Tokyo Summit: Infra debt chosen for stable cash yields and lower fees

Now that infrastructure debt has become a popular asset class among Japanese institutions, fee and fund structures are drawing their attention.

Infrastructure is in demand among Japanese institutions as they favour the stable characteristics of the asset class and higher yielding cash coupons compared to public fixed-income assets, three Japanese institutional investors said during a panel at Infrastructure Investor Tokyo Summit 2018 last Friday.

To cope with the low yielding environment from public bonds and loans, more Japanese insurance companies and pension funds are increasing their exposure to the infrastructure debt strategy, with a focus on projects based in the US and Europe.

Yasuhiro Ono, a Tokyo-based director of the private equity investment department at Japan Post Bank, overseeing both the infrastructure and corporate private debt investment portfolios of the organisation, said that the firm is seeking cash yield components from its investments.

“For an infrastructure core strategy, we expect five to six percent returns from cash yielding, but for mezzanine and distressed, [we expect] around 10 percent,” he added.

Hisamitsu Iida, a Tokyo-based section manager of the investment and loan department at Sompo Japan Nipponkoa Insurance, added that the total return is better in an infrastructure debt strategy as long-term investors in Japan can mitigate j-curve effects to a degree.

AISIN Employees’ Pension Fund, a Tokyo-based corporate pension fund for the Japanese manufacturer, has committed $10 million to an offshore infrastructure debt strategy this year, according to Takeshi Ito, a Tokyo-based senior investment officer at the pension fund.

He also told us that the fund plans to commit further capital to the strategy. “We will increase [our exposure to infrastructure debt] to about $50 million this year,” he said.

Japanese asset managers also see this trend among insurance companies and pension funds. “Infrastructure is increasingly popular among Japanese investors”, said Takako Koizumi, head of infrastructure investments at Tokio Marine Asset Management.

This popularity has pushed asset prices up in recent years. “Trophy assets are expensive,” said Ono, adding that he has seen more capital inflows in the infrastructure investment strategy.

However, infrastructure is still a newer asset class to most of the Japanese investors. For instance, Japan Post Bank started investing in the asset class in 2016, according to Ono.

“People have been waiting for Japan to wake up, and I think this is what happened over the past few years,” Kay Sano, a Tokyo-based representative director of Monument Group, a Boston-based private placement firm said, adding that there will be higher demand from Japanese limited partners for select offshore managers targeting infrastructure investment opportunities.

Investors’ manager selection process is likely to be more focused on assessing fee and fund structures given the nature of the infrastructure debt strategy where investors find less upside potential.

“The fee [structure] is something that we have to pay attention to,” said Masashi Kataoka, a Tokyo-based general manager of the alternative investment group at Dai-ichi Life Insurance.

He added that there is not so much upside in credit investments for infrastructure assets and the spread is tight now. “If the fee is too high, it is conducive to reduced returns,” Kataoka noted.

Additionally, investors will look thoroughly at the revenue and cost structure of the underlying assets as well as the deal pipelines of funds to assess infrastructure managers’ relative strengths, according to Tadasu Matsuo, head of alternative investment at Japan Post Insurance.