Japan: A hot place for infra debt managers

Infrastructure debt continues to attract conservative but income-seeking Japanese institutions like Dai-ichi Life Insurance and Development Bank of Japan

Last week at the Tokyo Summit hosted by sister title Infrastructure Investor, Japanese investors, their managers and advisors shared their views on infrastructure assets and their work.

Overall, the asset class is perceived as “an attractive alternative to fixed income products” to LPs including Dai-ichi Life Insurance Company and Development Bank of Japan. Here are our key takeaways from those big LPs:

Dai-ichi Life Insurance Company

As PDI reported, the insurer launched its new investment department dedicated to structured finance in April with a view to strengthening its expertise in project finance.

According to Masashi Kataoka, a general manager of the alternative investment department at Dai-ichi Life Insurance, who spoke at a panel, the lifer’s two departments are having internal discussions about various approaches to infrastructure debt.

The team finds it difficult to make direct debt commitments to infrastructure projects as it is hard for them to conduct due diligence processes on underlying debt instruments within a given timeframe, Kataoka said.

Notably, the insurance firm only invests in ESG-compliant infrastructure assets. “I never heard about fund managers without [an] ESG [matrix in place],” he added.

There was no sign of the insurer stopping infrastructure debt investments as the asset class offers a way to diversify its portfolio with limited downside risks.

Development Bank of Japan

The bank was established by the Japanese Government and is known for its co-investment vehicle with the world’s largest pension fund, Government Pension Investment Fund. It is a conservative infrastructure investor, focusing on senior debt tranches, according to Shigefumi Kuroki, a Tokyo-based general manager and head of global infrastructure investments and structured finance department.

However, at the investment department, Kuroki is focusing more on the mezzanine and sub-investment grade debt this year, looking for a typical return structure of ‘[floating] base rate plus up to 5 percent cash yields’ from the debt investments.

As the bank is looking to diversify further their geographic exposures, tax implications and foreign currency hedging costs have emerged as bigger issues. Notably, European infrastructure debt is considered as a niche strategy and floating rate-based debt instruments are preferred now due to the market expectation on interest rate rise from the US in the next few years.