World’s Largest Pension Fund Looks to Private Equity for First Time

Japan’s Government Pension Investment Fund (GPIF) is preparing to dive into private equity for the first time: the fund says it is committing $500 million to the International Finance Corp., for investing in private equity in developing nations.

A pension fund of GPIF’s size would normally be interested in pursuing direct investments and avoiding middlemen altogether. But regulations prohibit the fund from doing so – and given that GPIF has only recently become interested in PE, the fund is unlikely to have the staff to execute those deals. So if the GPIF wants private equity exposure, it must go through an outside manager.

More from the Wall Street Journal:

No investments have been made yet under the partnership with IFC, which was made final in June. A spokesman for the GPIF declined to comment on the deal. A spokesman for IFC couldn’t immediately be reached for comment.

[…]

The negotiations behind the deal show how the GPIF is becoming a savvier investor under its chief investment officer, Hiromichi Mizuno, who joined the fund in January after working for a private-equity firm in London. Mr. Mizuno was appointed as Prime Minister Shinzo Abe’s administration tries to strengthen management at the fund and ensure long-term returns.

IFC had courted the GPIF for several years, and a deal was finally near completion when Mr. Mizuno arrived, according to people familiar with the talks. To the surprise of people on both sides, Mr. Mizuno insisted on renegotiating the terms, including by cutting the fees paid by the GPIF by nearly half, they said. Also, the GPIF decided that the deal shouldn’t include the acquisition of private-equity assets on the secondary market, known as secondaries.

The partnership is a way for the GPIF to gain exposure to developing countries with a growing middle class where publicly traded stock markets don’t necessarily provide enough ways to invest in companies that profit from consumer demand.

As a result, the investments will exclude companies such as banks and oil companies that are often overrepresented on stock markets in developing countries, said people familiar with the deal.

The GPIF manages $1.2 trillion in assets.

Photo by Ville Miettinen via Flickr CC License