PRIVATE ASSETS ATTRACTING CORPORATE PENSION INVESTORS

AL-IN’s latest private asset investment survey found more than half of respondents (56.6%) have invested or are considering investing in private assets (PAs), while 43.4% hold no such investments. 

Types of PA investments now include not only open-end funds, mostly in real estate and infrastructure, but also closed-end funds, secondary funds which can suppress J-curve effects, co-investments, and separate accounts requiring investment thresholds.

EXPECTATIONS FOR PRIVATE ASSET INVESTMENTS

Among funds that have invested in PAs, the most common expectation was “Transparency/clarity of investment operation”.  PAs are relatively stingy with information and thus difficult to manage and monitor, whereas institutional investors require transparency in order to be accountable to stakeholders.  The second most common expectation was “Lower correlation with public stocks/bonds”, followed by “Stability of income“.  Decidedly less important was "Investment target being domestic assets".  In fact, more and more Japanese corporate pension funds are considering foreign assets for investment opportunities and diversification benefits.

The most common expectation for “Level of return sought (after deducting costs)" was in the low single-digits, with demand decreasing significantly in the double-digit range.

Given that many corporate funds emphasize a certain level of surrender liquidity, there still seems to be a strong need for core-type open-ended funds, such as domestic private REITs, which triggered a rapid expansion of private asset investment among Japanese pension funds.

AL-IN's survey posed the same question to asset managers (N=41) as corporate pension funs.  Asset management companies cited “Stability of income” as their clients’ top priority, followed by “Transparency/clarity of investment operation” and “Lower correlations with public stocks/bonds”.  Those responses largely overlapped with those from corporate pensions.  In terms of levels of risk and return after deducting costs, however, there was a slight divergence from the levels required by asset owners.  Managers ranked "Medium risk, 5-10% return after deducting costs" highest, and “High risk 10% and over after costs” higher than their clients did.

ESG FACROTS STILL LIMITED

Lastly, the survey asked about the impact of ESG on PA investment.  When asked about ESG and the impact on "environment and society" in their PA investments, more corporate pension funds believe ESG has a positive impact on the environment and society when it comes to public infrastructure investments and natural capital, such as farmland and forest investments.

Responses to how ESG influences "performance" also show that many funds believe ESG factors have a positive impact on infrastructure (34.9%) and farmland/forestry (35.7%) investments.  Slightly more respondents answered that ESG would have a positive effect in "environmental and social" areas than in "performance", while the number of respondents who believed ESG would have a negative effect in "performance" also increased slightly.  The question of whether ESG factors lead to economic returns has long been debated in equity and bond management, and it seems equally unsettled with respect to PAs.

* 2019 survey: https://investmentjapan.jp/research/1193/

** 2020 survey: https://investmentjapan.jp/research/2616/