Amid a slowing economy that has seen further disruption due to the COVID-19 pandemic, Malaysia’s COPE Private Equity sees an opportunity to access quality deals.
Business activities in Malaysia are resuming as the country gradually eased coronavirus lockdown measures. Almost all businesses are allowed to reopen, albeit subject to strict conditions, in the so-called conditional movement control order (CMCO).
Still, the World Bank has cut Malaysia’s 2020 GDP growth forecast to a negative 0.1 per cent, as stay-home orders froze economic activity for almost two months. Similar measures across the globe, which have slowed trade, further compound the challenges for Malaysia’s export-oriented economy.
“While COVID-19 is an unprecedented human tragedy which spares no one, the silver lining is that the economic downturn provides us access to quality businesses which may not otherwise be available,” COPE Private Equity founder and managing director Azam Azman told DealStreetAsia. “This access to quality deals, coupled with reasonable valuations and operational improvements, will hopefully work together to drive alpha returns over the next few years.”
COPE, which has invested in oil and gas companies such as the now-listed Serba Dinamik Holdings Bhd and Daya Material Bhd, also expects the downturn in the oil and gas sector to spur consolidation among industry players in Malaysia. However, the pricing gap between buyers and sellers may take time to narrow, said Azam.
COPE, which is also a Shariah-compliant private equity firm, will continue to favour sectors that fulfil large consumer needs such as energy, healthcare, education, food production, medical devices and engineering maintenance services, among others.
Established in 2005, COPE has 600 million ringgit ($138 million) of assets under management. Its portfolio includes aluminium and zinc die casting business STX Precision Group, fruit retailer MBG Holdings, school uniforms maker and distributor My Sutera Holdings, IoT company MDT Innovations and laundromat chain Cleanpro.
Edited excerpts of an interview:
How do you foresee fundraising activities in Malaysia for the rest of the year?
We think fundraising activities will slow down in the coming months. In terms of allocations to private equity, in times of market distress, limited partners (LPs) may be forced to slow down or freeze new commitments into private equity due to the denominator effect.
The denominator effect happens when an investor’s private equity allocation increases as a percentage of the portfolio as a result of the declining value of the public markets, rendering the investor temporarily over-allocated to the asset class. For general partners (GPs), those with dry powder will prioritise making investments in the current period over fundraising, due to the sheer amount of opportunities in the current environment.
Is COPE raising new funds in the near term?
We raised our last fund, COPE Opportunities IV (275 million ringgit), in 2018. Having paced our investment in anticipation of an economic downturn, we are focusing on deployment in the near term.
COPE previously invested in the oil and gas sector. What’s your view on the oil and gas sector?
Generally, we think O&G activities, in terms of cycles, are punctuated by geopolitical events. Understanding where we are in the cycle is important to ensure we become a seller when everyone is bullish and a buyer when the market is in a down cycle.
The O&G industry is divided into upstream explorers and producers, oilfield service providers, midstream transporters, downstream refiners and petrochemicals producers. We tend to avoid investing in the upstream sector as the investment performance is directly influenced by commodity pricing, which is outside our control.
We prefer companies providing essential services whose demand is less influenced by the oil price.
The recent downturn in the industry may encourage a wave of consolidation and M&A among the players in Malaysia, although the pricing gap between buyers and sellers may take time to narrow.
From our end, we continue to keep an open mind when evaluating opportunities in O&G and invest in a broad variety of sectors to diversify sector-specific risk.
How has the Covid-19 outbreak and lockdowns across countries impacted COPE’s investments and strategy?
Sir Ronald Cohen, the founder of Apax Partners, vividly described the search for advantage in an uncertain environment in his 2007 book, the Second Bounce of the Ball. Everyone can see the first bounce – the economic fallout arising from containment measures and international order closures — but the ball is now up in the air and no one can say for certain what the second bounce will look like.
Will the pace of consumer behaviour change accelerate? Will the political pressure for ‘onshoring’ or the transfer of business operations once overseas back home intensify? Will the demand for office space reduce permanently?
Entrepreneurs and the PE firms backing them who can best predict the second bounce will emerge stronger from the crisis. Selecting winners for the second bounce is what good PE thrives on to deliver consistent alpha returns.
We have seen similar plays on previous occasions and have developed in-house case studies to better equip our analysts in forecasting the second bounce.
In terms of sectors, we continue to favour those that fulfil large consumer needs such as energy, healthcare, education, food production and peripheries, like innovative solutions provider, medical devices and engineering maintenance services. While this does not change, given the unprecedented disruption from the COVID-19 pandemic, we are looking to back agile and forward-thinking entrepreneurs – businessmen who recognise opportunities in a crisis, coming up with new products and distributing through new channels to meet changing consumer demand.
Ultimately, this is not the first crisis humanity has faced and nor will it be the last. Change is the only constant in the order of things and we will have to adapt to the new realities.