Alternative source: Private equity is benefitting from stability, liquidity and state support

Despite the traditional dominance of banks in providing debt finance, the Malaysian private equity (PE) industry is now gaining traction as an alternative source of capital for high-growth companies.

Big Deal

A landmark $201.2m private placement deal completed in 2013 by global PE firm Kohlberg Kravis Roberts (KKR) drew international attention to what may turn out to be one of the most overlooked PE markets in South-east Asia. Following the deal, Ming Lu, the firm’s regional head for South-east Asia, said, “Malaysia is a key target market for KKR. It has differentiated demographics with a young and growing population. It has its own natural resources, a strong banking system with a relatively balanced economy, and strong opportunities for growth and productivity." SMALL THINGS GROW: Nonetheless, in overall terms PE deals in Malaysia continue to account for a relatively small share of under 3% of the total funding market, according to sources. In all, only eight transactions of this kind were reported in 2013, though many are carried out informally, according to sector participants.

The conditions for growth in PE are ripe. With state-owned institutional funds now backing the industry, liquidity is no longer a major issue. Analysts point out that entrepreneurs have already taken out a lot of debt. Meanwhile, the market for initial public offerings (IPOs) has been volatile in 2014.

There are, however, structural challenges to driving a profitable flow of PE deals. Malaysia may be one of the most advanced economies in South-east Asia, but its companies tend to be either very large state-owned enterprises, with their own sources of capital, or relatively small family-owned businesses. “We have yet to win the trust of founding shareholders that have traditionally been reluctant to let in outside investors,” said Syed Haizam Jamalullail, operating principal at Tuas Capital Partners, a Malaysian PE firm. “They need to be convinced that, apart from providing an alternative source of funding on attractive terms, PE funds can play a constructive role in growing their business. We usually look for minority stakes in mid-size companies with three-year proven cash flows and strong growth potential without being tied to a specific sector. Competition for such deals in Malaysia is quite high.”

State Help

Tuas was one of four PE firms to receive funding from the state-owned PE fund Ekuiti Nasional (Ekuinas), which allocated RM360m ($112m) in 2013 for its Outsourced Programme Tranche II, aimed at spurring growth in the Malaysian PE industry. Under the state-backed scheme, selected PE firms – including TAEL Partners, RM Capital Partners and CMS Opus Private Equity – are allowed to top up their funds by seeking third-party investors to expand the pool of PE capital. All participating firms are expected to acquire minority stakes in high-growth companies that receive their revenues from Malaysia. In line with Ekuinas’s mandate, such firms must invest in companies with Bumiputera (indigenous Malay) shareholders to enhance the latter’s economic participation.

Another liquidity boost to Malaysian PE industry is likely to come from the RM586bn ($182bn) Employees Provident Fund (EPF), which in 2013 pledged to support the Malaysian PE sector by raising its PE investments above 2% of assets. In September 2014 EPF and Ekuinas joined forces to organise an international PE forum in Kuala Lumpur to showcase Malaysia’s edge as a destination for bets on promising businesses.

Benefits

Apart from stable macroeconomics, ample liquidity and supportive government policy, Malaysia’s PE sector is attractive because of its low level of penetration. Malaysia may also offer PE firms a more predictable exit outlook than higher-growth countries such as Indonesia, according to Zubin Rada Krishnan, an operating principal at Tuas.

“Exit routes include trade sales to foreign investors keen on Malaysia’s stable growth story, as well as liquid domestic corporates strengthening their market share,” he said. “Public market investors may also appreciate the efforts taken by PE houses to professionalise investee companies that eventually reach an IPO.”