Brahmal: Both the EPF and Permodalan Nasional Bhd have a well-established PE programme with a dedicated team.
OVER the last few years, government-linked investment companies (GLICs) have been investing more into alternative assets with the intention of increasing their returns.
The Employees Provident Fund (EPF), for example, has said it aims to venture more into the private equity (PE) space, and targets to raise the PE allocation of its total strategic asset allocation to above 3% from 2% in 2018.
Similarly, the Malaysian Retirement Fund Incorporated (KWAP) also aims to ramp up return on its investments via higher allocation to the private investment market.
Towards this end, KWAP has identified three different asset classes in this space, one being private equity, which includes the pre-initial public offering (IPO) stage. The other two areas are infrastructure and property, KWAP’s chief executive officer Nik Amlizan Mohamed said last year.
Explaining the move, she said returns from the public markets have not been on the high trajectory in terms of growth compared to the private markets, which are charting double-digit growth returns.
According to Nik Amlizan KWAP aims to rebalance its portfolio to 80% public holdings and 20% private holdings by 2025 from a 90:10 ratio now.
Economist Manokaran Mottain says that with equity markets remaining volatile, it is not surprising that GLICs are venturing outside their tradition of long-term, conservative investing.
“Investments in private assets are looking more appealing for many funds as they face lackluster public market projections with growing concern that the world economy is entering a recession,” Manokaran tells StarBizWeek. While deemed more risky, Manokaran says the key is in “identifying the right company to invest in, be it pre-IPO or start-up companies”.
For general partners of PE funds (who are essentially the managers of the PE funds) like Creador’s founder Brahmal Vasudevan, it makes sense for GLICs to invest in PE funds, considering the higher returns they generate.
“Both the EPF and Permodalan Nasional Bhd have a well-established PE programme with a dedicated team. They have a good method of analysing and assessing PE funds and should continue investing into these given the higher returns they are getting,” says Brahmal.
According to him, some pension funds in the United States and Europe have been investing even more in PE funds in terms of their total assets, and are enjoying those good returns.
The catch though is that there is a liquidity issue when investing in PE funds.
Points out Brahmal,“In PE funds, you typically get your capital and returns back after five to 10 years. So if you have a need for that money, then that’s the challenge. This is opposed to investing in say public markets where you can exit anytime.”
Over in the United States, the California Public Employees’ Retirement System (Calpers) is making a US$1bil (RM4.4bil) wager that small private equity firms can boost its returns and clout.
This came as the pension giant posted a 6.1% loss in the year ended June 30, 2022 – marking its worst investment performance in more than a decade.
However, Calpers’ private equity investments had posted positive returns of 21.3%. It was reported that Calpers’ decision to be conservative and put its private equity programme on hold for more than ten years had cost it up to US18bil (RM79bil) of returns.
Elsewhere, it was reported this week that Norway is looking to allow the country’s sovereign wealth fund, which generally is not permitted to invest in PE, to potentially expand into that space.
Back to Malaysia, Navis Capital Partners’ co-managing partner Datuk Seri Nicholas Bloy says the idea of GLICs looking to invest more in alternative asset classes is good in principle, and a well-trodden path undertaken by some of the Canadian, Middle Eastern and Asian sovereign wealth funds.
“However, you have to have the right investment framework and the right talent to do this.
“And to get the right talent, you have to be able to compensate people at close-to-market rates,” Bloy tells StarBizWeek. Bloy does not think PE investing is particularly risky as one is able to do far more due diligence on a private company than a public company.
“Really, the only thing you are giving up is the liquidity offered by the public markets, but that’s a matter addressed via overall asset allocation,” Bloy says, adding that the best guidelines is to develop a perspective on certain investment themes.
“For example, sectors which have long term compounding growth in front of them; develop expertise in each sector, and try to invest alongside the ‘winningest’ company with the best management team in that sector,” he says.
To undertake this successfully, Bloy says GLICs should avoid making controlling investments initially as this requires a massive additional skill set.
These institutions should also avoid loss-making or turnaround investments, plus he asserts that GLICs must have the independence to not make crony investments.
One missed opportunity often cited in relation to the local PE scene is losing Grab to neighbouring Singapore when Khazanah Nasional Bhd could not close an early deal to fund the Malaysian-founded ride-hailing company.
Other investors, including Singapore’s state-owned investor Temasek Holdings Pte eventually took a stake in Grab, resulting in the company moving its headquarters across the causeway and later listing on US’ Nasdaq market.
While this is the case, observers say that Khazanah could stand to make a “handsome gain should China’s fintech giant Ant Group, in which it had invested in alongside an elite group of foreign investors, go for listing.
Ant’s IPO was unexpectedly suspended in Nov 2020, but parent Alibaba’s major revamp has renewed hopes of a potential listing, CNBC reported a week ago.
Bank Muamalat chief economist Afzanizam Abdul Rashid notes GLICs’ exposure to alternative investments remains relatively small, but foresees it gaining traction because of their attractive returns.
Given the dominance of micro, small and medium enterprises, GLICs, which collectively manage over RM1.7 trillion of investments, can step in to fill the financing gap with a lack of available capital for investments.
That said, GLICs are guided by their respective strategic asset allocation, which will determine the size of an investment in a particular asset class.
“This will take into consideration the risks and return trade off. More importantly is that PE is not highly correlated with the traditional asset class such as equities and bonds. In that sense, from a portfolio perspective, it can reduce the overall portfolio risks,” Afzanizam adds.
Navis Capital’s Bloy does not believe GLICs will crowd out the field as the industry is still incredibly immature.
On the other hand, he believes there is space for everyone.
“It’s not a zero-sum industry. They (GLICs) sometimes need experienced partners to act as sounding boards, and sometimes as co-investors,” Bloy adds.
