Headwinds buffet Malaysian private equity

While the government tries to promote private equity investment in the country, a combination of regulatory issues, corruption concerns and economic instability have put the brakes on deal flow.

The value of private equity and venture capital investment in Malaysia decreased by almost one-third in 2015, according to Securities Commission Malaysia’s 2015 annual report.

Malaysian mid-market firm Navis Capital put around $300 million to work last year, compared to a normal investment rate of around $500 million, said managing partner Nicholas Bloy.

“We consciously held back our pace of investments in Asia, because currencies and multiples were moving quite strongly,” said Bloy.

Total investments in the country last year came in at MYR 2.2 billion ($532 million; €480 million), down from MYR 3.3 billion in 2014, as local general partners dealt with several “key domestic challenges”, said Brian Chia and Stephanie Phua, corporate & securities lawyers from Baker & McKenzie’s member firm Wong & Partners in Malaysia.

“Deal sizes in Malaysia have traditionally centred around the lower to mid-market range and this has been magnified in the past year with the decline of the Malaysian ringgit. While there is ample dry powder, the relatively smaller deals available plays against Malaysia and draws interest to other competing regional investments in southeast Asia.”

Deals from Malaysian firms such as Creador, Ekuinas and Navis Capital were in the $10-80 million range in 2015, compared to previous years where deal values reached more than $100 million, such as Navis’ acquisition of Singapore’s ECO Industrial in 2013.

Chia and Phua added that the regulatory environment in Malaysia, especially as it relates to foreign equity restrictions, continues to be a challenge for foreign private equity firms as well as firms which have both local and foreign investors.

Limits on foreign ownership in Malaysia are sector-specific and imposed by the different government ministries, rather than a central body. As well as formalised restrictions, the ministries may also impose equity restrictions as conditions to obtain a business licence. Restrictions on foreign equity apply to key sensitive sectors such as financial services, oil and gas, telecommunications, education, healthcare and professional services.

As well as the complicated regulatory landscape, the industry has also been spooked by corruption allegations against Prime Minister Najib Razak. Razak has been accused of embezzling nearly $700 million from state investment fund 1MDB. “The perception of sovereign risk arising from local political uncertainty has PE firms treading more carefully,” Chia and Phua said.