In understanding the changes just beginning in the investor mind-set of Japan, it is important to distinguish between two eras: pre- and post-1990. Up until the 1990 stock market crash there was sufficient growth in Japanese markets that there was little interest by asset managers in investing outside of the country. Japan’s fund managers, typically bureaucratic, had no financial incentive to take any risks that might jeopardize the overall value of their fund assets.
After the crash, the returns on Japan’s stocks and bonds were so abysmally low that asset managers were forced to look elsewhere. It is important to recognize that Japan’s Keiretsu, those interwoven networks of corporations unique to the nation, have been longstanding strategic investors in the United States, and that Japanese institutions, especially pension funds in Japan, among the largest in the world, have been restricted from investing in private equity, even in Japan.
Thus the story of Japanese investment is one of the latest diversification of assets among the industrialized world’s nations. The first wave of Japanese investment in the United States went into hedge funds, in part because they were heavily advertised in Japan and because there were so discrete (something that appealed to the nature of Japanese investors). The second wave of investment went into U.S. public equities. Japanese asset managers worked their way toward venture capital investments in a third wave of investing, about the time that the Internet bubble was peaking. Since then, Japanese investors have been participants in U.S. buyout funds.
That brings us to 2002 and the actions taken by the Pension Fund Association for Local Government Officials, also known as “Chikoren.” With about $100 billion in assets that it manages for about 3.5 million people, Chikoren is the largest fund manager group in Japan. So when it invested $130 million into U.S. funds of funds and private equities last year, the country’s asset managers took note. Japan, which typically has fully funded pensions, faces one of the most rapidly growing crises of all industrialized nations in terms of levels of funding. It has the largest proportional group of soon-to-be pensioners in the world.
The investments in U.S. private equities are both an admission of the need to improve the returns available for future pension holders and that Japan’s private equity market is, relative to the United States, not up to the task of absorbing the vast amounts of investment that asset managers will need to make in order to improve the returns on their assets.
The move by the Chikoren is a watershed event for the entire Japanese asset management industry, says Motoya Kitamura, a staff researcher at Mitsubishi Research Institute Inc., a private company owned by 20 different Mitsubishi companies. Until now, says Kitamura, there was no need or incentive to diversify investment portfolios. Now there are a large number of U.S. gatekeeper firms and agents in Japan, and they have been successful in obtaining investments from two well known funds of funds: a combination of Mitsubishi Corp. and Pacific Corporate Group, and a combination of Mitsubishi and Daido Life Insurance. Kitamura also cites a third important collaboration between Tokio Marine and Capital and Pathway Capital Management, a U.S. advisory that is working to identify Japanese investors for the U.S. private equity market.
One other key event happened last year when a government working group sponsored by the Ministry of International Trade and Industry (MITI) issued a report that identified legal obstacles to the buyout industry and other obstacles to private equity investment in Japan. While it was not the sort of clarion call of recognition that will open a floodgate of investment, it does signal the recognition by official Japan that private equity investment in the United States is somewhere in the future for the trillions of dollars of assets held by Japanese institutions.