Fund managers to keep on investing


HOW the investment landscape has changed since February.

As Malaysia enters Day 53 of the movement control order (MCO), uncertainty and fear still permeates the economy. Over the past few weeks, the market has started hearing of businesses, particularly hotels, ceasing operations.

Most analysts have downgraded corporate earnings this year, with many expecting to see a contraction of 6% to 8%, followed by a sharp rebound next year.

While the stock market has recovered almost 15% from its low on March 19, at its current level of 1,386 points, it is still down some 12% on a year-to-date basis.

StarBizWeek spoke to private equity fund managers on how they view this pandemic and what sort of opportunities they see.

Bloy: We are also lucky that we have about US$1bil in cash to invest.Bloy: We are also lucky that we have about US$1bil in cash to invest.

NICHOLAS BLOY

Managing Partner/Co-Founder

Navis Capital Partners Ltd

HOW is the current pandemic impacting your investee companies and your investment strategies?

Navis has a really well diversified set of portfolio companies, all of which we control and all of which have low leverage and plenty of cash.

So overall, we are in good shape. Some companies are really hurting – our restaurants, cinemas and fitness centres are all closed – so no revenues but at the same time our supermarkets, private hospital, medical and pharmaceutical businesses are all doing very well.

It’s a good example of why diversified portfolios are important.

We are also lucky that we have about US$1bil in cash to invest. There are many themes we are exploring that are unaffected or even accelerated by Covid-19: digital platforms, cybersecurity, home delivery and telemedicine, for example.

And, of course, there will be incredible bargains to be had in the industries most badly affected, for example, in the travel and tourism sectors

Are you in a position to help your investee companies receive more capital to stay afloat if necessary, or are you likely to decide to shut down businesses that have less chances of survival in this new norm?

We don’t believe we will close down any Navis business due to Covid-19, but there is a limit to our ability to incur losses from a lockdown.

At the shortest end, we have one company that would run out of cash in August 2020 if it cannot re-open. At the longest end, we have another business that can keep going until August 2021 with no revenues.

We are now in the fourth phase of the movement control order (MCO) period. From your perspective looking to invest into businesses, what do you think the government should be doing to ensure businesses are on a steadier footing?

Honestly, I think the government has handled things pretty well as we are in uncharted territory after all. But I feel that social behaviour no longer needs to be dictated by government. Everyone knows to distance themselves, wear face masks and so on. So the key is a predictable “unlocking” of different sectors of the economy with new SOPs where necessary, for example, how many people per available space.

Also, it would be helpful to know what is the government’s “second wave” strategy if that eventuates.

What is your personal strategy on the PE side? Acquisitions? Fund raising? Wait for opportunities?

We are investing. In the next couple of weeks, we will complete the acquisition of a large K-12 education business in one of the lesser-developed economies of South-East Asia.

In this country, there are not enough private school places for the demand that exists, so demand is pent-up. That’s an easy story against which to deploy growth capital.

Fundraising is more challenging as people cannot conduct their required due diligence. A lot can be done digitally and via video-conference, but almost every investor I know must visit the offices, meet the team, visit a few portfolio companies and so on.

Do you feel the world has changed since Covid-19? Is it really a new normal or do people revert to old habits after awhile? With that in mind, are there any sectors or markets you are eyeing?

Covid-19 has accelerated a number of trends that have or will soon reach a tipping point where before Covid-19, they could be considered a fad or a niche but which will become mainstream faster than before.

Navis has a very clear framework around what these are. I will give some obvious examples. Home delivery and click-and-collect for supermarket businesses, online education . . . and a less obvious example would be plant-based cuisine but we have about 30 areas under investigation.Azam: our investment team has been working overtime in identifying quality and scalable businesses to invest in.Azam: our investment team has been working overtime in identifying quality and scalable businesses to invest in.

DATUK AZAM AZMAN

Founder and Managing Director

COPE Private Equity

Covid-19 and low oil prices have rendered global markets a lot lower than what they were in February. What is your outlook for the economy, moving forward? On this note, do you also see opportunities because of cheaper valuations?

When we look back a few years from now, 2020 will be remembered as an unprecedented event that shaped our generation, a titanic battle between human mortality and economic sustainability.

In terms of opportunities, our investment team has been working overtime in identifying quality and scalable businesses to invest in. Yet, despite the de-rating of public markets, sellers tend to cling to “yesterday’s price” so deal-making may be challenging in the near term until valuation adjusts to the new reality.

Is it really a new normal or so people revert to old habits after awhile? With that in mind, are there any sectors or markets you are currently eyeing?

In an uncertain economy, everyone can see the first bounce – the economic fallout.

Entrepreneurs, and those backing them, who can best predict the second bounce in the economy will emerge stronger from the crisis. Selecting winners for the second bounce is what good PE thrive on to deliver consistent alpha returns.

We continue to favour sectors that fulfil large consumer needs such as energy, healthcare, education, food production and peripheries, like medical devices and engineering maintenance services.

We are looking to back agile and forward-thinking entrepreneurs – businessmen who recognise opportunities in a crisis, coming up with new products and distributing through new channels to meet changing consumer demand.

What are some of the indicators you would like to see before putting money more convincingly into businesses?

From a macro point of view, we try to be ahead of the curve, emphasising investments in times of heightened risk aversion and emphasising exits when the economy is booming.

The micro view of each business franchise is even more important. We prefer businesses which are leaders in their industry, entrepreneurs who understand the importance of branding, deploy proprietary technology and are regional in outlook.

The perfect business does not exist but from our observation, successful businesses have a significant combination of the above.Siau: Any crisis will always present the best investment opportunities.Siau: Any crisis will always present the best investment opportunities.

ANTHONY SIAU

Managing Partner

Kairos Capital Singapore

How is the current pandemic impacting your investee companies and your investment strategies?

We are very selective in our investments, most of our portfolio of investee companies are affected in one way or another, but they are also very resilient.

We recommended them to preserve cash during this turbulent time and to manage their businesses prudently.

Any crisis will always present the best investment opportunities.

We are now in the fourth phase of the MCO. From your perspective looking to invest into businesses, what do you think the government should be doing to ensure businesses are on a steadier footing?

On hindsight, with its limited resources and political turmoil, Malaysia has done relatively well in the containment of Covid-19. The way forward is to ensure that the containment efforts remain vigilant, even as the country starts to open-up the economy.

But it should be done with a comprehensive execution plan rather than haphazard announcements.

The recent debacle on the hire-purchase interest charges should not have happened if coordination is well-oiled and communication is flowing.

That is a lesson the ruling government should take a page out of New York governor Andrew Cuomo’s book, communicate clearly with facts and science, no ambiguity or vagueness. Also this is not the time for politics.

What is your personal strategy on the PE side? Acquisitions? Fund raising?

Personally, I am actively looking for investible assets at attractive valuations, particularly focusing on late stage opportunities. I won’t hesitate to invest in leaders of fast-growing markets at a depressed value inflection point, especially during this current market downturn.

As for fund raising, even as most investors are flushed with cash as compared to the last couple of downturns, most of them are cautious in their investment decisions but I welcome any like-minded investors who share my outlook to invest together, there are opportunities abound.

The country has been attacked on oil prices and crude palm oil (CPO) prices. Politically it’s uncertain too. Are you optimistic on Malaysia?

Oil and CPO prices are seasonal and political. The low-price environment will eventually ride its course, similarly for Malaysia’s economy.

However, the political impasse must end. It is by far the biggest impediments to Malaysia’s growth trajectory as the rakyat is extremely weary of the political uncertainties.

As a Malaysian residing overseas, I am optimistic on the country’s future as long as it is governed by an administration that prioritises the rakyat’s interest above its own.

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