Malaysia PE: Shaken, not stirred

When Affin Hwang Asset Management launched its private equity arm last month, it didn’t turn a lot of heads in the industry. But the development did demonstrate how Malaysia’s seemingly straightforward PE space can throw almost invisible curveballs.

Citing increased demand for alternative investment options from institutional and high net worth investors, the subsidiary of Affin Bank established Bintang Capital Partners with a view to backing mid-sized companies across Asia Pacific. It extended a period of increased private equity activity in recent years among local lenders, including CIMB, Maybank, and RHB Bank.

From an industry perspective, this trend seems somewhat at odds with many of the Malaysian banking industry’s global counterparts, which have tended to shift away from the asset class for reasons ranging from conflict-of-interest issues to difficulty sourcing best-in-class staff. From a higher altitude, it gets even more counterintuitive. 

The swell in banking related PE in Malaysia has coincided with the local investment industry’s rockiest period to date, including a government probe into misuse of a Ministry of Finance venture program that effectively brought down a six-decade regime. Enduring confidence, however, indicates that despite massive government participation in developing the existing private equity industry, political cues have actually not been the biggest sources of momentum.

“Ekuinas sees the launching of PE funds by local financial institutions as a positive step towards building up our local PE community – from a talent and capability perspective,” says Syed Yasir Arafat Syed Abd Kadir, CEO of state-owned investor Ekuinas. “Having a larger pool of investible funds means more companies stand a better chance to benefit. The challenge is not so much identifying assets as determining the right valuation levels. This, in turn, should function as a catalyst for the local companies looking to grow, regionalize and for some, realize their dreams of a public listing.”

Notes on a scandal

One could be forgiven for suggesting that the biggest catalyst for local private investment in recent years has been the scandal around strategic investment program 1Malaysia Development Berhad (1MDB), which saw Najib Razak, the former prime minister, arrested earlier this month on charges of embezzling billions of dollars. 1MDB, which was launched in 2009 as a means of attracting foreign direct investment, is now estimated to have lost of up to $10 billion via various channels.

The Wall Street Journal first published documents tracking the flow of 1MDB funds to Najib’s personal accounts in July 2015, precipitating three years of anti-corruption investigations and murky yet explosive revelations about plundered government coffers. At times the affair has taken genuinely Hollywoodian twists. Riza Aziz, a movie producer and stepson of Najib, has been accused of siphoning 1MDB funds to bankroll the film The Wolf of Wall Street.

Meanwhile, Low Taek Jho, a venture capitalist at the center of the drama who is known for extravagant spending and hobnobbing with celebrities, is said to have been on the move for the past three months. He was reportedly jet-setting between lavish accommodations in Hong Kong and Macau as recently as last week amid efforts by authorities including Interpol to track him down.  

This backdrop set the stage for historic national elections in May that saw the defeat of Najib’s Barisan Nasional coalition, the conservative party that has held power in Malaysia since the country established its independence in 1957. However, despite the investment industry being at the heart of the political upheaval, private equity professionals expect business to continue as usual under the new government.

"We do not anticipate much impact to our private equity investments as the Malaysian government has always been business friendly,” says Azam Azman, managing partner at COPE Private Equity. “Getting returns is more important in making sure the domestic industry gets to the next stage. And to get good returns, the investments have to be international. We have an advantage there due to the country's multicultural population. In terms of risk, we spread our exposure across Southeast Asia, the Middle East and Europe, so we’re not pinned down to a single customer – or a single country for that matter.”

COPE focuses on domestic middle-market companies that generate most of their revenues offshore in foreign currencies. It has been able to leverage the dented company valuations caused by international wariness around 1MDB by sourcing deals at attractive prices. It also claims to have achieved exits with an average return of 3.8x during this period, including 8.9x from energy industry services provider Serba Dinamik. COPE invested in the company in 2013 and subsequently took it public. 

Founded in 2005 by asset manager Opus Capital and CMS Capital, the private equity arm of domestic conglomerate Cahya Mata Sarawak, COPE positions itself as the only PE firm in the country that invests growth capital domestically. The idea is that most of the industry’s bandwidth in the country is taken up by venture capital or a clutch of regionally facing buyout shops represented most prominently by Navis Capital Partners and Creador.

The gradual emergence of commercial banks as PE players focused largely pre-IPO deals appears to be modifying this environment, however. While investors sometimes hesitate to describe Malaysia’s still-nascent private equity market as crowded, intermediaries are sensing increased competition. Local advisory firm Celadon Capital notes that as the industry has gained traction, the culture has shifted on the back of technological advancements and the growth of entrepreneurialism as a percentage of GDP.

“The biggest change has not been within the private equity industry itself but in the business owners because these days they are much more educated about the various sources of funding available, including private equity, and alternatives to traditional private equity such as bank debt,” says Nicholas Ashby, founder and CEO at Celadon. “They make more effort to cultivate good relationships with the people behind those sources.”

The Mavcap effect

While much of the momentum in Malaysian private equity traces back to the establishment of Ekuinas in 2009, venture capital has enjoyed a longer government-backed gestation period. The main mover in this space since 2001 has been Malaysia Venture Capital Management (Mavcap), a wing of the Ministry of Science. Set up to make direct investments in domestic technology companies, more recently it has begun making LP commitments to regionally active VC firms such as 500 Startups – a move intended to bring much needed skills to the local ecosystem.  

Early-stage investors consequently expect this year’s political overhaul to have more of a direct impact on their operations. Nevertheless, uncertainty remains around a number of policy issues. These include previously announced incentives for private investors that are now in doubt with the impending replacement of an unpopular goods and services tax as well as the introduction of new rules for alternatives investors. The latter remain in limbo because no government body has been formally assigned to the agenda.

“The whole transition with the government is looking very bright for us because a lot of previous initiatives into alternative financing and private funding should be maintained but with more transparency,” says Andrew Tan, a managing partner at Kuala Lumpur-based TBV Capital. “However, it will take about 12 months before some important things become clear. For example, the government previously introduced a MYR1 billion [$250 million] fund-of-funds for private equity and venture capital, but we don’t know if the budget will still be allocated and when we can actually apply.”

Other policy concerns revolve around difficulties hiring foreign talent. Under the current rules, all start-ups must apply for MSC status under the MSC Malaysia special economic zone to bring in workers from overseas. VCs are hoping the new government will make the application process faster and easier as this has proven a cumbersome procedural obstacle for young companies.

The need for internationalization has become an increasingly urgent issue since 2014, when Malaysia’s flagship start-up success, the ride-hailing app operator Grab, relocated to Singapore to benefit from perceived advantages in the city-state’s policy environment and improved access to global investors. The most recent action on this front includes domestic conglomerate Sunway launching a VC fund called Sun SEA Capital this month under a partnership with Singapore-based seed-stage investor KK Fund. 

“Essentially, Sun SEA Capital will provide a plug-and-play scenario for the start-ups we invest in – they can plug into the powerful all-in-one ecosystem that Sunway has established and immediately play to grow,” says Koichi Saito, co-founder and general partner at KK Fund. “In addition, having the support of a conglomerate with financial strength also means that they have a clear and visible exit strategy.”

However, the arrival of captive PE and VC players has done little to dispel the sense that government is an arguably over-pervasive presence in Malaysia. Mavcap illustrates the point better than most institutions with a number of specialized vehicles that appear to dwarf all the country’s traditional homegrown VCs combined. These include a $254 million IT and biotech fund and a $200 million cleantech fund, among others.

The rollout of these initiatives in concert with later-stage direct investment programs from the likes of Ekuinas and sovereign wealth fund Khazanah Nasional are rightly credited with providing an initial spark for the domestic PE industry. But a self-sustaining fire has yet to light.

According to AVCJ Research, combined PE and VC investment activity in Malaysia across the past 20 years has generally increased since Mavcap and other government gatekeepers made their presence felt in the early 2000s. But within these 10-year blocks, no pattern of progress can be discerned. From 1997-2007, private sector investment jumped wildly back and forth between an annual low of $12.4 million and a high of $6 billion. The period from 2008-2017 was even more directionless, dipping as low as $158 million four years after another peak of $6 billion.

“Malaysia as a private equity destination is overly dominated by government-linked funds and agendas, and that’s been the case across all sectors,” says one industry participant. “The problem is that you see companies get funded that don’t necessarily deserve it and groups like Mavcap did sort of suck out the other funds that were looking to invest. So why would they bother putting too much emphasis in Malaysia when there are so many interesting alternatives around the rest of the region.”

Seeking diversity

The Malaysian Venture Capital Association (MVCA) estimates that up to 70% of its members are tied to government-funded VCs and sovereign wealth funds. In an effort to reverse this ratio, Victor Chua, president of MVCA and a former vice president at Gobi Partners, has launched his own Malaysia-based VC firm under the name Vynn Capital. The fund has raised almost all its targeted $40 million corpus, with all the LP contributions coming from non-government entities, especially family offices and corporations.

Chua sees the response as an encouraging sign of the local industry’s ongoing maturation. This process extends from the company level, where start-up ecosystems are said to be increasingly acclimatized to higher professional standards; to the macro level, where policy reform, although still foggy, appears set to underpin more sustainable industry growth going forward.

“Malaysia is doing her best to emerge stronger from all those incidents that we’ve seen and at the same time trying to figure out what we’re going to do going forward,” says Chua. “Right now, we are seeing a lot of Malaysians coming back and foreigners coming to Malaysia because it’s no longer just an idea – it’s really about how do we actually execute. That’s why I think this is an especially good time to invest in Malaysian entrepreneurs. You’re starting to see that regional pool of talent being based here.”

As these evolutions unfold, Malaysia’s understated natural advantages are expected to gain prominence. These include a population that is large enough for businesses to gain critical mass but small enough to consistently encourage overseas expansion. Strong language skills, including proficiency in English, Chinese, and Arabic, are also in the Malaysia plus column, along with ease of transport, and relatively seamless cultural and physical access to Singapore.

“It's a combination of things that sets Malaysia apart rather than any one factor,” explains Celadon’s Ashby. “Malaysia’s not going to win on labor, cost, or people availability, and certainly not on size of local market, but it will come in second or third in just about every other desired category. That combination makes it a preferred destination for many types of investor.”

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• Topics
• Southeast Asia
• GPs
• Regulation
• Malaysia
• Venture
• Growth capital
• Ekuinas
• COPE Private Equity