Bottlenecks in capital recycling

WHEN it comes to mergers and acquisitions (M&A) involving government linked companies and government-linked investment companies (GLCs and GLICs), the landscape today is far from open or free.

Some call it the “silly season”. This refers to the fact that whenever a GLC or GLIC wants to buy or sell an asset, unnecessary scrutiny is placed on the deal.

Going by the undue attention given to recent deals, it is clear that nothing is going to escape the microscope of these nosy quarters.

It is easy to make accusations and launch lengthy investigations against the professionals running these deals. But most of these witch-hunts have not resulted in any damaging findings.

Cases have been closed. Yet irreparable damage has already been done.

Not only have the working professionals at these organisations been harangued by the authorities, they and those in similar positions may now be reluctant to embark on future deals, lest the same thing happens to them.

The net effect of this can be damaging to the economic prospects of the entities involved.

First, the seller. By not divesting assets and recycling that capital into new investments, it is essentially going against the very raison d’etre of some of these government investment companies.

Then there is the asset itself. By not being acquired by a new owner willing to put in more money into the business or merge it with other companies to build an even stronger entity, it misses out on crucial growth opportunities.

In some of these deals today, the seller is only allowed to deal with other GLCs, GLICs or a certain class of companies as potential buyers.

The problem with this is that it is unlikely to get the best price for the asset as the buyer pool is limited to the select few.

In many of these cases, the asset being sold comes with government concessions, vast tracts of land or critical infrastructure.

The thinking is that these assets cannot fall into the hands of foreign parties or even certain types of local entities.

One can understand the thinking behind these protectionist measures.

But these worries should not become deal-breakers.

Conditions can be imposed that entail the buyer to adhere to national interests.

For example, in the case of land, stipulations can be included in the sale and purchase agreement requiring a certain portion to be used for low-cost housing projects.

For infrastructure, requirements can be included to ensure that the security of those assets remains in the best interest of the country.

One should be able to think outside of the box to come up with such conditions.

That would still be a better outcome than scaring dealmakers with uncertainty over the prospect of scrutiny after a deal is announced.

A similar problem is putting undue pressure on participants in Malaysia’s renewable energy (RE) rollout.

While Malaysia’s large scale solar (LSS) projects have positively put the country on global RE map, some of the conditions imposed are working against industry participants.

Under LSS5 and 5+, for example, the owners of the projects are unable to make any single shareholding change for eight years after the project is awarded. This works out to around five years after a project achieves its commercial operation date.

Within this period, they not only cannot divest these assets as a means to recycle their capital, but also struggle to refinance such projects, as that entails some tweaking of the shareholding structure.

The rationale for locking in participants for those number of years is to ensure that players don’t flip their projects in the way some Malaysian corporates have done with other concessions in the past.

That, too, is an acceptable condition. But it is way too long to lock them in for those eight years.

This issue becomes even more damaging as we enter LSS6, the country’s biggest RE rollout thus far, comprising 2.65GW of solar farms alongside 1.25GW of battery storage to be built.

The total capital expenditure goes into the billions of ringgit.

Operators with good track records may already have their capital tied up in existing projects. They need to be able to divest those assets and recycle that capital into LSS6.

Already, there exists a significant funding gap for RE in Malaysia, as banks are reaching their single-customer exposure limits when lending to this sector.

(Recall that this is because Tenaga Nasional Bhd is typically the offtaker of the LSS projects, thereby banks’ exposure to the utility is calculated as part of their total risks when funding LSS projects).

Furthermore, wouldn’t many of these solar projects, with power purchase agreements in place and generating decent yields, make attractive acquisitions for GLICs, insurance companies and pension funds, which are always looking to increase their exposure to income-generating assets?

Hence, there is a need to facilitate the recycling of capital in Malaysia, which would bring about a plethora of positive spillover effects, including increasing productivity, stimulating innovation, creating jobs and improving overall economic growth.