Malaysia state-fund Ekuinas expects M&A boom, CEO says

Linda J. Dodson

KUALA LUMPUR — Shaky markets besieged by the new coronavirus are providing opportunities to bag faltering companies and seal mergers, according to the head of Ekuiti Nasional(Ekuinas), Malaysia’s state-backed private equity fund.

“These depressed and volatile times are definitely an opportune time for companies to look into investment in distressed assets,” said Ekuinas CEO Syed Yasir Arafat Abd Kadir in an email interview with DealstreetAsia. “We expect valuations to drop significantly, as the impact of COVID-19 begins to wind its way through the global economy.”

This is a rare opportunity, he said, because asset valuations have been going up over the last few years.

“We see this pandemic as an opportunity,” he said. “Challenging economic and business environments will force businesses to rethink their respective business models as financial robustness is put to the test.”

Ekuinas, he added, has been selectively deploying capital over the past two to three years as it focuses on divesting assets and strengthening the operations of portfolio companies. Amid the pandemic, Syed Yasir anticipates an M&A frenzy as companies fight to survive.

“We see this as a great opportunity for firms such as ours, which divested around 50% of our portfolio to reset and aggressively look at opportunities to acquire companies, or as [additions] for our portfolio companies to consolidate and further strengthen their positions,” the CEO said.

Last year, the group divested its equity in private tertiary-education provider APIIT Lanka for about 41 million ringgit ($9.41 million). It also sold its 60% stake in claims service providers MediExpress Group and PMCare to Japan’s Sumitomo Corporation, generating gross internal rates of return of 17.5%, and 38.8%, respectively.

As the only state-backed private equity player in Malaysia, Ekuinas will focus on investing in leading or uniquely positioned homegrown companies affected by the pandemic.

Even before the crisis, this year’s strategy was to deepen value-creation within portfolio companies. “This work has taken on even greater urgency since the start of the coronavirus outbreak,” said Syed Yasir.

Since Malaysia implemented movement restrictions on March 18, Ekuinas has engaged with portfolio companies to identify key stakeholders and map out core processes to ensure business continuity.

“We worked with our portfolio companies’ senior leadership to develop company-specific business continuity plans, including frequent interaction with the management teams to identify, minimize and mitigate any risk,” said Syed Yasir.

According to him, initiatives that are already in place include establishing boundaries of business that are permitted to operate during the period of restricted movement, as well as stabilizing operations and supply chains to prioritize stock and inventory.

More importantly, Ekuinas has asked portfolio companies to see that cashflow, liquidity and cost control are well planned, while exploring alternative streams of income.

In addition to asking non-essential employees to telework, and establishing health and safety guidelines for employees, portfolio companies are trying to keep functioning.

“To monitor implementation of these initiatives, we scheduled regular weekly calls, and worked with our portfolio companies’ CEOs to ensure rapid response to arising challenges,” said Syed Yasir.

The fund currently has direct exposure to numerous homegrown companies, and acquired a 40% stake in internet service provider Exabytes Capital Group for 44 million ringgit.

While the recent political turmoil in Malaysia has dampened investor confidence, Syed Yasir believes the government’s expansive fiscal stance will help shore up the local economy and provide much-needed support for businesses.

“There’s still a lot of [highly marketable securities ] out there as a result of cautious investment in the last two years, and we expect that once the dust has settled, there will be a lot of opportunities for judicious deal-making,” he said.

Syed Yasir feels the impact of the pandemic is unprecedented, and no economy was prepared for it. Malaysia’s central bank has forecast growth to be between minus 2% and 0.5% this year. “We see the current government taking on very bold and decisive measures to protect the national economy from the deleterious effects of the global economic slowdown,” he said.

Since its inception in 2009, Ekuinas has received more than 3.95 billion ringgit from the government and has invested in 41 companies. Early last year, it launched the 1-billion ringgit EkuinasDirect (Tranche IV) Fund to invest in local businesses in a number of sectors, including education, energy, health care and consumer goods.

Last year, reports of a merger of state-backed funds surfaced as the former government restructured agencies. Syed Yasir, however, dismissed any such talks involving Ekuinas, saying the fund is the only state-backed private equity company that invests directly, outsourcing only a small portion of the fund.

According to the group’s annual report, Ekuinas Direct (Tranche II) Fund and Ekuinas Direct (Tranche III) Fund recorded a gross profit of 490.1 million ringgit and 53.5 million ringgit, respectively, in 2018, with annualized gross IRR of 14% and 4.5%.

For the original story from DealStreetAsia, click here.

DealStreetAsia is a financial news site based in Singapore that focuses on corporate investment activity in Southeast Asia and India. Nikkei recently announced the acquisition of a majority stake in the company.

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