Once you start investing in private funds, you need to stay in the game. That is the golden rule that has helped Hideya Sadanaga build up Japan Post Bank’s private equity and infrastructure programmes from scratch over the last four years.
“Our goal is to be as consistent as possible in terms of our investment pacing year after year – we don’t want to be in and out of the game,” Sadanaga, managing director and head of the private equity investment department at one of Japan’s largest financial institutions, tells Infrastructure Investor.
Sadanaga believes investors who stay away from the market will lose out on the best vintages. “The beauty of private funds is that if you commit beforehand, you can obtain exposure when most people are too scared to do so, and therefore you can catch a lot of value,” he argues.
His persistence has put JPB at the forefront of Japan’s growing alternative scene. The firm declined to provide specific numbers on its commitments to infrastructure assets. It did, however, say that its deployed capital to private equity and infrastructure through co-investments and blind-pool funds stood at approximately $11 billion as of the second quarter of 2019, with a “minor portion” of this amount being committed to infrastructure.
In comparison, the combined private equity and infrastructure exposure of Japan’s GPIF, the world’s largest pension fund, stood at ¥307.9 billion ($2.8 billion; €2.5 billion) at the end of March, according to its annual report.
Several industry sources have told Infrastructure Investor that JPB is Japan’s largest investor in infrastructure funds, and have praised the firm’s “seasoned” investment team. “They have invested quickly, but in a responsible manner. They are a very rational investor,” a Tokyo-based asset manager says.
JPB’s push into alternatives started in 2015, when it appointed Katsunori Sago, who had held several positions at Goldman Sachs Japan, as head of asset management and chief investment officer.
“There was some description of starting private equity investments in our previous three-year medium-term plan, but quite frankly, no one was talking about it during those introductory meetings,” Sago told sister publication Private Equity International last year, as he was preparing to end his tenure with JPB to become Softbank Group’s chief strategy officer.
Sago recruited Sadanaga in January 2016 to lead the new private equity department, at a time when many Japanese financial institutions were starting to turn to alternative assets space to counter the country´s low interest rates.
Sadanaga was no stranger to alternatives. He had previously spearheaded the development of several alternative investment products as head of product development and general manager of the global product division of Nissay Asset Management. Previously, the investment professional worked as deputy general manager for credit and alternative investment at Nippon Life Insurance.
At JPB, Sadanaga was tasked with creating a team focused on private equity, but he had no doubt that infrastructure had to be part of the bank’s portfolio: “When I arrived to create JPB’s private-equity programme, we decided early on that we would be including infrastructure in the JPB portfolio, since in my previous job with Nippon Life Insurance, infrastructure funds were part of our private equity portfolio.”
“Our goal is to be as consistent as possible in terms of our investment pacing year after year – we don’t want to be in and out of the game.” Hideya Sadanaga
The asset class’s main advantages, Sandanaga says, are its ability to provide “diversification, because it’s a distinct strategy, and it provides income, unlike many other private-equity strategies that are totally reliant on capital gains”.
Although there were discussions around whether it was necessary to set up an investment department focused on infrastructure, or add it to the bank’s real estate department, the asset class was initially included in the private equity division, and has remained part of it ever since.
“The discussion is still ongoing, but we first started investing in value-add vehicles that produce private equity type returns, and that’s why the asset class was initially included in the private equity department,” Sadanaga explains.
JPB’s private equity team numbers 17, including 12 investment professionals, two of whom are focused on infrastructure.
Setting up an infrastructure programme in Japan was no walk in the park, though.
“When we started, in 2016, we were only looking at value-add strategies, and there were many questions raised regarding risk management and involvement in greenfield projects,” Sadanaga recalls.
That meant the team had to place limits on investments to make the portfolio acceptable for “a risk-averse institution” like JPB. “When we started, limits were placed on non-OECD and greenfield exposure, for example, and that was necessary to start the investment programme,” he says.
Perhaps unsurprisingly, the team faced fewer headwinds expanding the programme into core and core-plus strategies, which “are easier to understand for a bank like us,” Sadanaga says.
At the same time, JPB had to deal with a common problem affecting most Japanese alternatives investors. “Creating a team was the biggest challenge for the private equity strategy as a whole; just hiring investment professionals that understood these assets. Since JPB had no previous experience investing in private equity-type assets, there were no [investment professionals] in-house,” Sadanaga says.
To make sure it retained asset-class expertise, investment professionals hired to be part of JPB’s private-equity department are not bound by the department-transfer rules that workers routinely face in Japanese financial institutions. These rules have, according to several sources, hampered alternative-assets expertise in the region.
In September 2017, Yasuhiro Ono joined JPB’s private equity department as director and head of infrastructure investment. In his previous role as principal at Mitsubishi Corporation, Ono focused on developing alternatives products for his clients that included investments in infrastructure, energy and power, renewables and agriculture assets, among other sectors.
In July, the bank recruited a second investment professional focused on infrastructure, Yuriko Watanabe, who previously worked at the Bank of Japan.
JPB has balanced its limited number of infrastructure-focused professionals with the help of five gatekeepers that have helped the institution deploy their funds into the asset class. “They act like an extended team for us,” Ono says.
Although Sadanaga says there is no specific internal process to review each investment pursued by the gatekeepers, he stresses the team is “in constant dialogue” with them about fund and co-investment opportunities.
Despite JPB’s hands-on approach, a placement agent based in the region, who asked to remain anonymous, says the infrastructure team is becoming “more advisory-driven” due to the growing size of its portfolio.
The right price
Both Sadanaga and Ono stress their interest in meeting directly with GPs to know more about how they are deploying their capital. “Our ultimate goal is to gain insight into the industry through the relationship with our GPs. We don’t want to be faceless investors behind a gatekeeper,” says Ono.
“We are very keen on knowing more about the purchase price of the asset, and the expected selling price. If you look carefully at the numbers in the spreadsheet, you can decide on that investment, even in a very aggressive market,” Ono adds.
Both professionals agree that asset valuations are often too high. “We regularly lose out on transactions for pricing reasons,” Sadanaga says.
“We don’t want to be faceless investors behind a gatekeeper.” Yasuhiro Ono
Other Japanese LPs have publicly asked for more information from infrastructure fund managers recently. At Infrastructure Investor’s May Tokyo Summit, Satoru Tanabe, the head of infrastructure and income investment at Japan’s Pension Fund Association, criticised the “limited information” offered by fund managers.
During the event, Hisamitsu Iida, private asset portfolio manager at Sompo Japan Nipponkoa Insurance, similarly bemoaned the lack of information on the asset exposure the insurer was getting through their blind-pool fund investments.
Those information demands haven’t always been welcomed by GPs. Our placement agent source, for example, calls them “unreasonable”, arguing fund managers need privacy to pursue deals. “[Information requirements] are one of the reasons why the Japanese [alternatives] market is smaller than it could be,” the source argues.
Waiting for a market correction
Moving forward, JPB is aiming to expand its exposure to core and core-plus strategies, which currently make up around 50 percent of its infrastructure portfolio. “It has been fairly challenging, as yields for core, contracted assets are extremely low at the moment,” Sadanaga says. The team is in discussions with the risk management department to start investing in infrastructure debt, he adds.
The bank is aiming to achieve high single-digit returns for its portfolio, after fees and currency-hedging costs.
“We try to navigate a certain band of investment opportunities, within which we can invest,” Sadanaga says. “We don’t want to be with GPs that engage in strategies we feel are too risky. But we also don’t want to invest below a certain rate of return,” he states.
JPB doesn´t have a specific target allocation for infrastructure. “We run on an annual budget, and the situation changes every year,” Sadanaga says.
He admits the bank might not increase its exposure to infrastructure as much as expected this year, due to “unexpected negative events” among some of their gatekeepers. He declines to provide more details beyond saying “we are constantly adjusting our allocation strategy”.
Both Ono and Sadanaga are keen to stress their interest in co-investments and rank its availability as a deal-breaker when choosing GPs. “Fees in alternatives are very high, and co-investments are very important as a lever to lower those fees,” Sadanaga says. The bank has its own co-investment division that manages those opportunities.
At the moment, high valuations are making it harder to invest, according to both investment professionals. “[Higher prices] have already stretched beyond my personal imagination. I previously felt the market would have corrected massively by now, and it has not,” Sadanaga says.
Even so, he is clear he is sticking to his fundamental rule: private investors must stay in the game at all times. “Staying on the sidelines and waiting for better times may look smart but it can result in a tremendous amount of lost investment opportunities, as you may have to wait for a very long time,” Sadanaga says.
While everyone waits for the cycle to turn, he offers other LPs a simple advice: “It is important that you keep investing, but importantly, in an intelligent and cautious manner.”