Q&A with Andrew Kershaw, Independent Investment Partners
Independent Investment Partners ( IIP ) is a financial consultancy staffed by Japan market specialists assisting foreign financial businesses who do not have a presence in Japan develop business with their target client base in Japan. Clients are fund management firms, including hedge funds, Private equity partnerships and other specialist funds and financial firms. The team comprises Foreign and Japanese nationals with skills and background in equity, debt, structured finance and fund management. IIP assists firms to develop strong relationships with end investors and work with strong local distributors to maximize sales potential in the Japanese market. IIP also offers an independent equity research capability to offshore fund management businesses through a team of experienced bilingual specialists. To a limited extent they also provide access and introductions in other Asian markets where there is a developed institutional base.
1) How has the Japanese institutional view towards hedge funds changed in the last 6 months?
There is a gradual move by experienced players towards single strategy funds away from fund of funds products but there is no general trend. However with more and more institutions starting to look at hedge fund of funds for the first time there will still be growing demand for fund of funds. There was a definite slow down in new investment in the second half of last year as a number of big players digested losses on fund of funds products that were not supposed to move into minus territory.
2) Where is their main interest - single strategy, multi strategy, fund of hedge funds?
It very much depends on where the institution is on the learning curve .The emphasis is chiefly going to be on single strategy funds or fund of funds rather than multi strategy.
3) Is there any appetite for emerging market hedge funds?
The word emerging markets still carries a surprising level of stigma in the Japanese market dating back to the major sovereign defaults in the 80s and more recently the irresponsible selling of higher yield country debt in the local bond markets. In the case of hedge funds when people talk of emerging markets they typically think of essentially equity products. Diversified emerging market bond portfolios on the other hand make a lot of sense at the moment given the ‘bubble’ in mainstream bond markets. As the understanding and interest in relatively low correlation products increases we expect to see emerging market bond funds attract growing attention.
4) How does the decision process timeline differ between pension funds, insurance companies and corporates?
It depends more on the proposition they are looking at and to what extent consultants and gatekeepers are involved. There is no hard and fast rule.
5) What sector would you say are the most aggressive hedge fund investors in Japan?
If you adopt the word active rather than aggressive it clearly still is the life and non-life companies and a few of the major banks.
6) How receptive are Japanese institutions to 3rd party consultants?
Generally Japanese investors are very interested to meet good managers as they recognize their own limitations in identifying new prospects and at the same time do not want always to be tied to a predetermined group of consultants / gatekeepers. If the consultant who assists an offshore fund in presenting to a Japanese audience is credible in terms of its people and business style then there is no problem in accessing investors. IIP is staffed by local and foreign professionals with long standing institutional connections with investors and we have spent a lot of effort on explaining to investors what we are looking to do. Whilst the offshore fund is our client we owe a strong ‘duty of care ‘ to our Japanese relationship.
7) Do they use outside service providers for due diligence?
There is no one answer to this question. As a broad comment Investors tend to use a mixture of internal and external resources but it has not been very structured to date and people who are sometimes sought for advice are conflicted by their relationship with certain funds. There was a tendency early in the game to use the first ‘gatekeeper ‘ who approached them without having a broader based look at what was available. Whilst it is changing, some of the advice we have seen is undoubtedly conflicted in a way that would not happen in a more mature market.
8) What are the biggest concerns of the major institutions when considering investment in a hedge fund?
Generally the normal concerns of any investor ( ! ) plus an extra layer of care on the reputation and standing of the fund. The approval process by “ringi” can result in a lot of the information requested being excessively detailed and sometimes missing the point. This is not so much a language issue but an effort by the manager concerned to preempt questions by less informed managers in the approval process.
9) What are the most common issues hedge funds do not anticipate when pitching to Japanese investors?
These can be myriad. Experienced hedge fund managers are often surprised at the relative junior level of managers who greet them. Investment size can be relatively small here too compared to what US and European Institutions would typically commit. This is particularly true with Private Equity where a Japanese participation is generally 20% of the normal investment size. A major surprise is that meetings can end summarily. The investor has seen the presentation and then wants to go away and study. On the other hand the fund salesman or manager is looking for an indication of whether his product fits the investor’s criteria or more generally an initial view on the opportunity. The “so what is the next step” stage. Our advice to marketers generally is don’t hold your breath. This is often not forthcoming and if pressed the investor may say something vaguely positive just to complete the meeting.
10) What is the view towards investing in new hedge funds / providing seed capital and how long before a new hedge fund/start-up can reasonably expect capital to flow in from Japanese investors?
Whilst there is an understanding that young funds with good managers can often achieve superior returns most investors, including the most experienced hedge fund investors look for a at least a 3 year track record by an existing fund before committing funds. There is a move towards major financial groups looking to do their own funds, a natural starting point being long/short Japanese equity product. This will obviously get in house ‘seed’ capital but whether it will ‘perform‘ will of course be another matter.
11) How are 3rd party marketing fee structures changing in the light of an overall change in fee structures?
Fee compression for most investment managers is a fact of life and for a lot of hedge funds this is also a growing reality. This in turn will impinge on the pot available to third party marketers.
Andrew Kershaw, CEO Tel: +81 3 5403 4720
