan-based investors favour lower-risk strategies such as core and core-plus in real assets or direct lending in private debt, reflecting their overall lower risk appetite as compared to global investors,” Minjoot said.
In real estate, for example, 62% of the surveyed Japan-based investors now target returns of 8% or below, compared with just 43% globally, according to Preqin’s investor survey.
Expectations among private equity investors are quite similar across the board, but around 25% of Japan-based respondents target returns of 10% or less, compared with 20% of global respondents.
In terms of preferred markets, Japan-based investors have long regarded the US as the most attractive developed market across most asset classes. This is followed by their home market in Japan, particularly in real estate, which has benefited from better fundamentals and foreign buying interest in the low Japanese yen environment.
“The consensus for emerging markets is mostly focused on India and Southeast Asia,” Minjoot said.
CHANGING DEMANDS
The push for more alternative investments has somewhat dampened among Japanese corporate pension funds, a 2023 survey among Japanese Defined Benefits (DB) corporate pension funds by JP Morgan Asset Management (JPMAM) showed.
Although 29.6% of respondents said they would increase their alternatives allocation, it is noteworthy that this response is down from the 2018 edition of the survey, which found 59.2% of respondents indicating the same.
A reason for this trend is that allocations to alternatives already make up almost a quarter, or 23.4% of the surveyed Japan corporate pensions’ overall portfolios, up from 12.8% in the 2015 edition of the survey, and 5.4% in 2009.
Kaguya Komatsu
JPMAM
“Given DB pension’s philosophy is diversification of portfolio, no single asset class should be dominating the portfolio. Hence, we think the room is limited for the share of alternatives to rapidly increase in their portfolio,” Kaguya Komatsu, head of Japan funds business and institutional business at JPMAM, told AsianInvestor in February.
Also read: Japanese corporate pensions interest in alternatives wanes
Minjoot declined to comment on the JPMAM corporate pension fund data, but highlighted that other groups of Japanese asset owners are adding to the growing demand for alternatives, and especially university endowment funds.
The University of Tokyo endowment fund plans to expand its allocation to alternatives from 23% to 60% by 2026. The Tokyo University of Science endowment is also mandated to allocate up to 50% of its portfolio into alternatives.
On the non-institutional side, Japanese households have approximately $14 trillion in assets as of June 2023, with half of that in cash and deposits.
“The retail investor space is one area where demand for alternatives may increase, particularly among notable GPs who have begun looking into this market through partnerships with domestic banks and brokerage firms,” Minjoot said.
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