Survey by Adveq and Kyoto University Shows Investment Allocation to Private Equity Increasing at Japanese Institutional Investors.

TOKYO -- Investment allocation to private equity by Japanese companies is expected to rise over the next two to five years, according to a study completed by Adveq, the Swiss private equity fund of funds manager, together with Kyoto University. The survey, Adveq's first full-market survey on the attitudes of Japanese institutional investors towards private equity, revealed that 25.2% of Japanese institutions are already investing in private equity; the majority of these only began doing so after 2000. The study also reveals that Japanese investors' allocation to private equity, by percentage of assets under management, will triple in the next two to five years.

Adveq, together with Kyoto University, one of the leading universities in Japan, analyzed the private equity investment behavior and future intentions of Japanese company pension funds, industry association pension funds, insurance companies, banks, investment advisory companies, securities companies and other financial service providers. The survey also analyzed institutions' tolerance of risk, with the aim of deepening the understanding of factors that motivate institutional investors to allocate capital to private equity. In total, the study was distributed to 1584 institutional investors1.

Key findings can be summarized as follows:

Planned increase in allocation

Among institutions already investing in private equity, 55.9% currently allocate less than 1% of total assets under management to this asset class. However, over the next two to five years the number of institutions allocating up to 5% will double from 14.3% to 28.6%, while those allocating up to 10% will increase from 2.9% to 8.6%. The percentage allocating over 10% will remain stable.

On average, the next two to five years will see Japanese investors' increase their allocation to private equity by more than three times. While average allocation is currently relatively low, at around 0.4% of assets under management, this is set to increase to around 1.3% in the next two to five years.

Planned increase in fund of funds investment

Of the three different classifications of private equity investments, direct company investment, direct fund investment and fund of fund investment, the most common route, 63.6%, is via direct fund investment. Although this will remain the case, this figure is expected to drop to 60.5% in the next two to five years, while direct investment is also expected to drop from 20.0% to 18.0%. At the same time, however, fund of funds investment is expected to increase significantly from 16.4% to 21.5%.

Allocation focus to become more international

To date, the majority, 67.3%, of private equity commitments have been directed towards the Japanese domestic market. However, this figure is expected to fall by 4.1 percentage points over the next two to five years. At the same time, target allocation to overseas markets will increase. Allocation to Asia is expected to rise by 2.5 percentage points and allocation to the U.S. and Europe by 1.4 percentage points.

Aim of achieving solid returns and portfolio diversification 

Japanese institutions investing in private equity cited their most important reasons for doing so as attaining greater returns relative to other asset classes and portfolio diversification, respectively. Institutions seek to generate, on average, an absolute return of 13.3%. They expect the return from private equity to be 670 basis points higher than the return from publicly quoted investments.

Overall satisfaction

According to the survey, the return on private equity investments has so far met the expectations of 60.6% of Japanese institutions. Performance exceeded the expectations of 15.2% of respondents and strongly outperformed expectations of 9%.

Commenting on the results of the study, Bruno E. Raschle, Managing Director of Adveq, said, "This study confirms that Japanese institutions are increasingly focusing on private equity as a component of their equity portfolios. The percentage allocation to private equity looks set to grow significantly in the coming years."

"As private equity is still at an earlier stage in Japan relative to other markets, and particularly due to the anticipated shift towards greater overseas private equity allocation, we expect fund of funds will play an increasingly important role in assisting Japanese companies in developing their private equity investments," Mr. Raschle added.

The study is the latest in a series of surveys sponsored by Adveq with a view to improving the level of information available about Japanese institutional investors' attitudes towards private equity investing. Together with a number of renowned academic institutions, Adveq has already completed similar studies in Australia, Switzerland, Germany, the Netherlands, the European Nordic region, and the U.K.

About Adveq

Adveq is the leading independent private equity fund of funds investment manager in Europe. Founded in 1997, Adveq currently manages approximately USD 2.5 billion of assets for its clients. These clients consist almost entirely of international institutional investors including pension funds, insurance companies, family offices and other financial services providers, that are located primarily in Europe, Asia, Australia and the United States.

1 A total of 171 institutions responded to the survey, which corresponds to a response rate of 10.8%. The market coverage by assets under management for the categories non-life insurance companies, life insurance companies, company pension funds and industry association pension funds is 45.7%.