Much ventured, little gained

DIRECT investments by government agencies to fast-track the creation and success of homegrown enterprises is not a new concept. The government had done so way back in 1999 when MSC Venture Corp Sdn Bhd was created targeting early-stage investments in the technology and healthcare sectors.

This fund is no longer active. It is not known how much was invested and if there were returns, if any.

Before MSC Ventures, there was Malaysian Technology Development Corp (MTDC) which was set up in 1992 to invest in small and medium enterprises (SMEs). It has had some successful exits via initial public offerings (IPOs) but none of these investments created any multi-billion dollar worth tech companies, observers note.

Then there is Malaysia Venture Capital Management Bhd (Mavcap) which was created in 2001 and fully funded by the government. Mavcap has also funded many local startups.

Mavcap, which aims to double its venture capital (VC) funding to US$1.4bil by 2030 from US$758mil as at April last year, has also struggled to provide financial returns or repay funds to the government. Since mid last year, the agency became a unit of Khazanah Nasional Bhd.

Government private equity

While venture capital entails writing smaller cheques, it is private equity (PE), where things get more interesting and sometimes worrisome because this is where billions of ringgit are invested.

VC funds typically invest in earlier-stage companies which are striving to be innovative and technology-driven. PE investments tend to be expanded to become larger and more mature with the intention of growing their value multi-fold before an exit.

One of the biggest attempts by the government to get directly involved in PE was through Ekuiti Nasional Bhd (Ekuinas), which was established in 2009, with the idea of promoting bumiputra participation by investing in high-potential Malaysian companies.

Based on its 2022 annual report, Ekuinas has invested some RM4.4bil in 71 companies, of which 48 were direct investments, and the rest through outsourced funds to third-party PE firms.

In terms of returns, PE funds are typically gauged by the financial ratio of internal rate of return (IRR), which not only takes into account the absolute return on investment but also the time it takes to produce those results. Ekuinas has managed an average net IRR of a paltry 5.35 times, based on the returns of four of its direct investment funds.

The global average net IRR of private equity hovers above 12%, according to advisory firm McKinsey & Company.

Even in Malaysia, privately-owned PE firms such as Creador and Navis Capital Partners, hit much higher returns.

Hence the question is, what did the government get out of putting the RM4bil or RM5bil into Ekuinas? It could have secured much higher returns by investing that money into third party PE funds.

But as explained, there is Ekuinas’ social objective. It was created to promote equitable and sustainable bumiputra wealth creation across equity ownership, management, employment and the supply chain.

Ekuinas’ annual report for 2022 highlights these achievements. It says its investments have resulted in an increase of RM6.5bil worth in bumiputra equity, which is 1.6 times the amount Ekuinas had invested. It isn’t clear though how this matrix is measured but it can be assumed that with Ekuinas (a government-owned entity) owning the assets it has acquired, in many cases buying it from non-bumiputra parties, then that is calculated as part of the bumiputra equity ratio.

There are two other positive results in this context according to Ekuinas – a 21.9% increase in bumiputra management since Ekuinas’ entry into its investee companies and a 14.4% increase in bumiputra employees into those entities.

While these certainly are positive indicators towards the raison d’etre of the creation of Ekuinas, it is debatable if it is the most cost-effective way of creating bumiputra equity, points out UniKL Business School associate professor Dr Aimi Zulhazmi Abdul Rashid.

“The days of ‘providing the fish’ is over,” he says, referring to the tendency of providing grants and soft-loans for startups or new small businesses.

What is telling though is that the government has today put Ekuinas, along with two other agencies, under the Economy Ministry. The two others –Yayasan Peneraju and Bumiputra Agenda Steering Unit (Teraju). The goal is to empower and boost the economic participation of the community through smart and innovative collaboration between the public and private sectors.

KWAP’s efforts

Another government agency which has honed in on PE investing is the Retirement Fund Inc (KWAP). In 2022, its chief executive officer Datuk Nik Amlizan Mohamed told StarBiz 7 that one way for the agency – the custodian of the civil service pension – to secure better returns is to get more exposure to PE. The fund has significantly done so by investing in PE funds as well as making direct investments.

KWAP made a tidy sum from buying into food and confectionery manufacturer Munchy Group in 2014 and exiting it at three times the value four years later.

KWAP, however, has been in the news recently about an investment that seems to have gone belly up. It is understood that in 2023, KWAP invested around US$30mil into an Indonesian technology-driven company called eFishery Pte. The startup’s main product is an automated smart feeding system designed to optimise the feeding process for fish farmers.

That investment has turned problematic amid allegations of financial irregularities and it is uncertain if KWAP will even get its capital back (see page 6).

While investments made into a single startup may be small relative to the fund size these government-linked companies’ manage, there’s food for thought.

Running a private equity fund requires a lot of skill sets and steadfast commitment. Essentially, the managers in PE funds must be able to add significant value in running companies they buy into. This is why many global PE funds employ C suites with a significant track record.

In privately-owned PE firms, executives are paid tidy salaries, including bonuses based on the funds performance. PE executives are said to make even more money than equity and debt fund managers in your typical asset management firms.

If deals go belly up, the executives have a lot to answer to and their careers in the firm will be short-lived.

“There does seem to be less pressure in a government firm. When a deal turns sour, it is government money and maybe there can be more acceptance. In a private firm, heads usually turn,” points out one veteran PE fund manager.

Criticism has been levelled at Khazanah and Permodalan Nasional Bhd (PNB) in regard to the highly publicised investment involving FashionValet Sdn Bhd. The two entities had invested a combined RM47mil in the eCommerce platform in 2018, with Khazanah putting in RM27mil for a 9% stake, and PNB RM20mil, for a minority stake. In late 2023, they sold their stakes for a total of RM3.1mil, resulting in a combined loss of about RM43.9mil.

Former PNB chief executive officer (CEO) Jalil Rasheed had spoken out over alleged non-accountability and idolisation of those involved in approving the investment in FashionValet in a post on X.

EPF’s safer approach

The Employees Provident Fund (EPF) has commendably taken a safer approach to PE. If anything, it is the fund that is in most need of exposure to PE, considering its huge size – it manages over RM1.1 trillion.

For large funds, there are essentially three ways of getting exposure to PE. First is through behaving like a PE fund and making direct investments in businesses. Second is by becoming an investor in a particular fund. Such investors are called limited partners or LPs. And the third is for the fund to invest into a “fund of funds”.

The third is the least risky as they will leave it to experts to determine which PE funds to put money into, considering that there are hundreds of PE funds in thousands of different markets and specialities. The EPF has been successful by investing in a fund of funds and is also slowly committing money directly into PE funds as an LP. It has avoided making any significant direct PE investments, knowing how challenging that is.

Creating the right environment

One of the main reasons for government-funded VC or PE investments is to ensure that capital gets deployed into Malaysian companies. The thinking is that if not for these investments, these companies would not have a chance to grow and succeed in bringing economic prosperity to the country.

The government funds are also allocating huge amounts of money to foreign VC firms on condition that they match that funding and direct those investments into Malaysian companies. Taiwan, South Korea and China have succeeded with government funding into the local ecosystem of companies in certain sectors. But there is no assurance of success.

UniKL’s Aimi Zulhazmi questions whether government funding for local companies is bearing fruit. He points out that the competitive landscape has seen many such investee companies failing after receiving government grants or equity investments.

“Unfamiliarity with the business environment and industries could be a reason. Worse are the investment failures made due to political connections. We have seen many case studies on both successes and failures. Nonetheless, the government continues to commit to providing loans and injecting shareholdings directly,” he adds.

He contends the government’s focus should be on creating an environment for businesses to flourish.

“It may need to relook at agencies providing loans, grants or invest in shares starting from the large fund managers like Khazanah, PNB and Ekuinas to smaller agencies like SME Bank Bhd, Bank Pembangunan Malaysia Bhd, Bank Simpanan Nasional and Credit Guarantee Corp Malaysia Bhd, among others.”

According to him, clear thresholds and guidelines are needed to separate the agencies in terms of their responsibilities and areas of coverage. This is because there seems to be overlapping demarcation above the different standards of practices.

Roping in professional firms to assist these agencies is good. Still, the combined expertise, field of experience and network on the ground may not guarantee total success, Aimi Zulhazmi admits as fund managers tend to have a short to medium-term investment horizon, which may not take into consideration intrinsic values like social commitment and welfare of the people which may require a long-term approach.

Economist Prof Geoffrey Williams says Malaysia’s MSME and startup policies seem to be ineffective.

“While MSMEs make up a large portion of businesses, their contribution to the economy is below 40% and productivity is low. Additionally, the representation of women and youth is also low, and we know MSMEs struggle with even minimum wages. All this shows that government intervention is not working,” Williams tells StarBiz 7.

He notes the huge allocation of funds available for MSMEs, including RM44bil in loans and financing guarantees. However, many do not apply for these funds due to concerns over loan commitments and government oversight. Moreover, most programmes run by various ministries show little impact.

“The government could instead offer direct tax relief to companies, say for those under RM3mil in revenue, allowing them to retain and invest their own money as deemed fit. This will encourage a more competitive and innovative MSME sector,” he adds.

Agreeing, Centre for Market Education (CME) chief executive officer Carmelo Ferlito says the ecosystem for entrepreneurship should ideally be market-driven.

“Government funding may encourage businesses to start for the sake of accessing funds. On the other hand those that respond to market needs typically have higher chances of success.”