Ekuinas’ restructuring or merger tricky to execute

There are political considerations at play as Ekuinas’ overarching business is to increase Bumiputera participation in the economy

by MARK RAO/ pic by TMR GRAPHIC

A RESTRUCTURING of Ekuiti Nasional Bhd (Ekuinas) or a merger with similar agencies should be considered to alleviate the government-owned private-equity (PE) firm from its limited commercial success.

A market commentator told The Malaysian Reserve (TMR) that there have been speculations on whether Ekuinas would be merged with government-linked venture capital firms and other government agencies involved in the PE space.

“Theoretically, a merger would achieve economies of scale and the non-duplication of resources, but there are political considerations at play as Ekuinas’ overarching business is to increase Bumiputera participation in the economy,” he said.

However, he said there is a disconnect between the company’s operating model, which is to provide financing for Bumiputera-owned private firms, and its mandate to contribute to the Bumiputera economic agenda.

A restructuring then is a more viable option given the commercial and political considerations at hand, but it remains to be seen if the PE model adopted by Ekuinas can effectively serve its mandate, the market commentator said.

The fund management company, established in September 2009, was envisioned to promote equitable and sustainable Bumiputera economic participation via a PE model which was designed to provide financing to Bumiputera-owned private firms seeking the next stage of growth.

However, a market commentator said Ekuinas’ commercial performance has been mixed-bagged, while the company has not been overly transparent on its return on investment (ROI) and return on equity (ROE).

“Based on its investments over the last 10 years, Ekuinas’ success remains debatable. For any company, success will be measured against the numbers — in this case, Ekuinas’ ROI and ROE,” the commentator, who works in investment banking, told TMR.

Among Ekuinas’ less than successful investments is Icon Offshore Bhd, which sees the fund as the largest shareholder via its investment of some RM484.1 million.

Shares in the offshore support vessel provider for the oil and gas (O&G) sector is trading at an all-time low, between 3.5 sen and four sen in the first half of trading yesterday — a far cry from its initial public offering of RM1.85 back in 2014.

The offshore service provider also reported four consecutive fiscal years of net losses from 2015 to 2018 amid the challenging O&G industry, while the company is in the middle of a recapitalisation exercise to strengthen its balance sheet.

Meanwhile in August 2017, Ekuinas was reportedly rushing to find buyers for the institutions held under ILMU Education Group — the holding company for the fund’s portfolio of education companies — on suspected losses and poor enrolment numbers.

As of the end of last year, Ekuinas invested a total of RM150 million in the education group.

The government-owned firm’s number of PE deals in 2019 is expected to continue to trend lower due to the mismatch in valuations between buyers and sellers.

The government provided Ekuinas with an initial endowment of RM500 million under the 9th Malaysia Plan before committing to an additional RM4.5 billion under the 10th Malaysia Plan.

Ekuinas established three direct funds from 2010 to 2014, amounting to a total of RM3.5 billion, as well as two outsourced funds in 2011 and 2013 respectively totalling RM640 million.

Apart from its social objective, the company set a minimum internal rate of return (IRR) from its investments at 12% as well as an aspirational target of an up to a 20% IRR.

While its direct (Tranche II) fund achieved a gross IRR of 14% per annum with a gross portfolio return of RM490.1 million in 2018, Ekuinas’ direct (Tranche I) fund only managed a gross and net IRR of 10.1% and 6.5% respectively in 2017.

The latter fund is fully realised, while the Tranche II fund is currently being deployed.

Nonetheless, Ekuinas said it has managed to increase Bumiputera management by 24.9% since its entry in the market, as well as facilitating a 17.3% increase in Bumiputera employees over that same period, according to the fund’s 2018 annual report.

Among Ekuinas’ portfolio companies that registered improvements in revenue and profitability last year were Orkim Sdn Bhd, PrimaBaguz Sdn Bhd and Coolblog Sdn Bhd.

Orkim Sdn Bhd is among the leading companies in the clean petroleum product transportation business while PrimaBaguz Sdn Bhd and Coolblog Sdn Bhd are involved in the food and beverage (F&B) industry.

O&G, education, services, fastmoving consumer goods, healthcare, and retail and leisure (which includes F&B) comprise Ekuinas’ six target sectors.

But the PE firm will not invest in “vice” businesses such as gaming and the selling of liquor, hedge funds, derivatives or commodities, property and construction, and companies that do not contribute to the economy.