Advisory Panel On Public Funds: Key Recommendations

Advisory panel formed under the Cabinet Office regarding the management of $ 2 trillion public and quasi-public funds that are currently managed by the below institutions submitted its final report on November 20th.

• Government Pension Investment Fund (GPIF) ($1.2 trillion) 
• Federation of National Public Service Personnel Mutual Aid Associations (KKR) ($78 billion), 
• Pension Fund Association For Local Government Officials ($175 billion) 
• The Promotion And Mutual Aid Corporation For Private Schools Of Japan ($36 billion) 
• Other 100 public institutions
• 86 national universities.

The below are some of the recommendations the panel made in the report.

1. The public funds should review the current portfolio allocation that is heavily biased towards domestic bonds.
2. The public funds should review their investment return targets and risk tolerance levels.
3. For increased portfolio diversification, the public funds should consider investing in new asset classes, such as REITs / real estate, infrastructure, venture capital, private equity and commodity. 
4. The public funds should consider increasing allocations to active management funds. Establishment of a "baby fund" (an internal segregated account) may be considered for more flexible deployment of capital.
5. The public funds should review appropriate benchmarks for passive investments. For Japanese equity, new benchmarks, such as JPX Nikkei 400 that focuses on constituent stocks' ROE, may be considered.
6. Ministries overseeing the public funds should duly entertain the initiatives of each fund management institution.
7. It is desirable that key investment decisions are made collectively by investment experts who work on a full-time basis and who are free of conflict. 
8. To invest in new asset classes and to have robust risk management capability, it is necessary that the public funds are amply resourced and staffed with top-class professionals. To this end, the HR and expense restrictions imposed by past cabinet decisions should be relaxed. 
9. GPIF should be reorganized under a new law that specifically caters to its unique status. GPIF should be given a higher degree of independence and authority on the condition that it maintains a high level of transparency and accountability. The change should enable key decisions be made by its board, whose member would be conflict-free investment experts. As an interim measure under the existing governing law, transferring/delegating investment decision making authority from the CEO to an investment committee made up of conflict free investment professionals should be considered. 
10. "Forward looking" risk management should be introduced and attentions should be paid to inflation risks. Investing in inflation-linked JGBs and use of derivatives should be contemplated for risk mitigation. 
11. The public funds should consider more active use of shareholder rights, despite their public nature, in order to maximize investment returns.  
12. GPIF should immediately work on the followings: 

              - Review of investment allocation within the current base portfolio
                guidelines, increasing allocations to active funds

              - Review of risk/return target
              - Review of benchmarks for passive investments
              - Application of forward-looking risk management,
                inflation risk hedging

         

              GPIF should work on the followings in the next 12 months:
              - Revision of base portfolio allocation
              - Introduction of new asset classes
                (mainly those with liquidity and NAV transparency)
              - Establishment of a baby fund
              - Employment of full-time committee members and investment
                professionals with significant expertise

        

             GPIF should work on the followings with necessary
             legislative changes.
            - Introduction of new asset classes
              (with lower liquidity and lower NAV transparency)
            - establishment of fully-empowered board

       

Nomura And Intermediate Capital To Launch Mezz Fund JV

Nomura has announced that it will form a 50:50 JV with Intermediate Capital that will manage a Japan-focused mezzanine fund and each institution has agreed to allocate JPY 10 billion to the fund. The below is excerpts from the press release:

"FOR IMMEDIATE RELEASE 16:00 JAPAN, 07:00 UK, 21 November 2013
Nomura and ICG Announce Agreement to Facilitate Planned Japanese Domestic Mezzanine Fund

Nomura Holdings, Inc., Asia’s global investment bank, and Intermediate Capital Group plc, the specialist investment firm and asset manager, have agreed a 50:50 partnership that will facilitate the future structuring and distribution of new domestic mezzanine investments and funds, to be managed by a local Japanese fund management company that will be established. Nomura and ICG have agreed to allocate Yen 10bn each to the initiative.

It is planned that a fund would provide institutional investors opportunities to invest in mezzanine debt with financial sponsors and in growth/expansion capital. As the market in Japan benefits from the current government’s economic initiatives the demand for mezzanine is anticipated to rise. Offering mezzanine investment within a fund structure opens up new opportunities to institutional investors. Any future funds structured as a result of the agreement will be jointly seeded, distributed and co-managed between Nomura and ICG."

Carlyle Is Set To Further Divest Chimney Through The TOB Announced By Yamaya

According to disclosure documents filed by Carlyle today,  Carlyle has entered into an agreement with Yamaya Corporation, Tohoku-based liquor retailer, where Carlyle funds will subscribe to the tender offer announced by Yamaya to acquire up to 50.22 % (or 48.66% excluding the exiting holdings) of Chimney Corporation, bar and casual restaurant chain operator.

The TOB price is set at JPY 1510 per share, which equates to a premium of 51.6% over the last 3 months average price and and 53.6% over the last 6 months average price. Total proceeds to buy a 48.6% stake of Chimney is JPY 14.3 billion.

Carlyle had delisted Chimney through a tender offer announced in November 2009 for approximately JPY 20 billion and subsequently squeezed out minority share holders.

In December 2013, Chimney was re-listed and Carlyle sold about 1/2 of its holdings. Currently, Carlyle funds collectively own 48.42%. The IPO price was JPY 945.

 Given the TOB ceiling is only 50% of the outstanding shares, (my understanding is that) there is no guarantee that Carlyle can sell all its stakes at the TOB, but the sale at this price for any amount would improve the return of Carlyle Japan II Fund.

Polaris Sells Nippon Oil Pump To Wendel

Polaris Capital Group announced the sale of Nippon Oil Pump Co., Ltd. (NOP) to a French listed investment group, Wendel, on 31 October.

According to the release,
NOP, with 94 years of history, has been engaged in designing, developing, manufacturing and selling hydraulic pumps and motors, enjoying more than 90% of domestic market share as well as substantial global market share for trochoid pumps principally used for circulating lubricating and cooling oil in metal cutting machine tools.

Polaris bought NOP from Takumi1st Fund managed by Japan Private Equity Co., Ltd. back in 2008. With the sale of NOP, Polaris has divested 4 portfolio companies out of 8 investments made by its 2nd fund.