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How Private Equity Is Fostering Economic Growth in Malaysia

by Preqin

  • 18 Dec 2019
  • PE
  • VC

Malaysian Government-linked private equity fund manager Ekuinas’s CEO on supporting the country’s next generation of leading companies

 

Ekuiti Nasional Berhad, known as Ekuinas, plays a key role in Malaysia’s private equity industry. Backed by the Malaysian Government, Ekuinas is a single-country fund targeting local mid- to large-sized companies that are in the growth stage. In the 10 years since its founding, Ekuinas has invested in 23 companies, generating MYR 6.6bn in economic value for shareholders at a multiple of 2.0x capital invested. Preqin spoke to Syed Yasir Arafat Syed Abd Kadir, Ekuinas’s CEO, about private equity’s role in promoting economic growth as it helps local companies to scale up.

How does Ekuinas fit into the private equity & venture capital (PE & VC) ecosystem in Malaysia?
Ekuinas was set up with a very clear vision in mind: it was introduced as one of the new market-friendly policy instruments designed to encourage sustainable Bumiputera (local Malay) wealth creation through PE investments. As such, we have a very specific role, which is to catalyze the growth of Malaysia’s next generation of leading companies.

As part of Ekuinas’s mandate, we focus our investments on mid- to large-sized companies with established, strong track records that are looking to expand into the next stage, with an investment horizon of approximately five years. Ekuinas’s role is to continue building up these companies to a size where they can expand and regionalize, and subsequently attract international investors that can help scale these companies further.

The below chart details where Ekuinas sees itself in the industry, which is specific to mature growth companies.

 

This year, we celebrate our 10th anniversary. In this time, we have done our best to ensure we capitalize on our strengths and deliver on our commercial and social objectives. Our commercial drive helps us to maximize our financial objectives, in turn enabling us to distribute portfolio gains and benefit the Bumiputera community at large. 

To achieve our social objectives, we contributed a total of MYR 37.2mn from 2013 to 2018 through our corporate social responsibility brand, ILTIZAM. In 2018, we invested MYR 7.7mn in ILTIZAM programs which impacted 9,000 beneficiaries.

Malaysia underwent a significant political shift in 2018, when the opposition won a national election and took the reins of government for the first time. How has that change affected the PE & VC sector, and your investment strategy, if at all?
Malaysia has the fundamentals – such as ease of financing, access to capital markets, legal and regulatory processes – that allow the market to perform well. Businesses are generally stable and generating positive growth. Once the political situation of 2018 cleared up, most companies continued as normal. The key growth challenge for the Malaysian PE & VC sector was the limited participation of institutional and private investors. However, the market overall has adapted well to changes and is slowly regaining its momentum.

On that front, it has been business as usual for Ekuinas. 2018 was a busy year for us; we delivered our value creation plans and concluded three transactions in total. To us, the ability of a PE firm to facilitate and negotiate successful investments – both entries and exits – is vital to the dynamics of the local business ecosystem.

In line with our investment strategy, our funds and portfolio companies have delivered commendable performance in the past 10 years. The measure of success of any private equity firm is its ability to crystallize its investments. Since inception, Ekuinas has invested in 23 companies and successfully divested 10 companies under Direct Investment.

The closure of our maiden fund, Ekuinas Direct (Tranche I) Fund, in 2017 saw us outperform both public and some private equity asset classes, placing the fund in the top quartile in net distribution to paid-in capital (DPI) for funds of vintages 2009-2011. This was based on the various benchmarking methods by the Centre of Asia Private Equity Research Ltd. (CAPER), a Hong Kong-based independent body specializing in the Asian PE industry.

Ekuinas’s mandate is to catalyze growth in Malaysia and scale local businesses. Which sectors do you focus on and why?
We invest across all sectors except for real estate and construction. As a strategy, we try to avoid a sectoral approach. I find a sectoral focus is less relevant in PE unless you are a thematic fund, especially if you are a single-country fund with a specific mandate, like us. However, we do undertake sectoral reviews to understand the spaces in which our portfolio companies or potential target companies operate.

As our investment philosophy is very much thesis driven, we look at opportunities in the sectors in which the prospective companies operate and the value proposition they offer. We also measure them against their competitors to ensure they have the core abilities to create value in line with our vision, as well as the exit strategies that would make it possible for us to generate good returns.

Having considered all factors, three sectors look attractive at this juncture: consumers with growing affluence; technology, media and telecommunications (TMT) and its increasing digitalization; and oil & gas, as the sector has pretty much hit the bottom in terms of oil prices and is ripe for consolidation.

One of Ekuinas’s objectives is to create a positive social impact through its investments. Do you see such opportunities in Malaysia? Could you give an example of an investment you made which showcases your responsible investing efforts?
Ekuinas’s objective is to support the next generation of leading companies through the PE model, acting as a partner for growth and economic catalyst for Malaysia. Through this, we have a social objective: to create sustainable Bumiputera wealth and economic participation through our investments.

The benefits of our activities echo throughout the supply chain: wealth creation, upskilling and widening the management and employer pool. We invest in high-potential Bumiputera companies, the sports store Al-Ikhsan Sports for example, with significant payoff.

Another way we provide social opportunity is by paying ‘sweat equity,’ which rewards the managers who work hardest for the performance of their company with equity ownership. This occurred with Icon Offshore Berhad (ICON) and Asia Pacific Institute of Information Technology Sdn Bhd (APIIT), where we provided managers an indirect stake in their respective companies, which they crystallized upon Ekuinas’s exit.

To date, Ekuinas has increased overall Bumiputera equity since its inception to MYR 5.0bn, which is 1.5x the capital invested. This achievement has also led to the creation of MYR 6.6bn in total economic value for all shareholders, at a multiple of 2.0x the capital invested.

Our efficiency is a real boon: by realizing the investment that maximizes its returns, Ekuinas is able to enhance capital and re-invest in other companies. This in turn benefits a larger group of Bumiputera and has a knock-on effect across the economy.

Ekuinas also extends beyond our core investment activities to meet our social goals, mentoring small-business owners who fall outside our remit. We help entrepreneurs by investing in the necessary systems or marketing tools to meet their business requirements. Additionally, we recognize the importance of education to a progressive and inclusive society, investing in scholarships as well as running a management trainee program and school adoption program.

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