PETALING JAYA: With market volatility worsening triggered by geopolitical risks, Ekuiti Nasional Bhd (Ekuinas) is taking a cautious stance, as the government-linked private equity firm pivots away from specific sectors.
Chief executive officer Syed Yasir Arafat Syed Abd Kadir told StarBiz Ekuinas was maintaining a more cautious approach to deals amidst ongoing market volatility.
Sector-wise, he said it is pivoting away from sectors which the equity firm expects would encounter turbulence in the near future, especially the retail sector and other areas of the economy which are highly correlated to consumer sentiment, including eCommerce.
“We are maintaining our focus on healthcare, as we believe that this sector will continue to remain resilient, and a good hedge against inflationary risks.
“Ekuinas is paying close attention especially to segments within the areas of manufacturing and industrial products. With the ringgit continuing to exhibit weakness against the US dollar, we believe that this is an opportunity to look at businesses that would benefit from increased export opportunities.
“With a strong pipeline of potential deals, ample dry powder and confidence in our ability to source and convert deal opportunities, we anticipate the closure of more deals at realistic valuations,” he said.
Among others, he said the economic outlook has been made murkier with recent geopolitical challenges. The United States and China trade war is still reverberating through global supply chains, and the ensuing slowdown in the Chinese economy is still playing itself out.
He said the war between Russia and Ukraine is fast becoming a stalemate, and the situation in Gaza has not only posed a grave humanitarian crisis for the global community, but also threatens to scramble geopolitical considerations amidst the United States staunch support for Israel.
This does not bode well for the private equity business, he said.
“The impact on South-East Asian economies, including Malaysia, has been quite severe. Inflation, especially for food-related items, is still a cause of great concern for the majority of Malaysian households.
“The ringgit has lost significant value against the US dollar and other major currencies, and has recently hit an all-time low against the greenback.
Syed Yasir Arafat said that with the global macroeconomic environment deeply affected by the coordinated increase in interest rates led by the US Federal Reserve and by all the major central banks, there is a sharp decline in valuations for technology companies, and the drop in the private equity fundraisings globally.
The recent bankruptcy of WeWork, which only four years ago was valued at US$47bil, is emblematic of this secular change, he noted.
Touching on the firm’s dealmaking activity, he said: ‘’Our own deal pipeline has remained relatively healthy, but we have been noticing a severe pullback in overall deal volumes and valuations from the peak back in 2021.
“We believe that merger and acquisition (M&A) volume and valuations in Malaysia and South-East Asia as a whole will taper off significantly, especially heading into 2024 when we expect that higher levels of interest rates and ongoing geopolitical risks are going to put the brakes on dealmaking.”
In view of the current economic volatility, he added that Ekuinas would be paying particularly close attention to businesses which can demonstrate resilience and sustainable growth amidst uncertainty.
He said in view of the current macroeconomic environment, it is especially important to remain disciplined when it comes to valuations.
If interest rates are indeed going to stay higher for longer, the asset inflation tailwind since the global financial crisis cannot be relied on any longer, and any value creation needs to be based on organic and fundamental growth, he said.
For financial year 2022 (FY22), Ekuinas’ total funds under management stood at RM4.1bil. Cumulative investments for Ekuinas’ direct investment programme for the period stood at RM3.7bil, with investments made into 24 companies to date, which include bolt-on investments that it makes for its portfolio companies.
For its outsourced fund management (OFM) programme in FY22, committed investments undertaken via the firm’s outsourced fund managers was at RM339.6mil through investments into 18 companies, across various sectors such as education, retail and leisure, fast moving consumer goods and healthcare services.
In terms of potential divestments for this year, including reports that Ekuinas may sell shipping company Orkim, Syed Yasir Arafat said: “Orkim has grown significantly since our acquisition, and its revenue and profits have doubled since we acquired the company in 2014.
“Today, Orkim is one of the leading maritime energy transportation services providers in the region, working with leading oil majors. We are currently exploring exit opportunities for this asset.”
On another note, he said for 2024, Ekuinas expects the current economic conditions would persist. Hence, the firm intends to devote more focus on portfolio performance, particularly in strengthening the balance sheets of its portfolio companies.
“We still have some dry powder to deploy, and so we will remain open to deal opportunities, especially in the target sectors which we are currently focusing on,” he noted.
