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The Alternative

The rapidly maturing Malaysian private equity industry may represent a lucrative alternative to the Japanese market for investors in Asian private equity, according to the Asia Private Equity Review. Malaysia raised $211m in the first half of this year, exhibiting considerable growth despite challenging economic conditions.

The dark horse in this year's country fund pool ranking is Malaysia. In Asia ex-Japan, Malaysia came in second for having the largest pool of fresh capital.  Excluding the new capital coming into Japan's private equity market, the first half of the year saw an additional US$856 million come into the Asian private equity fund pool. South Korea led in taking up US$293 million, while Malaysia recorded US$ 211 million, with India trailing behind by US$83 million (fig.1). Malaysia has demonstrated its ability to enlarge its current private equity fund pool by a substantial margin at a time when an uncongenial fund raising environment persists. This development, coupled with a series of significant happenings taking place in June and July, heralds the growth of Islamic capital in Asian private equity. Islamic institutions are now taking a pragmatic approach to defining the future direction of their capital flow.
 
Sources from Asia
Malaysian institutions are breaking away  from the long adhered to principle of backing those that are solely deploying capital to domestic companies.  They are asserting their position in private equity investment vehicles with a non-domestic focus. Commerce International Merchant Bankers Ltd. (‘CMIB'), the investment arm of Commerce Asset Holding Bhd, Malaysia's number two bank, has been active in allocating funds to private equity. It is a sponsor of CIMB Muamalat Fund, the first Islamic private equity fund in Asia that is managed by the Kuala-Lumpur-based Navis Capital Partners.  With an investment focus principally in Southeast Asian countries, Navis Capital Partners has received a substantial commitment from CMIB. At the end of June its NAVIS Asia Fund III  (‘Navis III') became the envy of all medium-sized fund management firms when it achieved its final closing at US$85 million, well above its original target of US$30 million to US$50 million. In the current hostile fund raising environment, this closing of NAVIS III is a crowning achievement.

As recently as July, Sime Darby, another well-known Malaysian conglomerate, closely associated with the Malaysian government, became a shareholder in The China Water Company, an investment firm. It deployed US$50.5 million and took up a 33% position when existing shareholders, Temasek Holdings and Hong Kong Land, decided to dilute their holdings in the company. Sime Darby was willing to pay a small premium in order to secure a foothold in China's water projects.  The transaction made a realised profit of US$3 million for Hong Kong Land. Sime Darby now shares the boardroom not only with Thames Water, the world's third largest water company with 70 million customers, but also with Hong Kong's Kadoorie family which owns  both of the territory's electricity operators and the Peninsula Hotel chain.
 

From the Gulf to Asia 
While Malaysia was quietly directing Islamic capital outside of its own domestic sphere, it has also received an inflow of capital from the Arab nations in the Persian Gulf. In June, two Malaysia-based companies received undertakings that added to a total of US$76 million from two leading financial institutions in the Middle East. The Islamic Development Bank is closely associated with this transaction aggregate.

One of these investees is Air Asia Sdn Bhd, which was established in 1993.  It had been in the red since coming into operation as a full-service airline. In 2001 Tune Air, a local investor, acquired Air Asia for Rm1 (US$0.26) and assumed 50% of its debt.  The new owner turned Air Asia into a low-cost carrier.  It has since been financing itself from positive cash flow.  A consortium of investors placed Air Asia's value at US$100 million when Air Asia received US$26 million from three private equity investors, Islamic Development Infrastructure Fund LP (‘IDB Infrastructure Fund'), Crescent Venture Partners and Deucalion Capital, two of which are backed by funds coming from the nations in the Middle East.

IDB Infrastructure Fund was Air Asia's largest investor in this US$26 million transaction.  It took up a 10% equity position. The fund, which has a target of US$1.5 billion, is managed by Emerging Markets Partnership, whose chairman is Mr Moeen Qureshi.  For a brief period in the mid 80's, Mr Qureshi held the office of the Prime Minister of Pakistan.

As its principal sponsor IDB Infrastructure Fund cited Islamic Development Bank.  The latter has committed US$250 million to the former, with US$150 million for equity, and the remaining US$100 million for complementary finance facility purposes. The Islamic Development Bank is owned by 54 Muslim countries and is one of the very few financial institutions in the world to receive the triple A credit rating from Standard and Poor's.

The lead sponsor of IDB Infrastructure Fund is Dar Al-Maal Al-Islami Trust  (‘Trust') which has allocated US$200 million to the fund, with US$100 million for equity, and an additional US$100 million for complementary finance facility purposes. The trust is a leading Islamic financial institution with assets of over US$3.6 billion under management. Its chairman, Prince Mohamed Al Faisal al Saud, was one of the founders of the Islamic Bank Portfolio under the management of Islamic Development Bank.

Crescent Venture Partners took up the second largest equity percentage, at 9%, in Air Asia. According to various information sources, Crescent Venture Partners has offices in both Jeddah, Saudi Arabia and New York.  Its investors include family offices, financial institutions and public/private partnerships in Saudi Arabia, Kuwait and the United Arab Emirates.

Among the three investors in Air Asia, Deucalion Capital appears to be the only entity without any direct link to Islamic institutions.  It is advised and funded by the Frankfurt-based DVB Bank which is a global financial institution that focuses on the transport industry.

While Air Asia was finalising all matters pertaining to the new partnership with its three investors, AtlasOne.net, a wireless broadband project in Kuala Lumpur, received a commitment of up to US$50 million from the Kuwait-based International Leasing and Investment Company which is 33%-owned by the Islamic Development Bank. 

AtlasOne dates its association with International Leasing and Investment Company back to September 2002 when the latter was the former's financial advisor. International Leasing and Investment Company will provide US$25 million of equity capital with the residual US$25 million as a commitment to lease equipment worth the similar amount from AtlasOne. The total cost of this project is estimated to be US$225 million. According to officials at International Leasing and Investment Company, the private sector of the Islamic Development Bank is also keen to invest in AtlasOne, as the latter's subscriber base is expected to reach half a million.

Observation
Arab nations are directing their capital to Malaysia with unprecedented speed.  In the first quarter of the year Rm79 million of a capital inflow was recorded, compared with Rm20 for the entire 12 months last year.  Malaysia is swiftly moving forward to become the catalyst of a new global alliance for Islamic investment.  In mid-July a landmark memorandum of understanding was announced that laid the foundation of active exchange of capital between Islamic nations in the Gulf States and Asia. CMIB and the investment arm of Commerce Asset Holding Bhd, Malaysia's number two bank, entered into an agreement with Al Tawfeek Company for Investment Funds Ltd., one of the world's leading Islamic financial institutions and part of the Dallah Al Baraka Group, to create the first global Islamic investment banking alliance.

In revealing the future direction of Al-Tawkeek, Dr Salleh J Malaikah, President of the investment company, said that “Al-Tawfeek aims to expand its Middle East based investment activities in Malaysia and Far East”.  Its parent company, Dallah Al Baraka Group, is one of the largest conglomerates in Saudi Arabia and in the Middle East with total assets in excess of US$16 billion. 
The Islamic banking industry began a quarter a century ago.  Its US$200 billion pool of capital is managed through 250 financial houses principally based in Europe, USA and Asia Pacific. With institutions in Europe and the USA adopting a tight monetary policy, the Shari'ah-compliant finance is an appealing alternative during a time of capital drought.  

Asia Private Equity Review (APER) is the foremost voice on matters related to private equity/venture capital in the region. Well-recognised as being the singular source for accurate and timely news, in-depth analysis and global perspectives, APER is published by the Hong Kong-based Centre for Asia Private Equity Research. For further information please visit our website at www.asiape.com or email us at info@asiape.com.