Chasing higher returns, Japanese investors to hike exposure in alternative assets

Kyoto, Japan. Photo: Alex Wolfe/Unsplash

Japanese investors are increasingly turning to alternative assets for higher returns amid the persistently low-interest-rate environment in the country.

Of the nearly 303 Japanese investors active in the space currently, a majority of them are allocating to private equity channels, a recent report from Preqin has said.

“Although Japan-based institutions have demonstrated an interest in outbound alternative investments in recent years to expand and diversify their portfolios, the Far East remains the preferred investment destination for private capital,” Preqin’s Investor Outlook on Alternatives in Japan has said.

The Far East includes China, Hong Kong, Macau, Japan, Korea and Southeast Asian countries like Malaysia, Indonesia, Myanmar, Singapore, Philippines, Thailand, and Vietnam.

Across most alternative asset classes, investors are primarily looking to gain exposure to the North American market when considering overseas investment, the report noted.

Geographic Preferences of Japan-Based Institutional Investors in Each Alternative Asset Class. Source: Preqin

The majority (61 per cent) of Japan-based private equity investors target North America-focused funds when making fund commitments, while 45 per cent and 44 per cent of real estate and infrastructure investors respectively hold a preference for assets in the region, it further said.

“Given that Japan is our home market, and since almost all of our liabilities are in yen, it is preferable for us that there exists a vibrant private equity market in Japan. The Japanese market is, however, still very small, so the vast majority of our portfolio is currently invested abroad. But it is our hope that we would be able to nurture and grow together with the Japanese private equity market,” noted Hideya Sadanga Managing Director and Head of Private Equity, Japan Post Bank.

To meet the need for yield-generating returns, overseas infrastructure funds have also become prevalent. Investment in infrastructure equity funds, primarily by corporate pension funds, started to spread and have been a major alternative asset class for financial institutions – mostly insurance companies – for the past five years.

Proportion of Institutional Investors Allocating to Each Alternative Asset Class: Japan vs. Rest of Asia-Pacific. Source: Preqin

Further, a Preqin survey found that investors across all alternative asset classes were planning to make new investments in the coming year and 96 per cent of private equity investors that are looking to make fresh investments in the next 12 months constitute the largest proportion of any asset class.

Also, half of these investors looking to invest in PE funds expect to allocate more capital than they did in the past 12 months. More Japan-based investors are looking at gaining exposure to international investments.

Meanwhile, for Japanese investors, in recent years, the concepts of environmental, social and governance (ESG) and Sustainable Development Goals (SDGs) have found broad acceptance in Japan as in other countries, and are now recognized as important issues in the due diligence process.

On the whole, there is a stronger tendency to value transparency, primarily for regulatory compliance.