Political uncertainty and an unrelenting COVID-19 crisis have dealt a double whammy to Malaysia’s already fragile investment climate.
While domestic investors seem unfazed, the crisis has weighed heavily on foreign investor sentiment.
A number of regional private equity firms have shied away from Malaysia while evaluating investments in Southeast Asia, executives at various firms told DealStreetAsia requesting anonymity, due to the sensitivity of the issue.
“A lot of investors had invested in Malaysia because the market had been politically very stable [earlier],” James Chin, Professor of Asian Studies and inaugural director of the Asia Institute Tasmania at University of Tasmania, recalled. “But the country has had three governments in the last three years. Now, many foreign investors are skipping Malaysia,” he said.
The domestic investors, though, see the appointment of the new government as a breath of fresh air.
“During the previous administration, investor confidence was low because of uncertainty on whether the government would stay in power and if the policies against the COVID-19 pandemic were working,” Izad Sallehuddin, a local PE consultant, remarked.
With the number of COVID-19 infections mounting, unemployment rising, and a stock market “going nowhere”, Sallehuddin said Malaysians needed a new prime minister to put new, strong policies in place to get things moving.
If the stock market is a proxy to how investors view the economy, then Malaysia has not been a favoured destination lately.
Malaysia’s FBM KLCI index
Malaysia’s FBMKLCI Index had shed 10% since the start of 2021 until the appointment of Ismail Sabri Yaakob as the new prime minister.
To put this in perspective, Vietnam’s stock market has risen 30% year-to-date, at times rising by 40%. Singapore’s Straits Times Index has also jumped around 13% YTD. Indonesia’s public market, meanwhile, has been flat in 2021, but it has risen about 25% in the last 12 months.
While Malaysia’s FBMKLCI Index has recouped some of the losses following the swearing-in of the new cabinet on Aug 21, “market sentiment remains unsettled due to the fragile ruling coalition and elevated uncertainties surrounding the performance of the new PM and reshuffled cabinet,” Dr Yeah Kim Leng, professor of economics at Malaysia’s Sunway University Business School, told DealStreetAsia in an email interaction.
Bottlenecks in capital raising
The double whammy of a political crisis and the pandemic has led to markdowns on Malaysian assets as investors attach a higher risk to them, Leng added.
In terms of private businesses seeking funding, it would not be too difficult to find capital. But the current climate can lead to some concerns about valuations.
“During my deal sourcing, I have seen that businesses have been talking to foreign investors, but they are moving at a slower pace. Travelling between states in the country is limited, so the challenge is how to do due diligence,” said an executive of one of the largest investment funds in Malaysia.
Another speed bump is that the Malaysian investment landscape has been dominated by government-linked companies (GLCs), according to Dr Leng. “There is, therefore, a potential for disruption in GLCs’ investment activities if appointments [at top positions] are delayed and if the strategic business and capital investment plans require board approval,” he added.
The banking route does not look any easier, either. “Banks are aggressive in lending, but only to good assets. Less capital coming into the market typically translates to a higher cost of borrowing and we can expect a knock-on effect on businesses in Malaysia,” commented Timothy Goh, a Singapore-based counsel at the law firm Dechert.
As COVID-19 containment measures remain in place, direct and portfolio investors will likely remain on the sidelines, pending clarity on the pandemic and the policies of the new government, Dr Leng asserted.
Malaysia is also falling behind regional peers on the foreign direct investment (FDI) front. It saw the steepest decline in FDI inflow last year, plummeting by 68%. This was much higher than in Thailand, which saw a 50% plunge, and Indonesia (-24%), and Vietnam (-10%), according to the United Nations Conference on Trade and Development’s (UNCTAD) Investment Trends Monitor report.
A major problem with Malaysia, Chin pointed out, is that the country’s finance ministry has not delivered the right stimulus package. Moreover, Malaysia may not be fully vaccinated until the end of this year.
Chin is of the view that Malaysia has not been able to build a strong economic structure. “Take the country’s manufacturing sector. It’s still far behind Indonesia or Vietnam in terms of attracting major investments,” he said.
Malaysia also has a smaller software tech ecosystem, say experts that DealStreetAsia spoke to.
“The areas that we have strengths in are not typically areas that are headline-grabbing. [Our strengths are] latex glove manufacturing, and hardware technology — they are not very sexy,” said an officer at a Malaysian independent asset manager.
The last government had initiated a few steps to fix the flaws of the economy.
One example is Penjana Kapital, which was founded last year. While Malaysia has seen its businesses moving to Singapore — ride-hailing decacorn Grab is the most obvious example — the launch of Penjana Kapital was to start growing companies from the seed stage up to pre-IPO, and making it attractive for them to stay in the country.
“Penjana Kapital’s main role is to stimulate Malaysia’s economy by digitalising and automating Malaysian businesses through innovation from startups, funded by private capital from strategic domestic and international investors, matched by the government and in turn developing the local venture capital space,” according to the programme’s website.
Penjana Kapital raised 676 million ringgit. Its Dana Penjana Nasional programme also raised 850 million ringgit earlier this year, which was more capital than expected.
“It means that there’s a lot of interest in the private equity and venture capital ecosystem in Malaysia,” Sallehuddin pointed out.
Headlines have recently turned to Malaysia’s startup ecosystem as the country recently got its first unicorn — the used car platform Carsome, which is eyeing an IPO in the US.
That said, investing in early-stage companies means the market will have to find buyers as these businesses mature.
Optimism at home
Domestic fund managers in Malaysia, however, seem calm on the ground.
One of the investment professionals quoted above is hopeful that Sabri Yaakob’s ruling United Malays National Organisation (UMNO) party will bring change. “We’ve got a new UMNO with a fresh mandate and a fresh perspective in terms of how to get the country out of this political turmoil and pandemic,” he said.
Ismail Sabri Yaakob has even signed a cooperation agreement with the opposition. This is the first sign of a mature democracy, the investment professional asserted.
For limited partners, who look at exposure to Malaysia, their commitments are often long-term, so they will probably not pull out their commitments, said an other independent fund manager. “A lot of the things that are happening right now are short-term, COVID-related noise.”
On the business side, investors DealStreetAsia spoke to say the quality of Malaysian companies has historically been high from a corporate governance perspective. Domestic deals have showcased some bright spots as well as vibrancy in terms of exits.
“The industries we operate in don’t depend on which government is in power. In fact, the government has always been supportive of the things that we do, which is building high-quality, consumer-orientated businesses that support other businesses,” said Brahmal Vasudevan, founder and CEO of Kuala Lumpur-based PE firm Creador.
The firm is raising its fifth fund and expects a final closing next month at a hard cap of $680 million. Vasudevan told DealStreetAsia recently that 35% of his firm’s deployment has been into Malaysian companies.
“New opportunities can be expected to arise with a lower PE entry value, and as the economy moves further along the recovery path, we should see an uptick in PE investment activity,” predicted Dechert’s Goh, whose advisory expertise covers private equity and venture capital, among others.