Japan’s ¥10 trillion ($123 billion) Pension Fund Association is interested in broadening its portfolio of alternative investments, but is chary of fund managers looking to use leverage in illiquids such as infrastructure.

Daisuke Hamaguchi, CIO, says the PFA has reacted to the global financial crisis by shifting away from funds of funds and relying more on single strategies. This is already happening in its hedge-fund exposures.

He is also keen to broaden PFA’s exposure to private equity and other illiquid strategies, including infrastructure and real estate. Currently the organisation has around $1 billion allocated to private equity, mainly distressed strategies, and Hamaguchi is looking to build a broad spectrum of strategies. This will include mega buyouts, mid-cap strategies and special situations, mainly focused on the US and Europe.

This build-out will take place gradually, with PFA relying more on gatekeepers and consultants to connect with GPs, while segueing away from funds of private-equity funds.

More difficult is infrastructure and real estate. Hamaguchi says he and his team have met with more than 100 funds of funds or GPs involved in these areas, but GPs are offering strategies based on leverage, in order to juice up returns.

The PFA is not interested in this method. “It doesn’t make sense for a pension fund like ours to use leverage when infrastructure is supposed to be about attaining a stable cashflow,” Hamaguchi says. “We want an exposure that generates just a little more than fixed income, that’s enough for us. But the fund managers in these segments are not presenting such opportunities.”

The PFA had hoped that the Japanese real-estate market would offer similar risk/return characteristics. However, it has found that local property is not open to pure asset financing by LPs: deals in Japan are cosy relationships involving developers, contractors and banks.

This means the PFA must look overseas if it wants private real-estate exposure.

“But that means we could be forced to rely on investment banks using leveraged strategies,” Hamaguchi says. “I’m reluctant to do this.”

The PFA is considering bypassing such agents by co-investing with other pension funds, and has been in initial talks with some peers in the United States and Europe.

Hamaguchi says these have yet to crystallise into anything meaningful, as the funds may not have enough skill at evaluating the value and risk of properties or infrastructure projects. A consultant or gatekeeper – or even an investment bank – may yet be required.