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By Ms Darawati Hussain, Chairman of Malaysian Venture Capital & Private Equity Association July 2011 WORKSHOP ON FINANCING FOR ASEAN MSME IN THE 21 ST.

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Presentation on theme: "By Ms Darawati Hussain, Chairman of Malaysian Venture Capital & Private Equity Association July 2011 WORKSHOP ON FINANCING FOR ASEAN MSME IN THE 21 ST."— Presentation transcript:

1 By Ms Darawati Hussain, Chairman of Malaysian Venture Capital & Private Equity Association July 2011 WORKSHOP ON FINANCING FOR ASEAN MSME IN THE 21 ST CENTURY

2 CONTENTS 2 Page Introduction to MVCA 3 Private Equity as an Alternative Asset Class9 Insights into PE Investing15 The Malaysian Challenge22

3 INTRODUCTION TO MVCA

4 OUR MISSION & OBJECTIVES To promote, develop and maintain the venture capital industry in Malaysia as a source of equity financing for business enterprises principally for the start-up and/or development of small and medium sized enterprises. To promote cooperation among members, encourage joint efforts and business undertakings as well as to provide a regular forum for the exchange of views amongst members and also foreign industry players and regulators. To represent, express and give effect to the views and opinions of persons or companies engaged in the venture capital industry, including making representations to all governmental or public authorities or bodies. To develop and encourage the highest standard of professional ethics in the venture capital industry. 4

5 To promote private sector’s participation in the VC/PE industry and thus, expanding the fundraising opportunities for the Fund Managers. To develop and expand the VC/PE industry in Malaysia by increasing the number of VC/PE firms and VC/PE Funds as a supporting engine to innovation. To develop the skills and experience of the local VC/PE companies by providing a larger funding platform and thereby, encouraging the companies to invest regionally and globally. To increase the number of VC/PE professionals and introduce more structured human capital development programmes in Malaysia for talent development and succession for the VC/PE industry. To support Government-backed programmes to produce quality entrepreneurs and technopreneurs To support Government initiatives to promote Malaysia as the hub of Islamic VC/PE which will be an integral part of the strategy to turn Malaysia as the hub for global Islamic finance. OUR TARGETS 5

6 INDUSTRY OVERVIEW INDUSTRY PARTICIPANTS % Change No of Registered VC Funds or Companies % No. of Registered VCMCs % No. of Investee Companies % SHAREHOLDING STRUCTURE 100% Local Ownership % Joint Ventures990.00% 100% Foreign Ownership % VENTURE CAPITAL INVESTMENTSAs at Dec 2010As at Dec 2009% Change Total Committed Funds Under Management RM 5.9 billion RM 5.3 billion11.45% Total Investment RM 3.4 billion RM2.6 billion31.05% Investment in Investee Companies RM 453 million RM 597 million-24.12% Divestments RM 89 million RM 43 million106.98% Source: Securities Commission 6

7 INDUSTRY OVERVIEW 7

8 Source: Securities Commission Number of Islamic Venture Capital Firm: 2 The number of venture capital professionals currently stands at 160 people. This number is based on professionals with at least 4 years experience in the venture capital industry. 28 venture companies were divested in 2010 compared to 21 in However, only 1 VC-backed company was listed on ACE Market of Bursa Malaysia in INDUSTRY OVERVIEW 8

9 PRIVATE EQUITY AS AN ALTERNATIVE ASSET CLASS

10 Non-traditional/Alternative assets include: Real estate Private equity Venture capital Hedge funds Commodities Others, e.g. wines, antiques, art Common features of alternative assets: Less liquid than traditional assets Caters to institutional or high net worth individuals Has mid-to-long term investment horizons (3 years or more) WHAT ARE ALTERNATIVE ASSETS? Traditional asset classes available to investors include equities and bonds Alternative assets simply describes NON TRADITIONAL asset classes Asset Classes Public Private Equities Derivatives Real Estate Debt Securities Cash Fixed Income Private Equity &Venture Capital Others Commodities 10

11 HOW A PRIVATE EQUITY & VENTURE CAPITAL FUND WORKS INVESTORS (e.g. GLCs) PE/VC MANAGEMENT TEAM (e.g. CIMB PE & VC) PE/VC FUND CO (e.g. CIMB PE Fund 2) 100% Preference Shares PORTFOLIO COMPANY 3 x% equity z% equity PORTFOLIO COMPANY 2 PORTFOLIO COMPANY 1 y% equity 11

12 PRIVATE EQUITY IN A BUSINESS LIFECYCLE Expansion Stage Early Stage/Start up Seed Stage Sales Growth Late Stage IPO/MBO/MBI/LBO Distressed situation Mezzanine Own funds Angel Investors Venture Capital Own funds Angel Investors Expansion Stage Early Stage/Start up Late Stage IPO/MBO/MBI/LBO Turnaround Private Equity PEVC Time Seed - For initial concept for R&D of a product Early - For product development and initial marketing; the company may be in the process of being organised or may have been in business for a short time, but has not yet sold its product commercially Expansion - For growth and expansion of a company that has built up a short track record; used for increasing production capacity, market/product development and/or additional working capital Growth/Mezzanine - Financing to help a company go public/trade sale Late Stage - Financing in form of loan/equity to enable MBOs or MBIs of an existing product/business Turnaround - Financing to re-establish a business which has encountered some performance difficulties 12

13 Private Equity and Venture Capital Annual Returns *Source: Thomson Reuters, through 31/3/ IRR 13

14 PRIVATE EQUITY AND VENTURE CAPITAL-BACKED COMPANIES Company In the United States, Europe and Australia... Closer to Home... 14

15 INSIGHTS INTO PE INVESTING

16 16 Extremely In-depth Investment Process Deal Sourcing Preliminary Deal Assessment In-depth Strategic Due Diligence Accounting, Tax and Due Diligence Legal Documentation Growth potential Attractiveness of industry Strength of management Competition Financials Indicative valuation Detailed Financial Evaluation Tax Compliance Contingent Liabilities Material Contracts and Agreements Licenses Deal structuring Share Purchase Agreement / subscription agreement Shareholders’ Agreement Others – Put/Call Option agreement etc. Network Monitoring / Business Plan Implementation 16 5-year business plan and projections Product and pricing strategy Marketing strategy R&D strategy Customers Suppliers Competitive strength High Quality Deals Only Business process improvement Active participation at Board and Management level Preferential Rights Number of deals: T = 0T + 2 wksT + 16 wks3 – 5 yrs Time: T + 6 wksT + 12 wks 16

17 INVESTMENT CRITERIA Right Fit – Willingness to admit and work with a PE/VC Investor Opportunities for value enhancement Attractive margins Relatively low cost position Strong product or service branding High or increasing market share Integrity of management Proven business model Strong industry fundamentals 17

18 Common Risks Encountered by the Fund Manager Type of RiskSelected Examples Business Risk Misrepresentation by the entrepreneur Risk of misalignment of interest of the entrepreneur with passive investors Lack of management performance Lack of management focus Risk of misalignment of management interest with passive investors Product development risk (including achievement of commercial break- even) Technology risk Financial risk Operational risk (not related to management) Liquidity Risk Illiquid investment in private companies No readily available secondary market Country Risk Change in regulation or government policy Foreign-exchange risk Market Risk Interest rate risk Global economic cotangent effect Private equity investments aim to achieve alpha returns, by combining thorough pre-investment due diligence with subsequent proactive participation in the business. 18

19 Monthly basis Monthly performance report (including management, operational, financial and industry performance). Regular basis Review all aspects of the business and implementation of post-acquisition initiatives. On-site visits to ensure company’s operations and performance are in line with expectations or projections. Attend board and management meetings. Quarterly basis Report to a risk oversight committee (including business model, competition & current position, exit strategy, risk & risk mitigation initiatives). Post-Investment: Proactive Monitoring Initiatives To ensure: Alignment of Interest Focused Efforts towards Goals Optimal Performance Operational Efficiency Corporate Governance Transparency 19

20 Post-Investment: Role at BOD and EXCO Preferential and veto rights over key decisions items such as: Replacing CEO, CFO and members of senior management Alteration to the terms of employment conditions Changes to pre-agreed business plans: including new business focus, marketing & strategy Capital expenditure above agreed figure Property/equipment leases above set value Annual CAPEX Operating budgets Issuance & repayment of debt Dividend policy Entering or accepting contracts above pre-agreed quantum Right to conduct special audit as and when necessary 20

21 21 Pre-acquisitionPost-acquisition CAGR: >22% CAGR: >30% Revenue Net Profit Careful selection of new stores increases revenue Business performance improvements via implementation of action plans Operational efficiency contributed to higher net margins Improvements in organizational structure to ensure efficient decision making process Improvements in procurement procedures to obtain best prices Case Study 1: Post Acquisition Initiatives for a F&B chain

22 THE MALAYSIAN CHALLENGE

23 WHERE WE ARE GNI Per Capita 2009 US$ Thousand GDP Growth M&A as % of GDP Sources: Economy Watch, IMF, Bloomberg, World Bank, Malaysia Productivity Corporation Productivity Levels, 2009 US$ Thousand Per Worker High Income Economies 23

24 GDP BY SECTOR Source: Bank Negara Malaysia 24

25 POPULATION BY COUNTRY Source: World Bank 25

26 Current Income $7000 ~$15,500 ~$17,500 Average Annual Growth of 6.5% Middle and Lower Income Economies High Income Economies Per Capita Income USD THE NEED TO GROW 26

27 FUNDING LANDSCAPE IN MALAYSIA BANKING INSTITUTION’S SME LOAN APPROVAL RATE; % FINANCING OUTSTANDING AS END- MAY 2009 (RM BILLION) Source: Bank Negara Malaysia 27

28 INNOVATION MODEL Technology Market (to be Identified) Market (to be Identified) Science (Basic Research) Market Identified Technology Grants Risk Capital Malaysia’s Strategic Positionin g and Market Niche Aggressively pursue market driven innovation and capture short- to-medium term opportunities for value creation Aggressively pursue market driven innovation and capture short- to-medium term opportunities for value creation Continue to actively support and facilitate technology driven innovation for medium to long term benefits Continue to actively support and facilitate technology driven innovation for medium to long term benefits Technology Science Grants Science Grants Risk Capital 10 – 15 years 3 – 5 years Market Driven Innovation Technology Driven Innovation Source: Ministry of Science, Technology and Innovation 28

29 (Pn) Darawati Hussain Chairman (Pn) Ariza Norhalim Secretariat Malaysian Venture Capital & Private Equity Association 26-3, Medan Setia 2, Plaza Damansara, Bukit Damansara Kuala Lumpur Tel: Fax: OUR CONTACTS 29


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