Japan-focused private equity firm NSSK will target higher financial returns with its next generation of impact funds, said Jun Tsusaka, CEO and CIO for the firm.

NSSK manages a flagship private equity fund family and a separate family of five impact funds, which invest in different regions of Japan, Tsusaka told delegates to the Responsible Investment Forum: APAC Investor Day last week. The impact funds invest in micro-cap companies with backing from local government entities and financial institutions.

The firm is currently in the market with the second-generation impact funds, with about half of the capital raised, Tsusaka said without disclosing the target fund sizes.

“On the impact side, what’s distinctly different today from the last funds that we raised four years ago is […] we had many investors that viewed impact investing or responsible investing as not necessarily being correlated with superior returns… ie. that certain types of impact investing came with lower returns,” he said.

Return expectations for the first generation of funds was 12-15 percent. This is below the global standard expectation from private equity of 20-30 percent, but still “nothing to be sneezed at” when compared to the risk-free rate in Japan, said Tsusaka. The anchor investor in the funds – the Japanese government – had proposed the lower target because “they wanted to ensure we invested in tough, difficult to manage businesses” and a 25-30 percent target could discourage this.

“The second generation that we are in the process of raising now […] the investors are asking for higher returns. They are not going to compromise returns for impact.  What that leads to is for us having to fine tune or focus on areas we can have impact on within our investment horizon.”