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Economy

Malaysian funds shifting into alternative investments

KUALA LUMPUR -- Malaysia's second-largest pension fund bought into ride sharing service Uber Technologies last week, in a deal that marked a continuing shift in local funds investment strategies. It was also the fund's first direct investment in a foreign company.

Fresh from the annual Malaysian Private Equity Forum last week where it played host, Kumpulan Wang Persaraan (KWAP), a $30 billion pension fund, spent $30 million on the deal, according to Reuters, quoting sources. Uber Technologies declined to comment on the sum.

The fund's latest investment signals a changing trend in local funds' allocation to include more alternative asset classes such as private equity. Currently, its investment allocation is at a ratio of 9:1, with the bulk invested in traditional asset classes such as fixed income and equities.

Other notable investments from local funds into alternative asset classes are Khazanah's investments in mobile entertainment provider Garena and augmented reality search engine Blippar, as well as mobile lending and credit analytics platform company WeLab. Khazanah is the Malaysian government's investment arm.

As one of those affected by the foreign exchange volatility, KWAP announced that it would be making changes in its asset allocation in favor of alternative asset classes such as PE. Its alternative asset-class investments consist of real estate at 7%, PE at 2% and infrastructure at 1%.

KWAP also wants to participate in the technology and logistics sectors. This is in line with its intention to tweak its asset allocation in a "lower for longer investment climate," which affected its return on investment, a measure of the amount returned relative to investment costs.

According to its annual report, KWAP's ROI had been increasing year-on-year from 2011 onward but fell in 2014. In 2015, it fell short of its target ROI of 6%, achieving 5.4% ROI instead. It expected to post a 5% ROI this year.

The slowdown in global economic growth has affected deal-making in the private equity sector, with the number of transactions tapering in the past two years within Southeast Asia. But not all hope is lost, according to panelists from MPEF.

The global PE capital raised in 2015 at $527 billion was lower than the $555 billion recorded the previous year, according to Bain & Company's "Global Private Equity Report 2016." Recent data from alternative assets industry intelligence firm Preqin reveals that only fairly recently the global PE fundraising activities picked up, bringing the total funds raised to date to $182 billion, compared to $137 billion in the previous corresponding period.

In a global environment of lackluster growth stemming from low interest rates, high volatility and valuations, the forum shed light on PE as an under tapped investment class that yields better returns than public equities.

On the VC front, concerns abound that Malaysia and the Southeast Asia region is playing catch-up to the aggressively expansionary China.

PEs admit it is a tough market. Some said they look for the most interesting opportunities with an international angle, while others spoke of "permanently warm areas." The latter were described as a decades-long trend that continues because of "natural tailwinds" in the industry, owing to the demographics and socioeconomics of a particular country or region.

For venture capital firms, concerns were raised about the relatively slower pace of deals inked between local or regional VCs. "If Malaysia cannot provide for [startups], they will go out of the [country] to find [funds]," said 500 Startups Managing Partner Ng Khailee. They cited Malaysia's ride-sharing app firm Grab, which initially received local funding but last week clinched $750 million from a series F round led by Japan's SoftBank. Overall, VCs believe that the future is in financial technology, with consumers as drivers of growth.

The PE funds raised in Southeast Asia total about $5.7 billion, while the rest of Asia saw a total of $60 billion to date, according to the Asian Venture Capital Journal.

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