Government funds risk overpaying and crowding the market

KHAZANAH Nasional Bhd has said that uncertainties stemming from the global tariff war are making it difficult for the sovereign wealth fund to exit its private assets.

This is often a problem among private equity firms, which Khazanah is modelled on.

In fact, this has been a recurring issue for the sector over the last few years.

Private equity firms typically rely on public markets to cash out from investments, usually after a period of around five years.

They can also sell those assets to other corporations or funds, although that is rarer.

When markets are vibrant, securing a healthy exit would not be a problem, especially if the investment case is well articulated to public market investors.

However, when markets weaken, problems arise.

This is why it is always important for investors (private equity players included) to avoid overpaying for assets.

Strict adherence to tried and tested valuation methods should not be ignored solely on the basis of securing a deal.

In other words, don’t overpay for assets.

Private equity firms rely on their track record to continue attracting their investors, known as limited partners in industry parlance.

The question is, when government-funded private equity players get into the game, is there a tendency for them to crowd out the market by overpaying for assets?

The worry is that these funds need not have as high returns as privately owned funds in order to get their next round of funding from the government.

While there may be strategic reasons for having government-backed funds, these funds should stay away from deals that also attract private investment to prevent crowding out the market.

They may end up overpaying for assets and struggle with returns on investments when markets turn awry.