Malaysia’s 2021 Private Equity Outlook

A Year into the Pandemic

As countries begin their mass inoculation drives, many are seeing hope on the horizon for a rebound of the economy with emerging markets and developing economies (EMDEs) taking the lead at growth rates of 6% compared to advanced economies’ forecast of 3.9%.

Malaysia’s economy is expected to rebound to between 6.5% and 7.5% in 2021 according to the Government’s Economic Report 2020/2021.

The improved sentiment is heralding the return of private equity (PE) deal flows as funds clear out a backlog of transactions stalled and shelved at the onset of the COVID-19 outbreak.

The hard hid private equity sector has since proven its resilience in its ability to roll with the punches of the pandemic and provide much needed support for the companies in its portfolio –not just in the capital they provide, but the management input given that demonstrates their industry network and expertise.

Funds that were wise in taking care of their portfolio will emerge stronger as market conditions improve, and are now assessing the landscape for opportunities.

Mega Trends and Opportunities for PE

The severity of the COVID-19 pandemic and its widespread impact globally and across all sectors has shifted industry dynamics, altering business models, consumer behaviour and public policies.

Tech-enabled businesses are leading the disruption in each industry, proving their ability to sustain growth through the current and any future crises.

The areas of online training and education, telehealth, e-commerce, food-tech, and distribution and delivery, will see a surge of deal making in the wake of COVID-19 as these models have helped to reshape consumers’ behaviour in the way we live, learn and work.

Software-as-a-Service (SaaS) and IT managed services companies have risen in tandem with the pandemic, as well as pharmaceuticals and other businesses supporting the healthcare industry.

Areas earmarked by government spending are also presenting more new opportunities, while mid-sized companies that have withstood a bad year and innovated to remain standing will emerge in a more robust competitive position after the dust settles.

Other Factors Shaping Malaysia’s Market

How each country has responded to the pandemic, in terms of movement and operating restrictions and fiscal policy response, will create important structural differences in their economies.

Although Malaysia was off to a rocky start in 2021 with the pandemic raging at a high of over 5,000 new infections daily at the end of January, the Government’s strict lockdown measures have managed to gain a control of the situation and brought it down to under 1,500 new infections daily by mid-March.

As businesses reopen under the current stage of Conditional Movement Control Order (CMCO) that is in effect across most parts of the country, winners and losers of the liquidity crisis created by the pandemic have already been determined.

Remaining players will have to contend with the continued political uncertainty hanging over the nation, which is deterring foreign investment into the country.

Geopolitical concerns will continue to play out in 2021 between the US and China, and between those countries and others such as Australia, India, the European Union and Japan, which has led to the imposition of tariffs and sanctions in many of these spats.

Amid these developments, Malaysia has repositioned itself as a manufacturing hub and an important player in the global supply chain and stands to benefit from the reshoring of manufacturing away from China.

This is supported by accommodative fiscal and monetary policies, with Bank Negara Malaysia expected to keep its Overnight Policy Rate at 1.75% until Q42021.

Choosing Survivors & Disruptors

The impact of COVID-19 and its recovery has been uneven across different sectors and PE investors will need to consider the broader macro-economic and sector specific prospects when making decisions on investments and exits.

The raft of insolvencies in affected sectors have created room for opportunistic transactions in distressed M&A, with new types of deals to be made that can better respond to the needs of this time of crisis.

We can also expect more elements of operational transformation and vertical integration in deal making to acquire complementary capabilities for funds’ portfolio.

Valuations within technology, healthcare and advanced manufacturing sectors will draw interest from funds, with tech-enabled businesses favoured as leaders in their fields, while travel related industry continues to face headwinds for as long as COVID-19 reigns. Interest is also growing in Environmental, Social and Corporate Governance (ESG) investing.

Outlook for PE Funds

The private equity industry is experiencing exciting times with formidable growth anticipated for the sector over the next few years. Its track record of high returns and perceived low volatility with increasing volumes of asset under management has endeared this sector to the investing community.

Funds that are responsive to evolving consumer patterns and investor preferences can expect to excel. And amid tighter lending policies in Malaysia, they will play an important role in spurring the recovery of the nation’s economy, injecting funds as well as expertise to revitalise troubled businesses and supercharge the growth of promising enterprises.

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