An expansion of alternatives investments is facing a human resource challenge for Japan’s Government Pension Investment Fund (GPIF).
The problem has occurred as the world’s largest pension fund seeks to expand its team of alternatives investment specialists. According to Hiromichi Mizuno, chief investment officer at GPIF, it is a challenge to find professionals with the right credentials to work for an indirectly investing yet assertive asset owner.
“The [alternatives professional] talent pool in Japan is too small,” Mizuno told AsianInvestor. “Especially for the people who have length or depth of experience among Japanese alternatives investors. They have little experience negotiating with the general partners.”
The challenge stems from the trend that most alternatives professionals have worked at smaller asset owners. When these investors commit capital in asset manager’s fund vehicles they act like “marginal limited partners who are not involved in structuring and negotiating”, Mizuno said.
Given GPIF’s size, the mindset is to be much more assertive on external managers. It is, therefore, necessary to implement this approach to alternatives professionals recruited from other, smaller asset owners.
“I keep telling the alternatives investment team that the marginal investor is usually making take or leave kind of decisions. I am saying: 'We are not going to make take or leave decisions',” Mizuno said.
GPIF had assets under management (AUM) worth ¥161.8 trillion ($1.49 trillion) as of September 30. Alternatives made up 0.37% of the AUM, but the asset class is allowed to grow to up to 5% under the current regulatory framework for the pension fund and is an area that GPIF wants to expand.
Since Japan is one of the epicentres of the global trend of relatively low interest rates in recent years, the country is also seeing a general growth in demand for alternatives investments among its institutional investors. Life insurance companies and corporate pension funds alike are increasing their exposure to the asset class.
That has led to a general surge in demand for investment professionals with alternatives capabilities. And Mizuno is right to point to a shortage of experienced professionals, according to Martin Eastgate, senior director in Japan at Ferguson Partners, a headhunter of alternatives executives.
“The pool of talent in the alternatives private markets space is still quite small in Japan, especially when bilingual skills may also be required,” Eastgate told AsianInvestor.
“In the past, outside some of the larger life insurance companies and groups such as Norinchukin Bank, LPs [limited partners] were not that active in the alternatives space, so it will take time for investors to build out specialised teams, with the relevant knowledge base,” he added.
Eastgate compares the scenario to the situation in South Korea five to seven years ago. Back then, limited partners in that market really began to turn their attention to the alternative asset classes.
“It has taken time but there is now a relatively strong bench of dedicated and experienced alternatives professionals in that market,” Eastgate said.
Eastgate’s point about the issue of English proficiency – and thus international investment capabilities – resonates with Mizuno.
As he stepped into the role of CIO in January 2015 and implemented his changes, he started to decline requests from international asset managers to bring interpreters into the room. This was done to increase the level of direct communication in English.
“As we are doing global asset management, I really don’t think that people who don’t speak English are qualified,” Mizuno stated. “They cannot communicate or read the information. To be honest, unless they have some special skill they are not qualified for this type of job.”
I really don’t think that people who don’t speak English are qualified. They cannot communicate or read the information.
But with a small talent pool and high standards for the right candidates, GPIF is starting to expand its scope for recruiting investment professionals to non-Japanese individuals. AsianInvestor understands that the pension fund currently employs one foreign investment professional, but that number is likely to increase.
“I had to make a decision in the beginning that it might be more difficult to hire a Japanese [person] with the right knowledge, but if we have one non-Japanese [employee] it will lower the communication efficiency quite significantly,” Mizuno explained.
“At the beginning, I decided to try hiring someone Japanese and train them, but now I think we are ready to hire foreigners to make the investment team more international.“
However, Eastgate argued that there are gains to be made if GPIF and other Japanese public pension funds expand their mindset for recruitment, as well as for other limited partners.
“While language is important, this should not outweigh actual product and investor knowledge, and if firms are flexible in hiring people with good business experience versus full fluency in English, it will open up options,” Eastgate said.
He pointed out that it is still early days for the public pension funds and their move into alternatives coverage, so in many cases, there is still a learning curve to be negotiated in terms of hiring and attracting the right talent.
Another issue is competitive compensation. In some cases, the Japanese public pension funds are having to compete with gatekeepers and asset managers, who are also building out their alternatives coverage teams in Japan.
“Moving forward, they may need to consider how best to attract the right talent and if this will require a revision of current compensation levels,” Eastgate said. “In general, it will take time to build out this talent base, which will be an evolutionary process rather than revolutionary in nature.”
At GPIF, Mizuno said that there is still room for expansion.
“We haven’t even reached the level or number of people that we have the approval to hire, so we have been either too picky or not popular enough! Hiring has been too slow,” Mizuno said.