An underperforming economy, in the middle of a booming region, is pushing Malaysian government-linked investors to seek higher returns from investments outside the country. At the same time, the country’s private equity and venture capital firms, traditionally well-supported by public monies, are increasingly seeking alternative sources of funding for growth.
These developments, according to industry players and observers, come as allocations of public and government-linked funds to the sector have declined, and the government restructures the venture capital sector.
Public and government-linked funds have typically accounted for as much as 73 per cent of total committed funds. But that pool of capital has been declining in the past five years, falling 15 per cent to 6.08 billion ringgit ($1.47 billion) in 2018, from a five-year peak of 7.1 billion ringgit in 2015.
“There will be an impact on the industry as the government reduces the allocation to those agencies,” said Jamaludin Bujang, managing director of regional venture capital firm Gobi Partners.
At the same time, the country’s government-linked investment companies (GLICs), such as Khazanah Nasional Bhd, Permodalan Nasional Bhd, and the Employees Provident Fund, are also appointing foreign fund managers to increase their investments in overseas markets.
In December last year, the three GLICs indicated the need to invest more outside of Malaysia in a bid for better returns.
The mandate, however, will remain the same for Malaysian government-linked PE firm Ekuiti Nasional Bhd (Ekuinas).
“We have been in operation for 10 years. We are the only government-linked PE firm that undertakes investments directly, with a very small portion of our fund allocated to our outsourced programme, which is currently under review,” its chief executive officer Syed Yasir Arafat Syed Abd Kadir said.
Industry observers pointed to limited growth prospects of local assets in a comparatively underperforming Malaysian economy. Indeed, Malaysia still lags behind its regional peers, who boast thriving tech ecosystems and several unicorns each.
“I don’t expect much activity [in Malaysia] this year. The key challenge is the lack of deal flow, and the return in this market is generally not that good,” said regional private equity firm Creador Capital Group’s chief executive officer and founder Brahmal Vasudevan. He, too, noted that the local GLICs are looking to increase their exposure to the international market.
Lacklustre deal size
According to Cento Research, despite the rise in Malaysia’s technology deal count in the past five years, overall investment in the sector remains low.
Even as he expects deal flows in the venture capital sector in Malaysia to remain healthy, Gobi’s Jamaludin said economic activities and growth expectations in Malaysia have been rather subdued since 2018.
“As a regional VC, we benchmark all companies with their regional and international peers and because of that, some local startups may be disadvantaged if they rely too much on the local market to grow,” he said. He added that fund managers are more cautious as there are several cases of “me-too” ideas, referring to startups that enter a visibly competitive market with already established players.
Consequently, the economies surrounding Malaysia are appearing more attractive to investors.
“I think Indonesia and Vietnam will continue to dominate for a while due to their big markets. Myanmar apparently (is) beginning to rise,” Jamaludin said.
Multi-family private investment firm RHL Ventures’s managing partner Rachel Lau sees more potential in Indonesia, underpinned by its big market and young population.
Lau also noted that while Malaysia has good companies and assets, the country needs more home-grown venture capital firms to attract foreign funds into the country.
“Capital investment is healthy, but fundraising is lacklustre at this point,” Lau added. “Private investment has not been great. There are strong companies that cannot get funding.”
On the face of it, the Malaysian government could simply be encouraging more public-private partnerships, as one industry observer noted.
Malaysia Venture Capital and Private Equity Association (MVCA) chairman Victor Chua believes that the government is trying to figure out the areas that can be covered by private sectors. “Funding is always short. We just need to go further to look for money,” he said.
In any case, the Malaysian government is in the midst of restructuring its venture capital agencies to avoid overlaps in financing schemes.
The funds involved are Cradle Fund, Malaysia Venture Capital Management (MAVCAP), Malaysia Debt Venture (MDV), Kumpulan Modal Perdana (KMP) and Malaysian Technology Development Corporation (MTDC).
Cradle will be the sole provider of grant funding, as new grants for startups are expected to be announced in the second quarter of this year.
MAVCAP will oversee a fund-of-funds – a combined fund between the government and private VCs – to co-invest in other VCs to cover equity funding while MDV will continue with its venture debt financing.
The new mandate for MAVCAP is to focus on a fund-of-funds model of indirect investments rather than carrying out direct equity investments as was done in the earlier stages of its operations, Energy, Science, Technology, Environment and Climate Change (MESTECC) minister Yeo Bee Yin told DealStreetAsia. “There is no limitation on who they may raise funds from, whether it is from external limited partners (LPs) or from other government-linked investment companies (GLICs).
Foreign investors betting on reform
Despite the continued political uncertainty weighing on the Malaysian economy, foreign investors are betting on political and economic reform taking place, and exploring investment opportunities in the country.
In a report last year, financial data provider Preqin highlighted that there was an untapped potential in Malaysia after the 2018 elections, underpinned by some of its reform measures to boost foreign investment.
Malaysian companies that have recently raised funds from foreign investors include drone services provider Aerodyne Group and used car marketplace Carsome.
DealStreetAsia reported earlier this month that Aerodyne had raised an additional, undisclosed amount in its Series B round from foreign-funds backed by China’s North Summit Capital, India’s Arc Ventures and Japanese firm Leave a Nest.
In December last year,, Carsome raised $50 million from strategic investors such as Japan’s MUFG Innovation Partners, Daiwa PI Partners, US-based Endeavor Catalyst, China’s Ondine Capital, as well as existing investors Gobi Partners and Convergence Ventures.
“Their ability in getting funding from foreign investors means Malaysia is getting recognition from foreign investors,” said MVCA’s Chua.