Malaysian pension fund KWAP is looking to increase its exposure to private equity from 4.8 to 12 per cent by 2025.
Over the past three years, investments in private equity (PE) have delivered respectable returns to Malaysia’s second-largest retirement fund, Kumpulan Wang Persaraan (KWAP), at a time of when the broader macro-economic environment has been challenging for most asset classes.
Understandably, the fund’s PE team had worried that the strong returns could not be maintained last year, but that concern was proven wrong. Once again, PE contributed positively to the fund’s overall return of RM9.7 billion (A$3.3 bn) in 2023.
KWAP, which was managing RM169.8 billion (A$59.1bn) in federal government employees’ retirement savings as at December 31, 2023, first ventured into venture capital (VC) and PE some 12 years ago.
Since then, the fund has built “quite a substantial” exposure to private equity, Muhammad Iskandar, Head of Portfolio Management, Private Equity, at KWAP, says.
KWAP’s PE allocation was 4.8 per cent of its funds under management at December 31, 2023 – a number set to rise to 12 per cent by 2025.
Allocation to PE is rising as part of the fund’s broader objective to increase the proportion of private markets allocation (versus public markets) from 10 per cent previously to at least 20 per cent of total AUM.
Central to this strategy is the creation of two new programs – known as ‘Dana Perintis’ and ‘Dana Pemacu’.
KWAP launched Dana Perintis in September 2023, allocating RM250 million for investment in Malaysia-focused venture capital funds and another RM250 million for direct investment into promising Malaysian start-ups, to be deployed over 18 to 24 months.
“We have committed quite a substantial amount abroad in the past 24 months. What I mean by ‘substantial’ is that we have invested around RM1.1 billion a year in non-Malaysian assets. We then decided that we needed to deploy more capital to our home market,” Iskandar says.
We have committed quite a substantial amount abroad in the past 24 months. What I mean by ‘substantial’ is that we have invested around RM1.1 billion a year in non-Malaysian assets. We then decided that we needed to deploy more capital to our home market
Hence the pivot to Malaysia with Dana Perintis and Dana Pemacu. The latter, also known as the Driver Fund , was launched in May this year with a total allocation of RM6 billion to be equally shared between PE, real estate and infrastructure.
Both programs are designed to catalyse the development of an ecosystem that will generate more PE investment in Malaysia. They will also help more generally to develop and establish a funds management industry in Malaysia.
KWAP’s capital will be deployed through separately-managed accounts (SMAs) to encourage partnerships between foreign and Malaysian fund managers across all three asset classes. In a two-pronged approach, each asset class will issue two SMAs – the first to attract foreign managers to work with Malaysian managers, the second aimed at creating club-like arrangements with KWAP to co-invest as a limited partner with like-minded institutions.
KWAP hopes to learn both from GPs and from its role as an LP from these mandates, Iskandar says.
“Generally speaking, we are sector- agnostic,” he says. “We don’t mandate in terms of sectors. We are aligned with the national agenda, which has several key initiatives that have been identified as drivers of the country’s growth.
“We will target investments in key economic sectors – energy transition and related infrastructure, healthcare, food security and manufacturing. Malaysia is well-known for semiconductors, so it makes sense to be looking at increasing our value chain for the semiconductor industry.”
Half of the allocation will target Shariah-compliant SMAs. The objective is to enhance overall private markets in Malaysia while offering opportunities for ethical and socially-responsible investing.
Dana Perentis is dedicated to early-stage venture capital, whereas Pemacu looks for “slightly more mature” enterprises, Iskandar says.
In February this year, KWAP made the first batch of investments under its Dana Perintis strategy. These investments, amounting to RM100 million, comprise two direct investments in Malaysian startups and two VC fund commitments.
Iskandar sees a healthy pipeline of good deal flows, and his team assesses these investment opportunities. He has, however, something of a caveat before committing to an investment.
“We need approval from MOF (the Ministry of Finance), and we have to make sure whatever we do stays within MOF guidelines in terms of investment,” he says. As the investment manager of the retirement savings of Malaysia’s federal public servants, KWAP is ultimately answerable to the MOF.
Currently, KWAP is invested in 54 PE funds and five private equity direct companies globally across various strategies – buyout, growth, infrastructure, secondaries and venture capital.
Its five direct investments include an interest in an ASEAN-focused telco infrastructure company, a UK-based renewable energy platform, Malaysian-based logistics haulage company, an unmanned aerial vehicle inspection and monitoring global business, and a global aviation group comprising three business portfolios: airlines, aviation services and travel business solutions.
One reason PE investments have been delivering returns is that early vintage investments – made in 2012 and 2013 – are starting to mature and that these funds are making good distributions, Iskandar says. The fund made investments in buy-out vehicles in 2019 and these investments are also starting to deliver returns.
“Our investment in secondaries funds continues to give us some capital back, and we are happy with that. In terms of our portfolio construction, exposure to secondaries helps cushion us against volatility in the market, and there is some visibility of cash flow coming into KWAP.”
KWAP is invested in five secondaries funds. “We saw discounts averaging from high teens to 25 per cent in the market last year and we were happy to be able to participate in these deals,” Iskandar says.
KWAP’s early PE investments were overseas. Its PE portfolio is heavily geared towards the United States because the fund looks for commercial returns, Iskandar, who has been driving the fund’s PE strategies for the past eight years, says. Before he joined KWAP, Iskandar ran an e-fulfillment start-up, giving him a good understanding of the private market sector – both from the buy and sell side.
From the point of view of diversification, you may also want to have exposure to Vietnam, the Philippines, Malaysia and Singapore..., particularly ... Vietnam and Malaysia, which are beneficiaries of the US - China trade war
“As you can imagine, when it comes to being return-driven it is all about where the opportunities and the returns are. So that has meant going to the US, which has established performance track records,” he says.
In terms of new markets, KWAP likes the potential of India. His appetite has been whetted by an initial investment with plans to commit further capital. “We have one exposure in India. It has given us formidable returns. We would like to repeat that, and we are exploring the market for more opportunities.”
Of North Asia – Japan, Korea and Asia ex-China – Iskandar says his team is weighing up the merits of country-specific and pan-Asian strategies.
“One of the case studies I have seen is a pan-Asian fund that has more than 50 per cent of the portfolio NAV (net asset value) in South Korean assets. That being the case, should we opt for a South Korea-specific fund rather than a pan-Asian vehicle?
“On balance, if you argue from the point of view of diversification, you may also want to have exposure to Vietnam, the Philippines, Malaysia and Singapore.
“Like South Korea, these are developing countries, and we can’t ignore them, particularly when it comes to Vietnam and Malaysia, which are beneficiaries of the US – China trade war. We are likely to invest in country-specific funds, hedging our exposure with commitments to pan-Asian funds.”
PE comes under KWAP’s umbrella of alternatives – real estate, infrastructure and private equity. Alternatives now account for about 12 per cent of KWAP’s investment allocation.
“Late last year, we split the division into three areas with PE now standing on its own as an asset class. That decision was made on the back of the risk-and-return perspective. If we have infrastructure, for example, it might somehow pull down our returns, and we don’t want that to happen,” he says.
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