Malaysia’s PE-VC ecosystem poised for recovery in 2021, but politics could be a party pooper

Petronas Twin Towers in Kuala Lumpur at night.

After a year of uncertainties brought about by COVID-19, Malaysia’s investors and the startup community have something to look forward to in the new year.

The easing of movement control orders (MCOs), hopes of COVID-19 vaccinations in the country by February, and government-led efforts to revive investment activity have helped to clear the pall of gloom, even as challenges such as political uncertainty linger in the horizon.

“The year-end optimism hinges on the possibility of a return to normalcy come 2021,” Marissa Salim, vice president at private equity industry tracker Preqin told DealStreetAsia. “With the gradual resumption of business travel, deal-making and fundraising activities should also gradually see an uptick in 2021, especially so on the back of vaccine optimism.”

The first green shoots may have started to appear, as recent year-end deals indicate.

Used car platform Carsome, for instance, announced on December 8 that it has secured $30 million in a Series D round, led by Asia Partners.

“Overall, I believe that 2021 will be a better year for startups and VCs in Malaysia. We are ending 2020 with multiple good news coming from Malaysia — [state-run investor] Penjana Kapital’s investment in several new VCs, and the successful fundraising by startups like Carsome,” Malaysian Venture Capital and Private Equity Association (MVCA) president  Victor Chua told DealStreetAsia.

Penjana Kapital had invested $25 million in VC firm Emissary Capital Growth Fund 1 on December 15.

“These are signals that capital is finding its way to promising asset classes. Venture Capital is expected to be one of the key growth contributors for 2021,” said Chua, the founding and managing partner of  Malaysian VC firm Vynn Capital, which is an investor in Carsome, among other startups.

While the country’s economy is expected to shrink 4.5 per cent in 2020, according to Bank Negara’s forecast, the central bank expects GDP in 2021 to grow in the range of 6.5 per cent to 7.5 per cent.

“Strengths that stand Malaysia in good stead are the uptrend in external demand for commodities and manufacturing, lower reliance on tourism and services exports, a bipartisan commitment to fiscal expansion and relatively ample policy room to enhance monetary accommodativeness,” investment bank CGS-CIMB economists Michelle Chia and Lim Yee Ping wrote in a note dated December 11.

State-owned investors lead the way

State-owned investors are showing the way in leading the revival.

Penjana Kapital was established in July this year by the Malaysian government to channel capital from international and local investors into the local VC space.

It had, in September, invited requests for proposals (RFPs) from VCs as part of the Dana Penjana Nasional (DPN) programme. The initial target fund size is 1.2 billion ringgit ($297.09 million), of which half will be invested by foreign and domestic investors, and the rest by the government. The DPN programme had exceeded its initial target and now plans to invest 1.57 billion ringgit ($387.2 million) into local startups.

State-run agencies, such as Cradle Fund and Malaysia Debt Ventures (MDV), are also lending their support to startups.

Cradle, a startup funding agency, will continue tackling short-term challenges, reducing barriers to entrepreneurship, and boosting entrepreneurial potential that could help speed up the recovery and preserve aggregate employment in the long term, its CEO Rafiza Ghazali told DealStreetAsia. “We will continue to pull together the best that the government and private sector already offers and add new focus in helping great innovative technology companies grow into leading global players.”

MDV, a financier of technology and green startups said in a statement on December 15 that it is ready to assist startups further via its venture financing programme as a complementary source of capital to ensure maximum returns from their businesses.

MDV recognises the importance of synergy and collaborations with other funders within the ecosystem. Through the DPN programme, potential investments by new venture debt firms will provide an opportunity for MDV to embark on club or syndicated deals,” it added.

State-owned Malaysia Venture Capital Management Berhad (MAVCAP), the country’s largest venture capital (VC) company, meanwhile, expects companies managed by its fund managers and those in its portfolio to recover in 2021.

“Based on our engagements with fund managers and individual companies, especially in 2020, we believe there continues to be a strong pipeline of entrepreneurs and startups in Malaysia,” MAVCAP CEO Shahril Anas told DealStreetAsia.

The state-backed investment push was necessitated by a steep fall in fundraising activity this year.

Lost ground

According to DealStreetAsia’s SE Asia Private Capital Markets Report 2020, Malaysia’s total fundraising value stood at $71 million in the first nine months of 2020 (9M20), down 22 per cent from $91 million in the same period a year ago (9M19).

Among the seven countries DealStreetAsia tracked, Indonesia was the only market to witness growth in both deal count and deal value in the first nine months.

Source: SE Asia Private Capital Markets Report 2020

It was devastating, at least during the first three months after the Movement Control Order (MCO) was introduced in March 2020. Everything went downhill and there was not the slightest indication of how long the situation will last,” VC firm Gobi Partners managing director for Malaysia Jamaludin Bujang told DealStreetAsia.

He, however, expects Gobi Partners’s portfolio companies to recover going into 2021. “Some of our portfolio companies managed to recover very fast and performed better in key metrics than their pre-MCO period. We think the companies will continue to recover, though at varying rates, going to 2021,” he said.

On Gobi’s plans for 2021, Jamaludin said the firm will raise new funds while finding avenues to exit some of its investments. As a portfolio manager that has gone through two 10-year fund lifecycles, we are in our third life cycle now. That means we are in the fund-building period again. We will continue to raise new funds in 2021 and beyond. This includes creating new funds in new markets.”

Tech-focused sectors to shine

Moving into 2021, Preqin’s Marrisa opined that there will be continued interest in technology-focused mandates such as healthtech, e-commerce, and software, more so with brick-and-mortar businesses getting digitalised during the pandemic.

Another pivot likely to be seen is in the recovery of the traditional economy in the post-vaccine world with renewed interest around distressed opportunities in the cyclical space,” she said.

MAVCAP’s Shahril said he expects there to be many opportunities ahead for local startups to innovate and cater to the changing lifestyle that the pandemic has brought about. Areas such as artificial intelligence, big data, healthtech, fintech, e-commerce and digital solutions will continue to see accelerated growth, he said.

Chua of Vynn Capital expects investors to focus on sectors that are going through the most changes. “Travel, mobility, supply chain, logistics and retail will see more growth as tech adoption and innovation will be key for survival and for a ‘hockey stick’ recovery as markets open up,” he said.

“I believe that capital is finding its way to the right destination. Investors are generally not satisfied with holding cash and yield cash rates, especially during this low-interest-rate environment, Chua added. “Given the trend of digitalisation and significant changes in the business landscape, VCs and PEs will be actively seeking new long term opportunities that would justify the risk exposure.”

Risks linger

While Malaysia is seen as well-positioned to recover in 2021, politics places a caveat on the rosy outlook, economists warned.

Opposition leader Anwar Ibrahim claimed to have sufficient support to form a new government in September.

The government led by Prime Minister Muhyiddin Yassin survived the Budget 2021 voting on December 15, with a razor-thin majority of three votes. Losing the budget vote would have been as good as a no-confidence vote, triggering an election as Malaysia faces a fresh spike in COVID-19 cases, analysts said.

Political instability in the country led to a by-election in Sabah, a state in East Malaysia in September, which many saw as the centre of another wave of new COVID-19 cases.

“Promises by Malaysia’s prime minister to hold elections after the health crisis is over could introduce fresh uncertainty to the economic revival and policymaking process. The narrow majority in parliament poses downside risks to the economic outlook on fears that policy formulation and implementation are taking a backseat,” Michelle Chia and Lim Yee Ping wrote in the CGS-CIMB note cited earlier.

Chua said uncertainties are always bad news for businesses. “But ultimately VC and PE [firms] strive in times of uncertainty and I believe this will be the case even more, as we no longer look at country-specific opportunities. Rather, more and more investors are looking at the regional story,” he said.

Having said that, political stability in Malaysia is essential for the entire Southeast Asia as Malaysia is poised to be the hub for the next successful regional stories, he added.

Singapore Reporter/s

In Singapore, we are looking to double our reporting team by this year-end to comprehensively cover the fast-moving world of funded startups and VC, PE & M&A deals. We want reporters who can tell our readers what is really happening in these sectors and why it matters to markets, companies and consumers. The ability to write precisely and urgently is crucial for these roles. Ideal candidates must have to ability to work in a collaborative, dynamic, and fast-changing environment. We want our new hires to be digitally savvy and ready to experiment with new forms of storytelling. Most importantly, we are looking for hard-hitting reporters who work well in a team. Collaboration and collegiality are a must.

Following vacancies can be applied for (only in Singapore).

Following vacancies can be applied for (only in Singapore).   

  • A reporter to track companies/startups that have raised private capital, and have the potential to become unicorns. SEA currently has over 40 companies with a valuation of over $100 million and under $1 billion.
  • A reporter who can get behind the scenes and reveal how funding rounds are put together, or why they’ve failed to materialise. She/he in this role will largely focus on long-format stories. 
  • A journalist to track special situations funds, distressed debt and private credit (from the PE angle) across Asia.

Singapore Reporter/s

In Singapore, we are looking to double our reporting team by this year-end to comprehensively cover the fast-moving world of funded startups and VC, PE & M&A deals. We want reporters who can tell our readers what is really happening in these sectors and why it matters to markets, companies and consumers. The ability to write precisely and urgently is crucial for these roles. Ideal candidates must have to ability to work in a collaborative, dynamic, and fast-changing environment. We want our new hires to be digitally savvy and ready to experiment with new forms of storytelling. Most importantly, we are looking for hard-hitting reporters who work well in a team. Collaboration and collegiality are a must.

Following vacancies can be applied for (only in Singapore).

Following vacancies can be applied for (only in Singapore).   

  • A reporter to track companies/startups that have raised private capital, and have the potential to become unicorns. SEA currently has over 40 companies with a valuation of over $100 million and under $1 billion.
  • A reporter who can get behind the scenes and reveal how funding rounds are put together, or why they’ve failed to materialise. She/he in this role will largely focus on long-format stories. 
  • A journalist to track special situations funds, distressed debt and private credit (from the PE angle) across Asia.