Japanese institutional investors have long wanted to branch out and invest in infrastructure but have been restrained by regulation and lack of expertise. Recent deals suggest that this sleeping giant is ready to become more active in the global infrastructure project finance market.
While two recent project finance infrastructure debt investments by Dai-ichi Life and Nippon Life were small by global standards, they nevertheless represented a growing trend by institutional investors to move beyond government bonds and stocks.
Last month, Nippon Life made its first overseas project finance loan, worth US$100m, by buying MUFG’s PF loan to a US LNG project. The loan, whose maturity is over 10 years, has a return of about 1.5% after deducting currency hedging costs, the company said.
In January, Nippon Life President Yoshinobu Tsutsui said the company would start overseas project finance as it accelerates the shift to non-traditional investment fields. More importantly, Nippon Life intends to invest in the primary project finance market rather than buy up debt in the secondary market.
Recently, Da-Ichi Life committed (US$52m) in the secondary market to a project financing backing an LNG plant in Qatar through a trust scheme, its first PF investment in the Middle East. In January, the insurer said it invested €30m (US$32m) in the secondary market for a PF backing offshore wind power plants in Germany through a trust scheme.
In February, Japan Post Insurance, the country’s largest insurer in asset terms and a unit of state-owned Japan Post Holdings, made its first PF investment, committing about ¥10bn alongside Dai-ichi Life Insurance in loans backing two mega solar plants in Japan.
Traditionally, Japanese life insurance companies have followed the safe path of investing in Japanese government bonds and stocks. But the sub-10bp returns on government bonds forced many to invest in government bonds overseas.
Life insurers had held a record US$659.41bn of foreign bonds and stocks in the year through to March 2015, according to data from the Life Insurance Association of Japan. Of this, roughly ¥67trn was in foreign bonds and ¥6trn in foreign stocks. Now, the life insurance companies want even better returns by investing in global infrastructure project finance.
“We would like to diversify our risks and strengthen our income generation capacity via a new style of investment in middle-risk, middle-return assets such as infrastructure funding,” said Tatsusaburo Yamamoto, general manager of investment planning at Dai-ichi Life Insurance, the second biggest life insurer.
For both Dai-ichi and Nippon Life, their overseas PF investments were done through intermediaries. Dai-ichi used a trust bank with the loan covered by Nippon Export and Investment Insurance. The trust scheme mitigates currency risks on the investment as Dai-ichi Life can invest in yen, while making the process easier for the insurer.
Nippon Life bought its PF loan from MUFG, one of the country’s largest and most trusted banks.
Trust banks are one of the most-important gatekeepers for foreign fund managers looking to distribute investment schemes in Japan. Trust banks in Japan have a broader function than many others in the global markets and often operate as intermediaries and trusted advisers. They are positioned to explain investment strategies to their institutional clients through broad networks and relationships with the public pension funds.
As infrastructure is a relatively new asset class in Japan, a lack of investment professionals in this sector has been a constraint on future growth.
But just as global pension funds evolved from using outside managers for their investments to developing in-house debt teams, the Japanese life insurance companies and even pension funds are now starting to develop their in-house investing capabilities with a view to becoming bigger players in the PF market.
Nippon Life Insurance, Japan’s largest private-sector life insurer, established a structured finance department on April 1 to invest in domestic and international PF to generate greater returns. Nippon Life has a larger appetite than its peers and has already invested over ¥300bn in the last two years in structured finance loans, such as domestic PF, leveraged buyout financings and hybrid financings.
Shinji Kuge heads the 12-member team that is expected to expand further with more hires later this year, as the insurer aims to invest ¥1.5trn (US$13.77bn) in growth areas, including onshore and offshore PF, over the next four years.
Dai-ichi has similar ambitions. “Our target for this fiscal year [ending March 2018] is 20%–30% more than what we invested in the previous FY. We are beefing up the team, too,” said Akinao Nishio, deputy general manager of structured finance group, fixed-income investment department at Dai-ichi Life.
It isn’t only life insurance companies that are looking for greater returns than those available in the Japanese domestic market.
Japan holds enormous amounts of capital – indeed it is the world’s largest creditor nation and foreign reserves are approaching US$1.5trn. The country has one of the largest pools of institutional investment assets in the world and the Japanese Government Pension Investment Fund (GPIF) is known as the world’s single largest public pension fund.
Historically, the asset allocation of Japan’s public pension funds has been heavily weighted to Japanese Government Bonds (JGBs). More than 60% of Japan’s assets under management were allocated to very low yield JGBs in 2012.
A number of recent reforms to the GPIF have been undertaken to respond to the size and speed of demographic changes, the introduction of more sophisticated investment options in the market, and the impact of Japanese government economic policies.
The Pension Fund Association (PFA) moved relatively early by participating in one of the world’s largest infrastructure investment alliances, the Global Strategic Investment Alliance (GSIA), in 2012. The PFA now invests up to A$2.5bn in large-scale infrastructure assets together with other Japanese financial institutions.
However, the majority of Japanese pension funds have very limited capacity for direct investment. These limitations are partially regulatory, but are also driven by limited numbers of professionals who can directly manage investments.
This is changing. On April 11, the Government Pension Investment Fund put out a notice calling for asset managers for its fund of funds with expertise in diversified investments in mainly Core/Brown field Infrastructure.
The rising participation of Japanese insurers and pension funds should bode well for the global PF market, which clocked 2016 volume of US$265bn, down 4.5% year-on-year. Japanese banks have dominated global PF as the stagnant economy and a negative interest rate environment at home has pushed them overseas in search of greater returns.
The insurers and funds are following suit.
The power sector, which accounted for almost half of global PF volume last year, holds the greatest appeal for Japanese insurers as the stable cashflow-generating assets pose fewer risks, while providing returns that are better than thinly priced plain-vanilla corporate loans.
Nippon Life and Dai-ichi Life, which shown to have an appetite for offshore wind-power projects, are also expected to invest in Japanese renewables.
“Our company is in the process to acquire know-how through our recent investment in the German offshore wind-power project. We would like to participate if a good project emerges in Japan in the future,” according to Dai-ichi.
The interest will now be on how soon one of the large insurers or pension funds will join an offshore bidding consortium for a chance to be at the front of an infrastructure asset auction. They will only need to look at the performance of their global peers to appreciate the returns achieved from infrastructure investment.
