Japanese insurance companies eye DACH funds

Japanese insurance company Nippon Life Insurance announced a deal with Deutsche Bank in March to acquire a 5% stake in its asset management arm (DWS) for approximately $375m. Nippon will be the anchor investor in the partial IPO of the company in which 20% of the business is expected to be floated at between €30-36 per share, equating to a market cap of €6-7.2bn.

DWS represents an indirect investment in private equity in the DACH region, as the asset manager acts as an LP in buyout funds and funds-of-funds that are either managed from or investing capital there.

Press reports on the transaction noted that the investment aligns with Nippon’s strategy to diversify its portfolio out of Japan due to the country’s monetary policy, which is said to be affecting returns.

The reason for looking at Germany is partly cultural. We recognise the potential of the many family-owned manufacturing businesses in the region because of the similarity to the Japanese economy" – Japanese insurance company representative

Senior executives at three other Japanese insurance companies contacted by Unquote in February and March reported plans to increase their exposure to European private equity and said that the DACH region was the most attractive for managers.

One of the insurance company representatives explained how the end of the Japanese financial year could lead to a change in how capital is allocated: "Currently, our private equity allocation outside of Japan is in one bucket," he says. "However, a decision will be made at the end of the current Japanese financial year on whether we have separate allocations for different geographies, including one for Europe."

If this were to happen, the DACH region, and specifically Germany, would be at the top of the list. "So far in Europe, we have invested in the big global managers, but if this happens we would target country-specific funds," he says. "The most attractive of these currently are German funds. It is a stable economy with a lot of industrial companies that we would like to get access to."

Cultural alignment
Two placement agents that have recently raised funds in the region say they have also observed this trend. Both mention that the business model of mid-market-focused GPs in the region is very easy to explain to Japanese LPs because of the somewhat wary and sometimes closed nature of business owners in Germany towards international private equity firms, which is also present in Japan. They understand that dealing with this kind of business owner requires a specific skillset.

A representative of another Japanese insurance company with European private equity investments has similar thoughts. He says: "The reason for looking at Germany is partly cultural. We recognise the potential of the many family-owned manufacturing businesses in the region because of the similarity to the Japanese economy."

He explains that his firm is at a more advanced stage of investment than the first LP and also plans a change in its approach to private equity investments. "The first stage of private equity investing was making LP investments," he says. "Now we are looking to seed managers by acquiring a significant minority stake in the GP. We will look for one or two managers in the DACH region with a fund size of around €300m and make a €100m investment."

However, Unquote contacted one GP that had been on the receiving end of such a proposal from the LP, but proved resistant to the idea. "Sometimes LPs approach us and want a stake in the management company alongside their fund commitment," he says. "We end the discussion at that point. We have a succession plan in place that involves gradually making more partner promotions; we would never sell a minority stake."

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