Japanese regulator urges caution on retail private asset products

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Japanese authorities are urging financial institutions to be cautious about selling retail investments in overseas private assets, a Financial Services Agency official has said, citing risks that may be difficult for individuals to understand.

The FSA is concerned that products such as variable life insurance backed by private assets abroad could increase retail investors' exposure to risks stemming from their limited liquidity and disclosure, said the official, who asked not to be identified discussing policy matters.

Private assets, such as stakes in unlisted overseas companies and loans made by nonbanks, tend to be less liquid and transparent than publicly traded equities and corporate bonds. Earlier this year, private credit funds saw a surge in retail investor requests to withdraw money, and some executives have conceded that redemption caps could have been explained better.

The official stressed that the FSA isn't seeking to curb the private asset market, especially in Japan. The government sees household wealth as an important source of funding for domestic companies that can drive economic growth.

Sales of private asset funds to retail investors, primarily wealthy individuals, have been growing in Japan in recent years, according to a report by the agency in July. Assets under management in related publicly offered investment trusts doubled from a year earlier to ¥1.5 trillion ($9.5 billion) as of March, according to Morningstar data.

Unlike in the U.S. and Europe, there are currently no variable life insurance products sold in Japan that invest primarily in private assets. But some insurers have expressed interest in offering them to rich individuals, according to the official.

Variable life insurance is a type of life policy in which part of the premiums is invested, with benefits fluctuating depending on investment performance. Death benefits are generally subject to a minimum guarantee, while the policyholder bears the investment risk.

The official declined to say whether the agency would approve such products.