On 11 April 2017, the Government Pension Investment Fund (GPIF) of Japan issued a call for asset managers of alternative assets, including infrastructure, private equity and real estate, as it seeks to invest via fund of funds products that are set up as separate managed accounts for GPIF.

The move is in line with the GPIF recent decision to reach a 5% allocation to alternative assets, equivalent to $75 billion split across infrastructure, real estate and private equity or $25 billion each if equally split. Within the infrastructure asset class, GPIF has stated it is seeking to invest in global, core infrastructure, in mainly developed countries, making diversified investments in primarily core/brownfield infrastructure funds.

As yields on Japanese government bonds near zero or negative, investors are expected to continue to seek higher yielding alternatives. GPIF is not the only government-owned institutional investor that is looking to boost its infrastructure exposure. Japan’s Pension Fund Association for Local Government Officials, known by its Japanese acronym Chikyoren, is also looking into infrastructure and has mandated Mitsubishi UFJ Trust Bank to help manage its new overseas infrastructure investment portfolio. Such efforts from the Japanese government to encourage investors to diversify their investment base and take on more risk are part of a broader attempt to boost the economy overall, which has been stagnant, as well investment returns which have been low in recent years. 

Infrastructure debt 

While over the past years, Asian institutional investors have in general increased their allocation to infrastructure, and continue to do so according to sources, GPIF could be a particularly promising one for the sector, given its ¥145 trillion assets under management (AUM). In a report released in April 2017, AMP Capital said it expects Japanese pension funds to continue to increase their allocation to infrastructure, with infrastructure debt being one of the main beneficiaries. 

"Over the next three-to-five-years we do not expect Japanese investors will become direct investors (like Canadian or Australian big institutional investors). Rather, they will continue to invest through fund managers... Infrastructure debt is expected to be one of the beneficiaries of a growing thirst for alternatives with the asset class rising to prominence in a relatively short period of time. It represented just 6% of infrastructure funds that completed fundraising in 2009 compared with almost a quarter of funds in 2015," the report reads.

AMP Capital global head of infrastructure debt Andrew Jones noted that the largest proportion of investors with a preference for unlisted infrastructure debt is based in Asia and said he sees a significant growth opportunity in the market.

"For Japanese institutional investors, infrastructure debt represents an asset class underpinned by defensive assets capable of generating consistent cash flows across market cycles, often in a highly regulated environment. Debt holders rank ahead of equity holders in the capital structure, creating an extra degree of security," he says.

Market snapshot and numbers

According to Willis Towers Watson's Global Pension Assets Study, 2016, Japanese pension funds are among the world’s largest, with approximately $2.75 trillion in AUM and were growing by 2% year-on-year in 2015. The Japanese institutional market is comprised of three segments: corporate pensions, public pensions and financial institutions. According to the AMP Capital report, the dominant pension scheme is defined benefit, comprising over 95% of all plans, with a significant portion having large unfunded liabilities. Defined contribution schemes, whilst small, are growing and attracting strong flows.

"Today, Japan’s asset management industry is on a new growth phase; its AUM (approaching ¥500 trillion) and asset management revenues both surpassed their 2007 peaks in 2016 and are likely to keep growing. Japanese institutional investors typically have longer term liabilities and over the last decade have been looking for new sources of long-term, inflation-protected returns. They represent a potentially major source of long-term financing for infrastructure assets," the report concluded.