On the ground presence
Japan continues to offer attractive investment opportunities to global investors. The second largest developed economy provides a comforting rule-of-law backdrop, which should not be taken for granted at the global level. Private market investment origination teams remain quite active. Real estate investment amounts by offshore investors, for example, over the past three years have consistently been over ¥1 trillion annually, despite the Covid-19 disruptions.
Investment opportunities can be found within a wide range of real assets in residential real estate, infrastructure, and commercial real estate, including sub-sectors such as office buildings, hospitality, logistics, and data centres. The recent yen devaluation has made long term investments in real assets even more attractive. For private equity funds, the opportunities may be more limited in number. Nonetheless, private equity funds with well-staffed origination teams, clear investment strategies, and the patience to find the right investments have been well rewarded. The competition for assets is fierce and new entrants, in both the real estate and private equity space, continue to make inroads.
Recent reports of investments in Japanese start-ups by Softbank Vision Fund and an investment in a domestic venture capital fund by the Government Pension Investment Fund, the first of its kind, have shone a light on a sector that has garnered the attention of the Kishida administration. The government has established a cabinet-level post in charge of supporting startups. The intent is for the ministries and agencies to work in a coordinated fashion to develop measures to encourage startups and their subsequent growth and to make this the pillar of the government’s action plan for a ‘new capitalism’. Pioneering offshore investors, across all stages of venture capital financing, have established a beachhead presence and it is not unusual to find global investors on shareholder lists of Japanese startups. The recent investor and government initiatives have already reinvigorated this investment space and it will likely lead to new investors joining the fray.
On the public markets side, many of the global multi-manager funds and managed account platforms continue to grow their already successful Tokyo-based asset management businesses. As a result of geopolitical concerns, Covid-19 disruptions in the region, and a need for diversification of geographic and strategy risks, more global hedge funds, especially those with multi-strategy, multi-manager teams, have begun to consider a trading presence in Tokyo.
High setup costs and language barriers are a concern but over the last couple of years, many asset managers have taken advantage of government and industry initiatives, including those offered by the Tokyo Metropolitan Government, FinCity Tokyo, and the FSA. That said, an investment in a fully licensed and regulated operation in Japan is a significant one, both in terms of cost and time. As an alternative to setting up a fully licensed operation, Gordian Capital, a specialised and fully licensed asset manager, holding a full Discretionary Investment Management license, an Investment Advisory license and a SEC Registered Investment Adviser license. The firm provides practical solutions to significantly reduce the time, cost, and uncertainties of establishing a regulated base in Tokyo enabling global managers to house key investment professionals on the ground in a fully regulated infrastructure.
Diversifying the investor base
The offshore funds which have considered Japan as an essential destination to diversify their investor base continue to be well rewarded, despite the challenges. The more successful funds have had a long presence in Japan, either by having appropriately licensed fund-raising personnel on the ground or working with independent distributors. Knowledgeable offshore funds have also made it a point of covering different types of investors through multiple distribution channels. That said, fundraising in Japan remains a challenge and requires great effort, determination, and long-term commitment.
Pension funds, for example, must make use of regulated fiduciary managers such as trust banks and discretionary investment management (also known as DIM) firms to make their investments. Finding a firm with the necessary language skills, and the traditional as well as broad alternatives investment expertise is much harder than the number of DIMs (around 130) would imply. The large firms have set up separate business units to handle third-party products but many of them have long-established relationships with competing products thereby creating a shelf-space problem for new offshore managers seeking to enter the market. The alternative is to work with independent fiduciary managers, who do not manage their own capital or funds, such as Gordian Capital Japan, with the necessary language, investment expertise, and established relationships.
Corporate pension funds continue to increase their allocations to alternatives. By some accounts, alternatives currently account for over 20% of their assets, up from 8% a decade ago. Given the continued near-zero interest rates in Japan, real estate and infrastructure funds continue to be popular for their steady income streams. Corporate pension funds tend to have relatively low return targets and the managers are not particularly incentivized to outperform those targets.
If anything, pension fund managers, fearing potential negative impacts on the plan sponsor finances, place priority on controlling investment risk. According to various surveys, returns for the year ending March 2022 averaged 3.5-3.7%. The larger and more sophisticated corporate pension funds, especially those that do not rely on consultants, have allocations to more illiquid private market strategies.
Gordian Capital Japan is a Tokyo-based asset manager offering operational and infrastructure solutions to support offshore asset managers establish a Tokyo base for research and trading of both public and private-market assets. In addition, in its capacity as fiduciary manager, it invests in offshore funds across a wide range of public and private market strategies on behalf of domestic pension funds. Gordian Capital Japan operates under a Discretionary Investment Management and Advisory license under the Financial Services Agency of Japan. It is also a Registered Investment Advisor with the United States SEC.
Contact:Â
Alvaro Tamura
[email protected].
+81 3 4520-2323
Alvaro Tamura, Managing Director & CEO, Gordian Capital Japan Limited – In a career spanning over 21 years at Morgan Stanley in NY and Tokyo, Alvaro was a founding member of the Japan interest-rate derivatives desk covering global macro funds, the Japan Global High Yield trading desk, and the Japan Special Situations Group.  Alvaro earned a BSE in Electrical Engineering and Computer Science from Princeton University and an MBA from The University of Chicago.
