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Japanese LPs weighing into private equity faster than ever before21/02/2007. Source: AltAssets. 
 Investment allocation to private equity by Japanese companies is expected to rise over the next two to five years, according to a study completed by Adveq and Kyoto University. The survey, Adveq’s first full-market survey on the attitudes of Japanese institutional investors towards private equity, revealed that 25.2 per cent of Japanese institutions are already investing in private equity; the majority of these only began doing so after 2000. The study also reveals that Japanese investors’ allocation to private equity, by percentage of assets under management, will triple in the next two to five years.
Adveq, together with Kyoto University, analysed the private equity investment behaviour and future intentions of Japanese company pension funds, industry association pension funds, insurance companies, banks, investment advisory companies, securities companies and other financial service providers. The survey also analysed institutions’ tolerance of risk, with the aim of deepening the understanding of factors that motivate institutional investors to allocate capital to private equity.
Among institutions already investing in private equity, 55.9 per cent currently allocate less than one per cent of total assets under management to this asset class. However, the next two to five years the number of institutions allocating up to five per cent will double from 14.3 per cent to 28.6 per cent, while those allocating up to ten per cent will increase from 2.9 per cent to 8.6 per cent. The percentage allocating ten per cent will remain stable.
On average, the next two to five years will see Japanese investors’ increase their allocation to private equity by three times. While average allocation is currently relatively low, at around 0.4 per cent of assets under management, this is set to increase to around 1.3 per cent in the next two to five years.
Of the three different classifications of private equity investments, direct company investment, direct fund investment and fund of fund investment, the most common route, 63.6 per cent, is via direct fund investment. Although this will remain the case, this figure is expected to drop to 60.5 per cent in the next two to five years, while direct investment is also expected to drop from 20.0 per cent to 18.0 per cent. At the same time, however, fund of funds investment is expected to increase significantly from 16.4 per cent to 21.5 per cent.
To date, the majority, 67.3 per cent, of private equity commitments have been directed towards the Japanese domestic market. However, this figure is expected to fall by 4.1 percentage points the next two to five years. At the same time, target allocation to overseas markets will increase. Allocation to Asia is expected to rise by 2.5 percentage points and allocation to the US and Europe by 1.4 percentage points.
Japanese institutions investing in private equity cited their most important reasons for doing so as attaining greater returns relative to other asset classes and portfolio diversification, respectively. Institutions seek to generate, on average, an absolute return of 13.3per cent. They expect the return from private equity to be 670 basis points higher than the return from publicly quoted investments.
According to the survey, the return on private equity investments has so far met the expectations of 60.6 per cent of Japanese institutions. Performance exceeded the expectations of 15.2 per cent of respondents and strongly outperformed expectations of nine per cent.
Commenting on the results of the study, Bruno E Raschle, managing director of Adveq, commented, ‘This study confirms that Japanese institutions are increasingly focusing on private equity as a component of their equity portfolios. The percentage allocation to private equity looks set to grow significantly in the coming years.’
‘As private equity is still at an earlier stage in Japan relative to other markets, and particularly due to the anticipated shift towards greater overseas private equity allocation, we expect fund of funds will play an increasingly important role in assisting Japanese companies in developing their private equity investments,’ Raschle added.
Adveq is a private equity fund of funds investment manager. Founded in 1997, Adveq currently manages approximately $2.5bn of assets for its clients
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