INTERVIEW-UPDATE 2-Daiwa Sec eyes $4.5 bln private equity fund

(Adds comments from Daiwa CEO)

By Junko Fujita and Emi Emoto

TOKYO, Aug 12 (Reuters) - Daiwa Securities Group Inc (8601.T), Japan's second-largest brokerage, said on Tuesday it may set up a $4.5 billion private equity fund as it seeks to diversify further beyond stocks, bonds and investment banking.

Daiwa Securities Chief Executive Officer Shigeharu Suzuki told Reuters in an interview that the fund would be separate from another that Daiwa operates using its own cash and that it is also seeking to expand.

"This market will definitely grow bigger. There will always be trade in assets," Suzuki said.

"Who will profit most from this? That would be those making the investments, rather than the investment banks advising on the deals."

The new 500 billion yen ($4.5 billion) fund could be set up in three to four years, he said.

Daiwa Securities SMBC Principal Investments, the unit that makes investments with Daiwa's own cash, has spent 436 billion yen investing in private equities, real estate and non-performing loans.

Daiwa wants to cap this amount at about 600 billion yen to avoid risk.

But the brokerage is still keen on private equity and will ask investors to invest in the new fund, Suzuki said.

The money may be put into a global fund or one focusing on Asia, or it may be divided up to focus on both areas, he said.

Through the fund, Daiwa would be willing to make single investments as large 100 billion yen, he said.

REAL ESTATE

Suzuki said Daiwa also wants to expand its real estate business to stabilise its revenue sources.

"We need to change our business model, which depends on stock and bonds," he said.

Daiwa is considering buying more than a 50 percent stake in Pacific Holdings Inc 8902.T, an operator of two real estate trusts, Suzuki said. [ID:nT133167]

Pacific Holdings, which is currently valued at 11 billion yen and runs real estate trusts Nippon Residential Investment Corp (8962.T) and Nippon Commercial Investment Corp (3229.T), has real estate assets. That would enable Daiwa to sell financial products backed by those assets, Suzuki said.

Last month, Pacific Holdings said it expected a 4.6 billion yen net loss for the year ending in November. It posted a net loss of 8.3 billion yen for the six months to May 31.

The Tokyo Stock Exchange's real estate index .IRLTY.T has fallen 18 percent this year. Its index for real estate trusts .TREIT lost 30 percent in the same period.

If Daiwa fails to reach an agreement with Pacific Holdings, it will seek other ways to get into the real estate business, including an alliance with a real estate firm, he said.

MAY MISS TARGET

Suzuki also said Daiwa would miss its target for a recurring profit of 350 billion yen in the financial year to next March -- a goal it set itself in April 2006.

"The U.S. subprime crisis slowed the stock market. With trading this thin, it will be difficult to achieve our initial target," Suzuki said.

Turnover on the first section of the Tokyo Stock Exchange fell to a daily average of 2.4 trillion yen in the April-June period, compared with 2.9 trillion yen a year earlier, according to figures provided by the exchange.

Analysts have forecast an average 126 billion yen in annual recurring profit for Daiwa, according to six projections from Reuters Estimates.

Daiwa was unable to offset decline in fees from investment banking business and stock and bond trading and reported a 78.5 percent drop in its net profit for the three months ended June.

Net profit for three months ended June 30 was 5.89 billion yen, against 27.3 billion yen a year earlier. (Editing by Edwina Gibbs and Hugh Lawson)