JIP Reportedly In Talks To Buy Sony's PC Business, Only A Week After It Bought NEC BIGLOBE

Today it was reported that Sony is in talks to sell personal computer operations to Japan Industrial Partners. The transaction value is said to be JPY 40 to 50 billion. The sale may be announced as early as tomorrow Feb 6th, as Sony is scheduled to report its earning results tomorrow.

Just a week ago, Japan Industrial Partners announced the acquisition of NEC Biglobe from its 4th fund.

The below is NEC's press release on the sale of NEC BIGLOBE to Japan Industrial Partners.

January 30, 2014
NEC Corporation
Japan Industrial Partners, Inc.
NEC BIGLOBE, Ltd.

Tokyo, January 30, 2014 - NEC Corporation (NEC; TSE 6701) and Japan Industrial Partners, Inc. (Japan Industrial Partners) today announced an agreement to transfer all of NEC's shares in NEC BIGLOBE, Ltd. (NEC BIGLOBE), an NEC subsidiary, to a special purpose company owned by Japan Industrial Partners Ⅳ Investment Limited Partnership and others in order to achieve further business expansion for NEC BIGLOBE.

Under the agreement, the transfer of all of NEC's shares in NEC BIGLOBE will be completed by the end of March 2014, and business operations will be carried out under a new organizational structure beginning in April.

In 1996, NEC initiated BIGLOBE as an internet service provider (ISP), then established NEC BIGLOBE in 2006 as a separate spin-off business. Since then, NEC BIGLOBE has expanded its business with the growth of the Internet and has contributed to providing stable earnings for NEC.

This agreement will enable NEC BIGLOBE to receive financial and management support from Japan Industrial Partners in order for it to realize further business growth.

NEC's enterprise system integration and service business will continue to collaborate with NEC BIGLOBE's knowhow and services in support of current and future customers.

Japan Industrial Partners has invested in a wide range of business divisions and subsidiaries of major corporations and has extensive experience in strategic initiatives that maximize business value. The combination of NEC BIGLOBE's competitiveness in the ISP business and its knowhow of Internet service platform operations with Japan Industrial Partners' management support knowhow is expected to result in further growth for NEC BIGLOBE.

Making the most of its more than three million broadband and mobile subscribers, its highly reliable Internet service platforms, and its knowhow in operating them, NEC BIGLOBE aims to activily expand its business while creating new value added services through the combination of broadband and mobile communications.

The below are Today's Nikkei article on the possible sale of SONY's PC unit.

TOKYO -- Sony is in talks to unload its sluggish personal computer operations to investment fund Japan Industrial Partners, part of a business overhaul designed to shift focus to smartphones, The Nikkei learned Tuesday.
     Under the plan, the fund will establish a new company to which Sony will sell its entire PC business. The sale price is estimated at 40 billion yen to 50 billion yen ($391 million to $489 million).

     The new entity would continue to sell PCs under the Vaio brand and also handle after-sales service. To facilitate the transfer, Sony will take only a small stake in the firm, which will try to solidify its business base at home. While the company may maintain operations in overseas markets where the Vaio brand is well-known, it will withdraw from most countries and regions.

     Sony's PC business has a staff of roughly 1,000. Many of them, including executives, will be taken on by the new firm, but some others will be transferred to other departments within Sony. The parties are discussing having Sony's PC site in Nagano Prefecture continue handling R&D and production under the new company.

     The sale of the PC business will result in disposal losses, pushing Sony into a net loss for the first time in two years for the year ending March 31 -- a reversal from the projected 30 billion yen in profit. With TV and digital camera operations languishing, its electronics business is performing below expectations.

     The Japanese consumer electronics titan made a full entry into information technology equipment by launching the Vaio brand of PCs back in 1996. Its annual PC shipments peaked at 8.7 million units but are now projected to fall to 5.8 million units this fiscal year. Sony was the ninth-ranked PC maker in the world with a 1.9% share of all PCs shipped during the January-September period of 2013, according to U.S. research firm IDC. Although Sony does not disclose earnings for the PC business, the segment is believed to be bleeding red ink.

Japan Industrial Partners May Buy Biglobe For JPY 70 Billion

The Nikkei reported that "NEC is in late-stage talks to sell Biglobe, Japan's fourth-largest Internet service provider by customers, to an investment fund for around 70 billion yen ($666 million)" and "Japan Industrial Partners, the prospective buyer, appears to be seeking tie-ups between Biglobe and Sony- and Fujitsu-affiliated players, among others."

Internet subscribership in Japan is growing, thanks to the proliferation of smartphones. But providers that belong to telecom groups, such as NTT, are taking the lion's share of new customers. Others, such as Sony unit So-net and Fujitsu's Nifty, are struggling.

Biglobe has some 3 million Internet subscribers with sales at JPY 84.1 billion in fiscal 2012.

NEC has held two rounds of bidding for the unit since last October. The parties proceeded to the final round in December were reportedly Itochu Corp, local buyout fund Japan Rising Equity and Japan Industrial Partners (JIP).

No press release was so far issued by NEC nor JIP.

Tokio Marine Capital Invests Approx. JPY 1 Billion In Asplund

Tokio Marine Capital announced that TMCAP 2011 fund has invested in Asplund Co.

According to Tokio, "Asplund is operating OEM for furniture and interior merchandising and sales of imported furniture to commercial spaces such as hotels, restaurants, cafes, and public spaces, as well as its own lifestyle retail stores “TIMELESS COMFORT” and “212 KITCHEN STORE”. 

Nikkei reported that Tokio acquired a majority stake of Asplund for slightly over  JPY 1 billion.  The revenue for the FY ending October 2013 was JPY 11.2 billion.

Tokio Marine Capital's press release:
http://www.tmcap.co.jp/english/news/buyout/relaese_asplund_20140117_en.pdf

GPIF Is Reportedly To Start Overseas Infrastructure Investments

According to The Nikkei Asian Review today:

 Japan's pension fund behemoth to invest in infrastructure abroad
TOKYO -- Japan's Government Pension Investment Fund (GPIF) will diversify its portfolio beyond bonds and stocks for the first time, targeting high-return overseas infrastructure.

     The public pension fund has some 120 trillion yen ($1.16 trillion) in assets under management. About 60% of that is in Japanese bonds, with the rest allotted to foreign bonds as well as domestic and international stocks.

     Under a partnership with the Ontario Municipal Employees Retirement System, a Canadian pension fund, it now plans to invest in airports, railways, ports and power facilities in the U.S. and Europe.

     Joint management will begin in 2014. Between tens of billions of yen and hundreds of billions of yen will likely be invested, although the exact amount has yet to be set.

     Last month, a panel of experts recommended to the government that the GPIF step up stock investment and begin putting money into infrastructure and real estate as well, in view of how the nation is moving to overcome deflation.

     Although infrastructure comes with the risk that the assets must be held for the long haul, it tends to offer higher returns than bonds and equities. Globally, pension funds are said to have far more than 20 trillion yen invested in infrastructure funds.

     The GPIF is in talks with other foreign funds to form similar partnerships, suggesting that it may raise the cap on infrastructure investment in the future.

     The fund has limited personnel that can handle new areas of investment, so the Ministry of Health, Labor and Welfare -- which oversees the GPIF -- decided Thursday to bump up the pay scale at the GPIF in an effort to bring aboard more investment experts.


The second paragraph from the bottom should better read (based on the original Japanese report)

    The GPIF is in talks with other foreign PENSION funds to form similar partnerships, suggesting that it may raise the cap on infrastructure investment in the future.

The source of information for this Nikkei article was not disclosed.

Reuters and Bloomberg also reported that Development Bank of Japan is a part of the reported GPIF/OMERS co-investment scheme.

Japan GPIF to buy inflation-linked JGBs, join Canada OMERS on infrastructure-sources

5:00pm EST TOKYO, Dec 12 (Reuters) - Japan's Government Pension Investment Fund, the world's largest public pension fund, will start buying inflation-linked government debt from April and will join Canada's OMERS in investing in infrastructure projects abroad, people familiar with the process said on Friday.

The $1.2 trillion fund will buy more than 400 billion yen in Japanese government bonds whose principal increases with rises in the nation's consumer prices, the sources told Reuters on condition of anonymity.

In tying up with OMERS, one of Canada's largest pension plans, GPIF joins a big investor with experience in infrastructure and will also be joined by the government-owned Development Bank of Japan, the sources said.

A spokeswoman for OMERS in Toronto was not immediately reachable for comment.

GPIF carries great weight in financial markets because of its enormous size and its role as a leader of other Japanese public funds, which have total assets of more than $2 trillion. 

The fund is under pressure to overhaul its portfolio, which is heavily weighted towards very low-yielding straight JGBs, as part of Prime Minister Shinzo Abe's drive to boost returns to help support Japan's burgeoning elderly population. Abe also wants to channel the nation's vast pools of financial assets towards riskier investments and more productive uses.

Earlier this month, GPIF president Takahiro Mitani told Reuters he had a strong interest in buying inflation-linked JGBs as an inflation hedge for the fund's portfolio but noted that the current amount is very low. The government plans to double its issuance of inflation-linked JGBs to 1.2 trillion yen next fiscal year as Abe pushes to break Japan free from 15 years of deflation, government sources said at the time.

GPIF is also considering further investment in alternative assets, such as private equity, as recently recommended by a government panel, one source said on Friday.

A government advisory panel has been looking for ways to have GPIF help revitalise Japan's capital markets, finding more productive uses for the country's $15 trillion in household assets, which are largely locked in very low-yielding bank accounts and Japanese government bonds. (Reporting by Chikafumi Hodo and Takaya Yamaguchi; Additional reporting by Euan Rocha; Writing by William Mallard; Editing by Chizu Nomiyama)

Bain To Invest JPY 17 Billion In Macromill Take-Private

Bain Capital has initiated a TOB to acquire 100％of outstanding shares and stock options issued by Macromill, Inc., which conducts internet-based marketing research in 87 countries with  the top market position in Japan and Korea.

The maximum amount of share purchase will be JPY 53 billion including fees.  The purchase price was set at 29.3% over the last 6 month average share price. Yahoo Japan is the largest shareholder with a 22.4 % stake.

Bain will invest JPY 17 billion through an SPC and up to JPY 36 billion will be financed by Mizuho Bank (JPY 28 billion) , Mizuho Capital Partners' mezzanine fund #2  (JPY 2 billion), Mizuho Securities Principal Investments (JPY 2 billion) and Chuo-Mitsui Private Equity Partners #8 (JPY 4 billion).

Macromill has a revenue of JPY 17 billion with JPY 4.2 billion EBITDA for the FY ending June 2013. The company had a net cash of approx. JPY 8 billion. Macromill aims to invest more aggressively in its research systems as well as business development globally by going private.

INCJ To Promote Japanese Venture Industry Via Robust Database And Large LP Commitments

The Innovation Network Corporation of Japan (INCJ) has announced that it will support Japan Venture Research Co. to create a robust venture company database. INCJ aims to foster a venture eco-system by promoting the use of such date base by venture capitalists, strategic and financial investors, entrepreneurs, industry professionals and academics. According to Nikkei, INCJ considers an extensive database on venture companies is essential for the growth of Japanese venture industry and for the  promotion of venture investments from home and from overseas. The venture database will have 10,000 companies and their basic information will be made available for free.

In October this year, INCJ made its first investments in venture funds as an LP by committing JPY 10 billion to UTEC (The University of Tokyo Edge Capital) 's 3rd fund.  In November, it made JPY 6 billion commitment to medical device incubation fund MedVenture Partners #1 with Mizuho Bank, followed by another JPY 10 billion commitment to ICT-focused Global Brain 5th fund.

Tokio Marine To Set Up A Mezzanine Fund

On Dec 3rd, Tokio Marine & Nichido Fire Insurance announced that it will establish a new subsidiary,  Tokio Marine Mezzanine Corp. which will manage a JPY 30 billion (target) mezzanine fund.
Tokio Marine will commit  JPY 10 billion from its balance sheet.

Tokio Marine has arranged 20 mezzanine financing deals since the 1990s, one of which involved Japanese sushi restaurant operator Akindo Sushiro.

Tokio Marine CP Sells Barneys Japan To Seven & i

Tokio Marine Capital Partners has agreed to sell its 49.99% holdings in Barneys Japan to Seven & i Holdings, which holds major department store operator Sogo & Seibu,   in addition to 7-Eleven and supermarket chain Ito Yokado.

The sale of the Japanese business of Barney‘s New York is reportedly for JPY 6 billion. It logged sales of JPY 19.5 billion last fiscal year and expects a higher number this year aided by increased spending on high-end goods.

In 2006, Tokio Marine and Sumitomo Corp. jointly acquired Barneys Japan from Isetan, another major  department store operator. Isetan had acquired a stake in Barneys New York in 1989 and later suffered a USD 400 million write-off when Barneys NY went bankrupt.  

Sumitomo Corp. will continue to hold a 50.01% stake in Barneys Japan. 

This makes the 3rd exit from Tokio's 2005 vintage fund. Last week, Bushu Pharmaceuticals, the last portfolio company of Tokio's 2005 fund, acquired a pharmaceutical plant nearby Tokyo from Eisai Co. The acquisition will triple Bushu's production capacity. 

Advantage To Sell 9.5% of Nissen To Seven & i

Seven & i Holdings Co.,  the parent of Seven Eleven and Ito Yokado supermarket chain has announced that, through its subsidiary Seven & i Net Media,  it will acquire up to 50.74% of Nissen Holdings, a catalogue and online retailer, through a TOB. Seven & i aims to bolster its catalogue/online merchandising operation by having Nissen as its subsidiary.

The TOB price is set at JPY 410,  which represents a 27.7% premium over the past 6 month average share price. 

According to Seven & i filing documents, Advantage has agreed to sell its remaining 9.5% holdings, which will bring JPY 2.36 billion to the fund. Advantage had purchased 14.4% of Nissen in 2007 at JPY 780 a share through a private placement.

The largest shareholder, UCC  (Ueshima Coffee)  Holdings will also sell its 20.9% holdings in Nissen. 

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.

Ant Acquires A Majority In 140 Years Old Shoe Maker MoonStar

Ant Capital has acquired a majority stake in shoe manufacturer MoonStar from its founding family and from its business partners. MoonStar was established in 1873 and is one of Japan’s major shoe manufacturers. It has operations in Japan, China and Vietnam and developed its own brand. It also does contract manufacturing work for global shoe manufacturers such as K-Swiss, Burberry and Disney.

No financial details are disclosed. This is the second deal from Ant's 4th SME-focused buyout fund.

For those who are interested in cute kids shoes, please see: http://www.moonstar.co.jp/product/company.php

J Star Divests Tokachi To Mediaflag

J-Star has sold its stake in Japanese-style confectionery Tokachi to Mediaflag (TSE 6067) for an undisclosed amount. The sale was originally reported on 18 September for the execution towards the end of October. The motivation of Mediaflag, provider of sales support and mystery shopping services for consumer goods companies, to acquire a small confectionary producer and retailer is quite intriguing. From the press release,  it appears that Mediaflag is trying to apply its marketing and operational know-how to improve Tokachi's profitability and it expects the small retailer also functions as a "labo" for their marketing support and data collection activities. Tokachi, together with its 100% subsidiary Tachibana, reported the combined sales of around JPY 2.1 billion and combined losses of around JPY 50 million in the past 3 years. J-Star acquired Tokachi in August 2007 from the founder and had Tokachi acquire Tachibana in March 2008.

According to PEI, "The exit multiple, according to a source with knowledge of the deal, was 1.3x.
J-Star declined to comment."

In July, J-Star closed its second SME-focused fund with JPY 20.4 billion, of which approx. 40 % were committed by overseas investors.

Polaris's Fusen-Usagi Filed For Bankruptcy

Fusen-Usagi Corporation, apparel maker specializing in baby/kid clothing, filed for bankruptcy at Osaka Regional Court on October 15th with JPY 3 billion debt. Fusen-Usagi has been invested by Polaris Capital's 1st fund since 2006. According to Teikoku Data Bank, the kid apparel maker has been divesting real estates, closing unprofitable overseas operations and streamlining corporate structures with a substantial restructuring under Polaris. Nonetheless, sharp decline in sales finally brought the  97 year old company to bankruptcy. The 2013 sales stood at JPY 6.2 billion, less than a quarter of  JPY 26.6 billion in 2000.

Ant Capital Sells Muginoho Holdings To Nagatanien

Ant Capital has agreed to sell 100% of Muginoho Holdings, which bakes creampuffs branded “Beard Papa” and operates sweet shops and noodle shops to Nagatanien (TSE 2899) for reportedly JPY 9.44 billion.  According to PEI, it represented a return on capital of 3.3x.

Nagatanien is a very well-known household name, manufacturing processed instant food, such as instant miso-soup, "ochazuke", sushi seasoning and noodles. It has approx. JPY 69 billion in sales in FY 2013.

Nagatanien was apparently attracted by Muginoho's overseas franchise as it seeks to beef up the sales outside of Japan. Muginoho has approx. 400 shops globally, of which 200 are in 17 countries including the US, Indonesia, Vietnam, Thai, Singapore and China.

DRC Capital Sold Casa (ex-Rento Go) To Ant Capital

It was announced that DRC Capital has sold Casa, formerly called Rento Go and provider of rent guarentee that is typically needed in Japan when an individual rents a unit from the unit owner, to Ant Capital Partners.

According to the DRC press release;

Assignment of all the stake in Casa inc. held 100% by the investment funds managed by DRC Capital (Japanese Limited Partnerships DRC I and DRC II, and DRC Capital Fund, LP and DRC Investment Fund, LP) was completed on September 30 when the stake was sold to the firm's management and an investment fund managed by Ant Capital Partners Co., Ltd. DRC's involvement in Casa dates back to October 2008 when it took over the rent guarantee business carved out from Re-plus Inc. who failed for other reasons. DRC has since rebuilt the business to today's solid state with a high growth rate and profitability. The management and Ant Capital Partner's investment fund have now taken it over as a management buyout scheme.

DRC apparently acquired the rent assurance business from the failed real estate company at such a low price  that one would look for from a turnaround situation. As such, the exit ROI seems to be quite high, even though the valuation (EBITDA multiple) of today's Casa may be reasonable.

This is the first investment from Ant Capital's latest fund, Ant Catalyzer IV, which was closed last year.

DRC, on the other hand, may be starting next fund raising early next year.

Integral Acquires A Stake In Restaurant Chain TBI Group

Integral has announced that it has acquired a part of TBI Group, restaurant chain operator with 78 shops. TBI is also involved in real estate business, advertising agency business travel businessand apparel business with USD 75 mil in revenue in 2012. No transaction details were disclosed.

http://www.tbi-group.co.jp/global/index.html.

Government Panel Suggests GPIF Status Change

The below is a DJ article on the press conference on the interim report by the government-appointed advisory panel, which name in direct translation is "an expert panel for an advanced / more sophisticated investment, risk management, etc., of public and quasi-public funds". It is interesting to note that the DJ article refers to private equity and infrastructure and other Japanese media cited real estate and infrastructure as potential avenue to increase GPIF's portfolio diversification. What is not explicitly reported in the DJ article, however, is that the panel has discussed and is likely to propose a change of GPIF's legal status from the current ”independent administrative corporation” to "permitted corporation" - the same status as the Bank of Japan. Such change would give more free hand to GPIF and help the institution to evolve itself closer to its global peers.

Thursday, September 26, 2013
DJ: Panel Tells Japan's Public Pensions To Fix Bond-Heavy Portfolios
TOKYO--Japan took a step toward revamping its over Y160 trillion ($1.6 trillion) public-pension system on Thursday, with a government-appointed advisory panel suggesting a shift in money from government bonds to higher returning assets like real estate and private equity.

Many members of the panel were also in favor of looking into using financial products like derivatives to protect against fluctuations in the market and attracting skilled investment professionals by increasing the salaries on the payrolls of each of the funds.

The ideas, which were unveiled in the panel's preliminary report, are still largely abstract and under discussion. Even after the panel's recommendations come out later this year, they'll have to be approved and implemented by the Japanese government.

Yet the steps could, if implemented, signal a sea change in how those trillions of yen are invested, unleashing a flood of cash into global markets as well as the Japanese economy. On Thursday, the yen strengthened against the dollar on mere speculation on what the report could say.

"If you reform portfolios and governance, you can manage assets in a way that contributes to Japan's growth," Takatoshi Ito, a professor of economics at the University of Tokyo and head of the seven-person panel, told reporters after the release.

Prime Minister Shinzo Abe has also singled out reform of the public pension system -- in particular the Y120 trillion Government Pension Investment Fund -- as key to Japan's long-term economic recovery, after two decades of stagnation. Around 60% of the GPIF's money is now in low-yielding Japanese bonds because public opinion has been overwhelmingly in favor of avoiding losses from assets viewed as having higher risks, such as stocks.

Yet the panel's report urged public pensions to quickly respond to the risks of a bond-heavy portfolio as the government and central bank are working to end 15 years of falling prices. Inflation is the enemy of bonds because rising prices erode the value of the bond's fixed interest payments and principal.

"Up until now we were in deflation, but are moving into inflation," said Mr. Ito.

If the GPIF is remade in line with global peers, with professional and independent management that actively searches for the best returns, that could affect everything from the government's fiscal health to the amount of money that flows into the country's stocks and real estate to the amount of pressure investors put on Japanese companies to perform well.

An activist GPIF, for instance, might finally be able to make Japanese corporations more transparent and responsive to investors, said Masaaki Kanno, chief economist at JP Morgan in Tokyo and a member of the panel.

The panel members were in consensus about reducing bond holdings, and most agree the panel needs to invest in a diversity of assets, including infrastructure and private equity. Asset managers say that could also be a cue for other domestic institutional investors to look into diversifying their own portfolios.

"It doesn't say anywhere in here, 'Increase bond investments.' But you can read 'reform bond-centric portfolios,' as 'it's better to lower the percentage of bond holdings," said Mr. Ito when asked whether the panel's suggestions could mean more money in Japanese stocks. "But I don't think we as a panel will go as far as to say" specifically how much of other assets holdings to increase to make up for a decrease in bond holdings.

Funds could "look at returns and volatility over a five or 10 year span, and think not simply about making and holding a portfolio, but whether there's something better out there," said Mr. Ito. "It's something only pensions can do."

The panel did not, however, come to a final decision about issues surrounding how much of a say the funds should have in their investment decisions, whether the funds should be headed by just one president, and how much of a say those covered by the plans should have in their investment decisions.

Mr. Ito said that the panel would submit its final recommendations in November.