More Japanese LPs are betting on red

Japanese institutions aren’t exactly known for high-risk bets. It is noteworthy then, that an increasing number are developing an appetite for distressed opportunities in the US.

Speaking at our Seoul Forum, Yoshi Kiguchi, chief investment officer at Pension Fund of Japanese Corporations said the institution had budgeted this year to raise its allocation to distressed debt to 10 percent, up from 2 percent.

“We believe this year we are preparing for a recession, especially in the US and Europe, and we have already budgeted to increase [our] distressed allocation to a maximum of 10 percent,” Kiguchi said. “In early 2009, we increased distressed exposure and we got an annual return of more than 20 percent… we believe later this year we may have a chance to increase [our exposure].”

Though PFJC has a greater risk appetite than most – it allocates a whopping 90 percent to alternatives – Kiguchi is not alone in his thinking. The head of alternatives for a Japanese insurer told affiliate title Private Equity International that it too was allocating more to US distressed in 2023, noting that the institution had deployed less capital into US buyout funds last year in anticipation of worsening market conditions.

Speaking at the PDI Tokyo Forum, Tadasu Matsuo, head of alternatives at the newly formed Japan Science and Technology Agency, said its private debt bucket will include an allocation to special situations. On the event sidelines, a senior executive at another Japanese financial institution said its private debt team had also begun to evaluate US distressed opportunities.

Of course, larger appetites for debt at a time when interest rates are climbing isn’t unexpected. However, predicting widespread distressed activity continues to be a brave bet and opinions are split. The latest study from Kroll Bond Rating Agency, for example, concluded that those who didn’t hedge themselves against interest rate rises have already suffered their fates and “the damage is mostly done”, meaning those anticipating a wave of distress may find themselves disappointed.

Distressed specialist Oaktree Capital Management, on the other hand, highlighted in a June credit report the potential for “a sustained rise in distressed opportunities”, citing a lack of interest rate hedging given that “almost no companies anticipated that interest rates would jump by 500bps in one year”.

As one US private debt manager told PEI: “There were a lot of businesses financed over the past couple of years that shouldn’t have been.”

This divide over whether or not a wall of distressed opportunities are around the corner also extends into the LP universe: one Japanese asset manager, for example, expressed surprise to PEI when they heard that their peers were growing bullish on distressed opportunities.

Whatever your take, an expanding pool of Japanese investors having conviction in a high-risk strategy feels significant – both for what it says about the US market and about the progressive maturity of some of Japan’s LP base.

This article was first published by Private Equity International