Malaysia pulls in private equity investments

MALAYSIA has become an attractive destination for private equity investments with a sizeable population of 27 million and a robust international business community, said RSM International in its first global business forecast report on mid-sized enterprises. 

The report indicated that much of the country's private equity capital comes from Singapore. 

Girish Ramachandran

But a growing amount of financing originates from Europe and the United States, including mega funds like Kohlberg Kravis Roberts whose portfolios included Western multinationals with subsidiary operations in Malaysia, RSM said in the report. 

RSM is a global member organisation of independent accounting and consulting firms. 

It published its inaugural RSM Global Business Forecast: Middle Enterprises in the World Economy report at the end of last year to address the challenges and opportunities facing mid-sized companies in the age of globalisation. 

Girish Ramachandran, executive director of RSM's consulting division in Malaysia, RSM Strategic Business Advisors Sdn Bhd, said the company planned to launch the report in Malaysia in the middle of this month. 

He said the survey was conducted between June and December last year across the five regions, namely the Asia-Pacific, Africa and the Middle East, the Caribbean and Latin America, Europe and North America. 

It was compiled by the RSM economic adviser David Bartlett. 

The report was based on a detailed survey by 130 professionals who are from partner firms in the RSM International network and whose knowledge and experience produced a wealth of insights into how middle enterprises are responding to global business shifts. 

In Malaysia, the survey was conducted and reported by RSM's audit practice in Malaysia, RSM Robert Teo, Kuan and Co. 

Datuk Robert Teo

“There were about 50 to 60 countries involved in the Global Business Forecast survey, and it is the first time RSM is publishing such a report on mid-sized companies. 

“The report has been developed as a tool for clients to help them address potential areas of concern to their business and maximise current opportunities available to mid-sized enterprises globally,” Girish told StarBiz. 

RSM said that the most important finding of the financial market survey concerned private equity. 

It has spearheaded the boom in cross-border mergers and acquisitions (M&As) and has become a major funding source for mid-sized companies in the five regions considered in the report. 

The report showed that commercial banks were rated as the most important in the financial market, followed by private equity, investment banks, venture capital and hedge funds. 

Based on the respondents' views on the impact of global financial shifts on middle enterprises, the balooning US balance of payments deficit is creating anxiety in the international financial community. 

But the exchange rate effects of the US deficit have not generated much impact on middle businesses outside North America, which undertake the bulk of their operations in domestic and regional markets where the fallout of dollar devaluation is limited. 

Seventy per cent of the survey respondents indicated that the rise of emerging economies as global financial powers would create the largest impact on the middle enterprise sector in terms of the global financial development. 

Girish said middle enterprises around the world were concerned about global expansion because they lacked tools and resources to tackle international business risks. 

Despite global technological shifts and economic liberalisation lowering the boundaries for mid-sized companies to grow overseas, most remain firmly focused on their domestic markets and are failing to reap the potential benefits of international growth. 

He said that almost 70% of respondents cited “capturing new customers in the home economy” as a high priority growth objective while the rest cited “penetration of geographic markets outside their region.” 

An overwhelming 90% said that while mid-sized companies recognised international business risks, they lacked the resources to properly manage them. 

According to the report, highly sophisticated technologies are now affordable to mid-sized companies and are being leveraged to boost operational performance and hasten penetration of global markets. 

Geographically, North America, Europe and the Asia-Pacific offer the best growth opportunities for mid-sized firms, but intra-regional trade still constitutes the dominant form of international commerce in these regions. 

In terms of sector, the services industry offers the greatest growth potential for mid-sized companies, reflecting the low barriers to entry in most service industries and indicating the technological changes that expand the “global sphere” of high growth service industries like accounting, engineering and medical diagnostics.  

Girish stressed that the report revealed many examples of mid-sized companies achieving profitable growth in carefully targeted segments of the global economy. 

“But it also finds that most middle enterprises are not reaping the growth possibilities arising from shifts in the global landscape,” he said. 

“Accordingly, we recommend that managers of mid-sized businesses treat international growth as a core strategic issue.”  

Girish said the survey involved eight cross-border issues related to mid-sized companies: international growth opportunities, global competitive threats, international business risks, industry and sector trends, international operations, global finance, emerging markets and human resource management. 

“Of all that, human resource management has been another concern among local companies,” he said. 

RSM learned that human capital flight was a growing problem in Malaysia's middle enterprise sector. 

RSM Robert Teo, Kuan and Co said in the report that Malaysia, which staged a strong rebound from the 1997 Asian financial crisis and hosted subsidiaries of a number of leasing Western multinationals, is suffering a brain drain of engineers, financial specialists, and other professionals that threatens the competitive position of mid-sized high technology companies. 

Many of these departing professionals are destined for China, where multinationals and cash-rich domestic companies offer large expatriate compensation packages. 

It said Malaysia also suffered human capital flight to neighbouring country, Singapore, where professional salaries were higher. 

RSM Robert Teo, Kuan and Co founder partner Datuk Robert Teo told StarBiz that the report made clear that middle enterprises were steep in the global war for talent. 

“Thus we recommend that the mid-sized companies' human resource managers develop ways of attracting and retaining talented employees that do not depend entirely on financial compensation, in which sphere large multinational advantages enjoy powerful advantages. 

“Such approaches should emphasise the particular virtues that are attached to working with mid-sized companies that are not commonly associated with Fortune 1,000-sized firms,” Teo said. 

Meanwhile, Girish said human capital had emerged as the primary source of sustainable competitive advantage. 

Engineers, scientists and other professionals who were internationally mobile and multi-lingual were aggressively recruited by leading multinationals, he said. 

The report said a strong majority of respondents across the five regions rated the competition for talent as equally important as finance, regulation, technology, market share and price competition. 

Girish noted also that there was a gap between middle enterprises' awareness of the importance of human capital as a competitive asset in the global economy and the efficacy of current human resource management practices of globally active mid-sized enterprises.