Malaysia’s sovereign and pension funds have jointly pooled in $250 million towards a tech-focused ‘fund of funds’ to make co-investments in fledgeling local companies. The corpus will be allocated to local and international venture capital firms that have a physical presence in the country, a top executive with a government-linked agency told this portal.
“In the past, the likes of Khazanah and KWAP have been investing directly into companies but this fund of funds (FoF) is to get them to co-invest as limited partners through venture capital management companies that are registered here,” Malaysia Digital Economy Corporation (MDEC) CEO Dato’ Yasmin Mahmood told DEALSTREETASIA in an interaction. The country is targeting to assign this $250 million to VCs in calendar year 2018, she added.
Malaysia is looking to emulate the Singapore model, where the city-state through its National Research Foundation (NRF), a department within the Prime Minister’s Office, has allotted tens of millions of dollars to several venture capital firms, to boost its startup scene. The NRF’s move to launch these schemes in 2008, when it initially put in $10 million each into select VCs, led to the city-state establishing a vibrant funding ecosystem over the last decade.
Several of the VCs that NRF helped launch have raised significantly larger vehicles in the recent past. Singapore wealth fund Temasek Holdings pumped in more than $100 million into the subsequent vehicles of NRF-supported VCs such as NSI Ventures, Monk’s Hill Ventures, Jungle Ventures, Wavemaker Partners, and Golden Gate Ventures.
In 2016, NRF extended this scheme and committed S$40 million to match startup investments made by four corporates – property giant CapitaLand, agribusiness group Wilmar International, tech company DeClout and logistics player YCH Group.
Mahmood said MDEC, which leads Malaysia’s drive to build a digital economy, would not be a limited partner (LP) or an investor in VCs, but would recommend eligible firms that can be allotted capital from this $250-million corpus.
This initiative, which was first announced in Budget 2018 by Prime Minister Datuk Seri Najib Razak to encourage investment in local digital startups and tech companies, does not follow the traditional fund of funds model. Yasmin Mahmood said the $250 million will not be pooled into a FOF vehicle, but held individually and managed by funds contributing to it.
“It will be facilitated and monitored by Securities Commission of Malaysia (SC). In SC there is a VC development council where I sit as well. A little of the fund has been committed… We want to get it committed (to the different VCs) by this year. We want to front-load it so we can catalyse the whole ecosystem,” she added.
These developments come even as Malaysian pension funds and sovereign wealth funds have begun to take baby steps in joining later stage investment rounds of large tech companies. Khazanah has invested a total of $400 million in Alibaba in two tranches, while KWAP put in around $30 million in Uber’s Series G round in 2016. Teaming up with VCs, in addition to boosting Malaysia’s startup ecosystem, will also allow these funds to get an early exposure to local and regional firms that could command high valuations in the future.
Mahmood also highlighted that Malaysia’s pension and sovereign funds shied away from participating in the funding rounds of tech companies and unicorns in the regions to minimise risks.
“Pension funds and sovereign funds cannot be doing very high-risk investments – so if you look at where they have invested, it would be more of late stage… So, this is where the fund of funds comes into play and they (sovereign and pension funds) can minimise the risk by working with those VCs who have greater expertise, a bigger portfolio and have gone through these rounds. Then they would be able to minimise the risk and not miss out on these opportunities,” she added.
In a detailed conversation, the MDEC chief talked about how Malaysia is the test bed for technology companies and startups and how the agency itself is playing a key role to make sure startups have access to venture builders and managers to advise them in terms of business model and validation.
What role does MDEC play in the ecosystem? Is it an LP in VCs?
MDEC is a government agency and our role is building the ecosystem. We have a data economy ecosystem and a talent ecosystem and the key ecosystem we are building right now is the startup ecosystem because we believe that startups will be the job creators of the future and really push the boundaries of innovation.
We believe that we have the inherent proposition in Malaysia — a market with 32 million people and a consumer base that is consistent with many Asean markets as well as emerging markets. That is why when startups come in, they have the position to globalize. At Series A (stage), they are already globalized and they are running series B to expand their business footprint but what is really missing is not only the money. Money can reside anywhere. For example, the Mountain Partners money can reside somewhere else but what we are looking for are venture builders. Mountain Partners has partnered with a local conglomerate and they are redomiciling some of their investment companies that have the potential to tap the emerging markets to Malaysia. It has been set up right now and they are already investing into more companies in Malaysia.
Also, there was a key policy announced in last year’s budget about us bringing in VC management companies (VCMCs) and venture capital companies (VCCs) to Malaysia. While money and people go together, we know that Malaysia may not be the ideal place for money to reside. So, if one wants to set up a VCMC — like what happened with Vickers (Venture Partners) recently, they are setting up a local office and coming in as a VCMC and placing some of their fund managers in Malaysia — that is what we really want. We want companies that are Malaysia-based or Malaysia organic. We have a number of companies from Europe as well and we want to make sure they have access to these people to advise them (startups) in terms of business model and validation. This is a key priority this year.
MDEC had announced that Mountain Partners is setting up a $100-million fund to invest in SEA startups and establishing an operations hub in Malaysia. What is the status of that fund and is MDEC involved in the investments and other decisions made by the fund?
No, we are not an investor. MDEC is not an LP and I am not at liberty to share their fund structure because it is a private sector and they have a partnership with a local corporate in Malaysia. We, as a government agency, are just helping them to connect with the ecosystem so we recommend companies to them, help them bring their companies and people to Malaysia.
Most of the VC money, 77 per cent in Malaysia, is coming from sovereign funds and we must expand the contribution from the private sector as well. That includes bringing in the fund managers and unleashing the Malaysian corporate money. Two policies came last year in this direction — one there is a tax exemption for VCMCs registered in Malaysia and the other part is the corporate tax deduction if compaines were to become LPs in VCMCs registered in Malaysia.
We also announced a fund of funds which sees the government investment companies coming together to allocate $250 million to be co-invested in VCMCs. In the past, the likes of Khazanah and KWAP have been investing directly into companies but this fund of funds is to get them to co-invest in LPs through VCMCs that are registered in Malaysia.
In terms of the structure, is the fund of funds pooled from all sovereign wealth funds to invest in other companies?
It is coughed out from the existing funds and combined together is $250 million. The percentage of sovereign fund investments into tech is not as high as it ought to be. What we were trying to do through this initiative is to get the fund managers with expertise into Malaysia. At the same time co-investing with reputable and experienced venture fund managers, you also minimise the risk and spread out the portfolio risk of the (sovereign) funds.
Will the fund of funds become an LP in the VCs or directly invest in the companies?
They will be an LP to the VCs that are registered and have an office in Malaysia. There is a requirement that around 50 per cent (of the allocation from the FoF that a VC gets) must be in invested in Malaysia-based companies. The VCs (that get these funds) must make their investments within five years, as the tax exemption is applicable from 2018 to 2022.
We also have the resident pass programme for tech innovators. As a consumer testbed, we have a lot to offer. On top of that, the entrepreneurial mindset is very much embedded here.
When you talk of Malaysia proposition, how do you compete with hubs like Singapore as there is a perception that it is easy to do business here and faster to set up companies? Also, as companies in Malaysia, Thailand or Indonesia grow bigger, they shift their domicile to Singapore. How do you address these challenges?
First of all, I do not use the word compete when it comes to Asean countries because I think it is not a zero-sum game. Asean collectively has so much to offer to the world. In the context of why Malaysia, there are 32 million people and the test bed coupled with the entrepreneurial skill set that we have has a proven track record.
For a company that wants to go to a test bed, though it is relatively easy to set up in Singapore, it takes two weeks to set up a company in Malaysia. We have a Malaysia tech entrepreneur programme which is a unique one where we encourage people from all over the world to come here.
We also have a pretty decent equity crowdfunding space and this year alone, there were 37 branded campaigns, including peer-to-peer funders, to raise $20 million. What we are looking at now is late stage. That ecosystem was not complete. We want to have a system where companies can start and go to the stage of raising late-stage funding, all in Malaysia because of the components that we have put in place.
Coming to Malaysia, historically, it has some the largest sovereign and pension funds in this region – yet, they have not done any tech deals. Have they missed out on the tech opportunities in the region because they have not really invested in the companies, especially those that have gone on to become unicorns?
Pension funds and sovereign funds cannot be doing very high-risk investments – so if you look at where they have invested, it would be more of late stage. So, some of our investments like Khazanah-Alibaba or KWAP-Uber were all late stage to minimize the risk. This is where the fund of funds comes into play – it can minimise the risk by working with those VCs who have greater expertise, a bigger portfolio and have gone through these rounds. Then they (sovereign funds) would be able to minimise the risk and not miss out on these opportunities. Nobody can ignore the digital economy and that is why we are connecting the dots so that Malaysia has its own digital economy.
MDEC is talking of ushering in a digital economy. What do you bring to the table?
When we talk of the digital economy, we peel it into many layers. First is the very high-level macro layer. It is about the contribution of the digital economy which is now over 18 per cent and we are talking of 20 per cent (in future). We are also looking at job creation, export numbers and some other key pillars. One is also that we remain as the investment destination for companies all over the world and we are not talking of the big tech companies but also the smaller ones.
The last component is about digital inclusivity. SMEs are a very big segment and a large portion of our SMEs are micro-enterprises and we want them to also take advantage of e-commerce. DTFZ is a project in that direction and that whole infrastructure has been set up.
One of the biggest challenges for SMEs not only in Malaysia but all over the world is lack of access to credit. Banks don’t want to touch SMEs and PE and VC firms traditionally don’t invest in them. You are building a digital ecosystem. Digital gives you data that can be used for enhancing credit outside the collateral-based banking and banks can use the data to lend against cash flows. Have you looked at digital as a way of enabling financing for SMEs?
It is the confluence of two strategies that we have. One is the fintech space. In fintech, we talk about the unbanked but in Malaysia, we are an under-banked society. Microfinancing to the SMEs is a very big requirement right now. It is about looking at track records and our partnership with Alibaba for the Digital Free Trade Zone was based on that.
You talked about your partnership with Alibaba. There are also concerns that Chinese capital and the likes of Alibaba can cause significant job losses in the region.
This whole thing is about globalisation. If I recall correctly, there was once a fear of American companies coming in. First of all, there is a very strong G-to-G (or inter-governmental) relationship and we are a destination in the One Belt One Road initiative.
The vision for DFTZ is to give an opportunity for our SMEs to go global and we believe in the power of ecommerce. Alibaba came into the picture because it has a similar vision and is a catalytic partner. Alibaba will be setting up the hub. That is a very transparent partnership. Since it went live in November, there have been SMEs who got market access in China and also the US.
What is next for MDEC in the short term and the medium term?
In the short term, we want to really develop the startup ecosystem. We had an inflection point last year and we will continue this year. The DFTZ went live last year and this year we will bring it to maturity. We are also working on some key technology bets including artificial intelligence (AI). The last point is about talent and we are approaching talent in the very holistic manner.