Malaysia GPs hustle with LPs on domestic deals

Deployment is getting harder for the southeast Asian country's managers as domestic investors become increasingly active in direct investing.

Private equity firms in Malaysia are finding it more difficult to deploy capital, partly because many government-linked entities are setting up their own direct investing arms.

Malaysia’s Employees Provident Fund (EPF), the sixth-largest pension fund in Asia with approximately $180 billion of assets, for example, is seeking more direct deals in the domestic market, Dato’ Mohamad Nasir Ab Latif, deputy chief executive for investment at EPF told Private Equity International, in October. Similarly, Permodalan Nasional Berhad (PNB) or National Equity Corporation, Malaysia’s largest fund management firm, said last year it will boost private investments in 2018 – both direct and fund commitments – as part of a five-year target to reduce its cash holdings.

Brian Chia, head of the corporate, commercial & securities practice group of Kuala Lumpur based Wong & Partners, told PEI that deployment of private equity capital in Malaysia is getting harder for two reasons: increasing competition and difficult public market conditions.

“First, it is becoming a more crowded space, and not just with the usual regional buyout funds,” he said. “Government-linked entities and government-linked funds such as EPF, Post Office Government Fund, and Ekuinas, among others are all starting to encroach on the private equity space. Many of them are setting up internal private equity arms for direct investments.”

“Secondly, there is always a flight to quality when the markets are not great. This means all the private equity players will become more discerning – their fear is that if they take on a sub-standard quality target and that investment doesn’t do so well, they will have difficulty exiting and as a result, have difficulty raising their next fund,” Chia went on to add.

Stephanie Phua, a partner at Wong & Partners, also pointed out that it’s still a hard environment for private equity to effectively deploy capital, especially in the mid-market segment.

“In the mid-market space, competition is stiff (including increasingly from sovereign wealth funds and strategic investors) resulting in relatively high valuations which makes it all the more difficult for a private equity firm to justify a deal (and not overpay for assets) with their investors,” she noted.

A mid-market Malaysian GP told PEI that in the last two years investors such as EPF and PNB have been in direct competition with managers in transactions greater than $50 million.

How successful these direct deals are, however, will only be apparent in the next few years, he noted.

PNB is an active investor in commercial and residential real estate in Australia and also holds stake in Malaysian companies Sime Darby and UEM Sunrise. Meanwhile, Ekuinas saw a marginal increase in the number of direct investments in FY 2016, its latest record to date. The government-linked manager made 29 investments worth MYR 123.2 million ($32 million; €25 million) in FY 2016, compared with 26 investments in the previous year.

Calling them the “new kids on the block”, Chia agreed that the investors would also have to face similar deployment challenges. “While LPs may have deep technical expertise, and continue to work on their deal track record, they are also up against seasoned regional dealmakers who bring industry expertise in Malaysia and globally,” he said.

Despite the challenges of investing in Malaysia, data from advisory firm Duff and Phelps shows deal activity in the country saw strong momentum in 2017. A total of $20.3 billion worth of M&A, private equity and venture capital deals and initial public offerings were recorded last year, compared with $15.6 billion in 2016, mainly driven by high deal activity in the energy sector.

Examples of private equity-backed deals in 2017 include Navis Capital Partners’ disposal of a 50.1 percent stake in HG Power Transmission for MYR 92 million as well as Ekuinas’ MYR 255 million acquisition of lighting solutions provider Davex.