While Japan, China and India occupy the leading positions in the race to be Asia's dominant private equity markets of tomorrow, Malaysia has made some dramatic progress up the inside rail.

The figures tell a dramatic story. From a negligible $30 million of private equity investment in the whole of 2003, Malaysia posted $459 million of investment in the first six months of 2004, according to figures from the Asian Venture Capital Journal.

Among those leading the charge is Actis, which in October 2004 announced the first closing of its Actis Malaysia Fund on $60 million. Rick Phillips, an Actis partner with responsibility for the fund, says it will aim to close on around $80 million by the middle of 2005.

Phillips says the potential of the Malaysian private equity market is such that it could double in size every year for the next ten years. He says regionalisation is one of the two main trends driving activity: “Globalisation and the threat from China mean that medium sized companies in Malaysia have to grow big and they are doing this by rolling out their products into the whole of Southeast Asia and acquiring businesses in neighbouring geographies”.

Such expansion strategies require capital, and such is the demand that not all of it can be provided from traditional banking and family sources. Private equity, through a process of raising awareness of its benefits and availability, is moving into the gap.

The other important dynamic, says Phillips, is Malaysian conglomerates unbundling assets. He says Malaysia has a higher proportion of conglomerates even than most conglomerate-rich Asian markets, and that many of these have realised that the best way to compete in the modern world is to focus on core specialisations and grow them regionally. “The best way to fund that is through sales of non-core businesses”, says Phillips. And here too, private equity is waiting in the wings.

Phillips says that, while more capital is targeting Malaysian deals, most of it is coming from pan-Asian rather than country-specific funds. That is not to say the opportunity has not been recognised by local institutions: Malaysia's Employees Provident Fund, the country's largest financial institution, has committed $20 million of the $60 million raised by Actis so far.

The other current investor, with a $40 million commitment, is CDC, the UK government-owned emerging markets investor. Actis spun out of CDC earlier this year in order to position itself better to attract third-party capital, though CDC remains the largest investor in its funds.