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Institutional Investor Profile: Kazushige Kobayashi, Executive Vice President, Alternative Investment Capital

Kazushige Kobayashi on Limited Partner-General Partner relationships, his firm's private equity strategy and on what he thinks Asia needs to do to attract more investors into the market.

Alternative Investment Capital (AIC), established in 2002, was one of the first fund of funds managers and investment advisors specialised in private equity in Japan. AIC is a joint venture between Mitsubishi Corporation and Daido Life Insurance Company. Mitsubishi, one of the largest trading houses in Japan, started making private equity investments in the early 1980s and has acted as both a limited partner and general partner ever since. Daido Life started making private equity investments in the late 1990s and is a prominent investor in the asset class.

AIC offers international investors exposure to Japanese and Asian private equity and assists Japanese institutions in participating in the global private equity business. Currently the firm manages two funds of funds: one investing in Japan and Asia and the other one investing in the US and Europe. The latter fund has Pacific Corporate Group (PCG), one of the prominent investment advisors based in La Jolla, US, as a sub-advisor. AIC also provides non-discretionary investment advisory services to institutional investors, including Daido and Mitsubishi. Total assets advised or managed currently exceed $1bn.

What type of investments do you look for?

'Geographically, we cover the United States, Western Europe, Asia and Japan. By type of investment, we focus on buy-out funds, venture capital funds and almost all other types of private equity funds in order to build up a diversified portfolio.

Typically we commit in the range of $5-15m per fund of funds. For the separate account that we manage for one of our largest clients, the typical commitment size is in the range of $20-50m.'

Do you invest directly?

How does your investment process work?

'Our investment process starts by defining an investment strategy and an asset allocation plan for the mid-term. We then formulate our annual plan, based on macro market conditions and the detailed information that we collate in our pipeline report of deals expected in the year ahead.

We monitor around 100 funds in our portfolios and keep in close contact with the GPs. In some cases we start talking to the GPs before they start fundraising. At the same time, we also review 300+ opportunities in the market per annum and generate sophisticated and updated information on the private equity market. Based on our research, we selectively pick the best opportunities and conduct comprehensive due diligence on them. Our due diligence process is very similar to what other sophisticated investors do. Generally speaking, it takes around three to four months to complete an investment from when we start our due diligence process.'

How do you find out about good investment opportunities?

'As I said, keeping in contact with existing GPs is very important. We source new opportunities mainly through other LPs, GPs and placement agents. We also have unique supplemental sources: one is the Mitsubishi Corporation and the other one is PCG in relation to US funds. Mitsubishi has a diversified global industrial network and through this network we have a different type of relationship with GPs. As for PCG, we help each other with the deal-sourcing.'

How many investments do you intend to make over the next year?

'As in the past, for our funds of funds and on behalf of our clients, we intend to make commitments to between ten and 15 funds a year in the US, Europe, Japan and Asia.'

What is your expected future allocation?

'The future allocation depends on the situation of the fund of funds and on how much our clients want to allocate to the asset class. Our current total allocation for the year 2005 is around $500m although this figure is 'target', not 'quota', and the final figure entirely depends on whether there are good investment opportunities around or not.'

What do you look for in a good private equity manager?

'As many investors would agree, 'discipline' is the most important thing for a good private equity manager. We highly appreciate those who limit the sizes of their funds, based on their strategies, and those who are patient in making new investments in an overheated market. We are not very keen on managers who change their investment strategy without special reasons.'

What is your appetite for first-time funds?

'If individual partners of such GPs can demonstrate their ability to make good investments, which is supported by their past track records, we are willing to consider investing in first-time funds. Having said that, in many cases we have been forced to be cautious for various reasons such as the lack of a long-term working relationship among individual partners. Generally, we are more likely to support first-time funds in Japan because there we are especially confident that we can evaluate all the pros and cons of those GPs, and we can provide appropriate advice to them on how to raise money from institutional investors in Japan.'

What are the most interesting countries/sectors going forward?

'We continue to monitor how the private equity market in Asia, and especially in Japan evolves. We feel Asia offers interesting opportunities, although there are still many pot holes. Japan has the second-largest economy in the world but it is underserved by private equity funds. Asia, but especially China and India, has a high-growth economy with a very large population.'

What is the biggest issue in the private equity industry?

'There are a couple of issues. In the US and in Europe, too much capital makes the market too competitive. This might lower returns for investors.

Now we see many 'mega funds' in the buy-out segment and we wonder how this affects the alignment of interest between LPs and GPs.'

What irritates you about private equity?

'In some cases, we are not able to spend enough time on due diligence and discussions with GPs due to the huge rush and shortened fundraising periods. Both LPs and GPs should be more cool-headed sometimes.'

How do you think the market will change in the future?

'As in the past, the market will continue to experience cycles of upturns and downturns. In the long run, we are confident that private equity will play a bigger role in the world economy, but also feel only a limited number of prominent GPs who differentiate themselves from others can survive in the market.'

How would you describe the market environment in which you are operating?

'In Asia, unclear treatment of capital gain tax and permanent establishment of GPs (notably called 'Shinsei tax' in Japan) are big issues to be resolved. It is important to have a better legal and tax infrastructure in Asia to attract more investments from the US and Europe for the development of the Asian private equity market.'

What advice would you give to an investor new to the asset class?

'Firstly, investors should have a clear investment strategy to build up a portfolio in the mid-term (with a minimum length of five years). Secondly, they should allocate enough human resources - either in-house human resources or through outsourcing - to implement their strategy. As access to top-tier GPs is one of the key success factors of private equity investing it is very important to build up good relationships with GPs. My final piece of advice is do not invest opportunistically or just by 'brands' of GPs.'

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