The financial crisis struck as many of the state-owned portfolio companies held by Khazanah Nasional Berdad, Malaysia’s $23 billion (RM82 billion) sovereign wealth fund (SWF), were learning to operate with new executive leaders and, crucially, less gearing. Simon Mumme charts the progress of the manager’s attempts to strengthen and diversify the Malaysian economy throughout the crisis and beyond.
The 50-odd companies in which Khazanah has direct controlling stakes, such as Telekom Malaysia and microchip manufacturer SilTerra, were bloated and sluggish when Azman Mokhtar became the boss of the SWF in 2004. His job, to create sustainable value in the ‘government-linked companies’ (GLCs) and thereby make Malaysia’s economy more competitive, was viewed by investors in the domestic market as tough.
New bosses were appointed to businesses such as SilTerra and commuter train operator Rapid KL, and debt was sliced off. Gearing in the 20 largest GLCs gradually fell from 39.4 per cent in 2004 to 27.4 per cent in 2007, when the crisis began to set in, while earnings rose from RM9.6 billion to RM19.3 billion. The companies brought in a profit of RM3.6 billion after racking up a loss of RM3.5 billion in 2005.Ã‚
For the ‘K9’ companiesÂ – those especially fast-tracked for outperformanceÂ – gearing was pared back from 64 per cent in 2004 to 43 per cent in 2007. Within the same time frame, a collective loss of RM4.7 billion in profit was remedied to generate a profit of RM458 million.
Earlier this year, Khazanah performed stress tests on each GLC and its ability to continue to support the companies. The results accelerated the SWF’s reformist actions: “cost cutting, rearranging financing lines, ‘armour plating’ balance sheets, reviewing counterparties and, most of all, managing cashflows,” were essential because the tests exposed terminal flaws in some companies, Mokhtar says.
“In our stress testing it was clear that had this not been achieved. Several companies – especially in the more difficult cyclical sectors such as aviation, electricity, infrastructure and autosÂ – would have been in severe financial distress by now, and in some cases may even not have survived,” he says.
Since many of the GLCs provide essential services, such as transport, telecommunications, finance and IT, and account for 36 per cent of Bursa Malaysia stock exchange while employing about 5 per cent of the national workforce, their collapse would have wrought severe economic and social damage in Malaysia.
As it stands, the realisable value of Khazanah’s assets are RM85 billion, up from RM69.5 billion at December 2008, and more than double its liabilities. Soon the fund will receive a RM10 billion injection from the government in a second round of stimulus spending. After emphasising a “crisis-preparedness”Â mode of operationÂ at the beginning of the year, Mokhtar says the entity is poised to assume a “more offensive stance” for the near future, and will channel the stimulus funds into high-multiplier projects.
“A new economic imperative beyond the current crisis management will, firstly, need to ensure that growth [of GLCs] approaches closer to a theoretical capacity of growth of at least 7 to 8 per cent of GDP.”
Despite the macroeconomic headwinds, Mokhtar outlines two ways of achieving this: making profitable investments in sectors undergoing growth, and attracting more private and institutional investment into the economy.
By signing a cross-border investment agreement last month with the Korea Investment Corporation (KIC), which will see the two investors collaborate on investment deals in their economies and around the world, Khazanah has already made headway on drawing more foreign capital into Malaysia.
Astutely judging which sectors will prosper in the future is tougher. Mokhtar says much of Khazanah’s work since 2004 has been analysing various sectors of Malaysia’s economy, from established industries such as power, telecommunications, aviation, financial services, automotive and electronics, to the newer sectors of Islamic finance, healthcare, biotechnology, advanced agriculture, sustainable energy, tourism and the creative industries.
As it begins to operate in emerging sectors, Khazanah will also aim to broaden the range of transaction methods at its disposal. Such new models include: co-investments, public-private partnerships, joint-ventures, direct acquisitions and reverse takeovers were some of the options put forward, particularly as it seeks to make profitable divestments in GLCs.
“Judicious and timely divestments can significantly add to value creation. In addition, in selected and more matured companies, Khazanah has been gradually selling down stakes, especially through the issuance of exchangeable bonds or sukuks.”
The fund has made 20 divestments since 2004, totalling RM12.6 billion and locking in a gain of RM3.6 billion.
Its most recent foray into an emerging sector was a $25 million investment in Small Bone Innovations (SBI), one of the orthopedics companies that have stolen the march on specialising in small bones and joints. After negotiations, the US company announced it would establish its Asia-Pacific operation in Malaysia to conduct biomaterial research, product development, surgeon education and distribution. The company is also considering a manufacturing base in the country.
Khazanah expects SBI’s presence will introduce new technologies and products to Malaysia and, in time, help expand the nation’s nascent medical devices industry, as it provides a foundation for collaborations between SBI and the local researchers, entrepreneurs and surgeons.