TOKYO -- Pension funds in Japan could satisfy their need for solid returns over long periods by pouring more money into private-equity investments, just as pension funds elsewhere do.
The Government Pension Investment Fund manages some 120 trillion yen ($1.15 trillion) in assets. In a report last November, an expert panel discussing changes to the Japanese entity's investment strategy said private equity should be added to its portfolio.
According to a survey last year by the Daiwa Institute of Research, 72% of 125 Japanese pension funds engage in alternative investing, which looks beyond such major asset classes as stocks and bonds. Of these, 23.6% invest in private-equity funds, up 5.1 percentage points from a year earlier.
Private-equity funds "must appear attractive to pension funds that have long been unable to find viable investment options due to the stock market slump and other factors," says Yasuo Sugeno, senior economist at the institute.
Still, private-equity funds are only a small slice of the pie. The Daiwa Institute of Research study found that most pension funds that choose such funds invest between 500 million yen and 1 billion yen. Less than 1% of the overall assets of corporate pension funds are invested in private-equity funds, according to Katsuyuki Tokushima of the NLI Research Institute, possibly out of concern that low liquidity will make holdings hard to sell.
Outside Japan, private-equity funds are already a main investment target for pension funds. In the U.S., they make up 5% of the portfolios of public pension funds and 4.3% at corporate pension funds, according to the Research Institute for Policies on Pension & Aging.
The California Public Employees Retirement System, or Calpers, had about 12% of its assets invested in private-equity funds as of last year. The Canada Pension Plan Investment Board had 36.4 billion Canadian dollars ($33 billion) in the funds as of last December, more than double the figure from five years earlier. It used to invest mainly in bonds.
A shortage of personnel handling investment activities may be one reason Japanese pension funds put less into private-equity funds. The funds often issue capital calls, in which investors must provide money committed earlier. The substantial administrative work involved may be too much for Japanese pension funds, according to a senior researcher at the Research Institute for Policies on Pension & Aging.
According to the British Private Equity & Venture Capital Association, private-equity funds generated returns of 15% over the past decade, outperforming the 8.8% of U.K. shares.
Private-equity funds take time to generate returns, making these instruments a good match for pension funds looking to invest over the long term. The stance that Japanese corporate pension funds take toward private-equity funds may determine their investment performances down the road.