LP interview: Malaysia's KWAP

Recent private equity fund commitments made by Kumpulan Wang Persaraan (KWAP), Malaysia's second-biggest pension fund, point to an LP in transition. Each of the nine managers it backed between 2010 and 2012 are concentrated on Asia: from Saratoga Capital and Ancora Capital in Indonesia to Advent Private Capital in Australia to the Southeast Asia-heavy offerings of Asiasons and Lombard Asia.

Last year, there was one big Asia investment - KWAP backed Affinity Equity's Partners' fourth fund, its first commitment to a large regional buyout vehicle - but the other three were far from home. Acon Equity Partners III and Stonepeak Infrastructure Fund are both North America-focused, while Nordic Capital III mainly invests in Sweden, Denmark, Finland and Norway.

"Our private equity fund program has gained momentum in terms of both geographical and fund strategy diversification in recent years," says Nik Amlizan Binti Mohamed, KWAP's CIO. "Last year we invested in four funds including a US infrastructure and a European buyout fund. As of the third quarter of this year, we have closed three funds, including one global secondaries fund. We aim for 4-5 funds per year."

The pension fund had 18 GP relationships at the end of 2013 and MYR816 million ($249 million) devoted to the asset class out of a total portfolio of MYR99.9 billion. It also had two direct private equity investments in Malaysia. Last year, the Ministry of Finance approved a new strategic asset allocation that will see KWAP's international investments rise from 10% of the portfolio to around 19%. As a result, the 1% PE allocation has jumped to 2%, with a further 1% for infrastructure. KWAP will deploy 6% in overseas equities, 5% in fixed income securities and 6% in real estate.

Based on the annual average increase in fund size over the past five years, KWAP will have MYR113.9 billion under management by the end of 2014, of which up to MYR3.4 billion could theoretically be in private equity and infrastructure.

Growing appetite

KWAP's origins lie in the Pensions Trust Fund established by the government in 1991 to cover federal pension liability. Under new legislation introduced in 2007, KWAP was incorporated and assumed responsibility for the Pensions Trust Fund. It receives contributions from 505 statutory bodies, local authorities and agencies that together have more than 160,000 members, plus additional funding from the government.

The first private equity fund investment came in 2001 but until incorporation commitments tended to be opportunistic and relatively small. In recent years, KWAP's commitment for a fund has grown from $20 million to $50 million.
Aside from picking the right managers - a challenge for all LPs, irrespective of size - KWAP faces two key pressures as it builds out its alternatives program. The first is brand recognition.

"We are still a small player in this global industry," Amlizan says. "However we believe that it is critical to build our presence in the industry in order to participate in high-performing global funds. In most cases, when top-performing GPs raise their subsequent fund, existing LPs re-up with a higher capital commitment. New LPs may not have the opportunity to invest unless they are we well known, reputable institutional investors."

The second is attracting talent capable of executing the pension fund's investment strategy. Malaysia is an immature private equity market relative to the likes of the US and this makes it difficult to recruit professionals who can source deals and funds. KWAP's alternatives department is growing fast, with nine professionals in private equity, covering both the investment and portfolio management, and others responsible for real estate, but the program is currently managed internally.

"If you are going to fast track a program you can appoint an advisor to assist in your portfolio construction and build up, but we decided to do it ourselves," Amlizan explains. "We might consider using advisors in the future to complement our in house investment program."

Co-investment target

This team is already working on geographic and sector diversification, with co-investment seen as the next step. Some deals are already in the pipeline. Co-investment is one area of consideration when KWAP invests in a fund; another is an observer seat, which presents the team with an opportunity to learn from its partner GPs and augment internal capabilities.

As to the kind of managers KWAP is targeting, large-cap players such as Affinity appear to be the exception rather than the rule. Acon Investments and Nordic Capital, well-established mid-market players in their respective geographies, arguably serve as a better indicator of what the pension fund is looking at. In addition to offering an element of diversification to an Asia-heavy portfolio, mid-market buyouts in developed markets are seen as strong performers.

"The focus in the medium-term is more of the mid-market funds where returns have been the strongest," Amlizan says. "We aren't going to focus so much on the mega funds, although if a manager has consistently delivered well in this space then we would consider them."

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• Topics
• LPs
• Southeast Asia
• LPs
• Malaysia
• KWAP