KWAP chief investment officer Hazman Hilmi Sallahuddin.
KUALA LUMPUR: Malaysia is fast emerging as a prime destination in the South-East Asia region for venture capital (VC), garnering interest from global funds driven by cost advantages and market scalability.
The Retirement Fund Inc chief investment officer Hazman Hilmi Salahuddin said although Singapore is viewed as a market centre given its developed ecosystem, Malaysia is catching up.
“There are good companies in Malaysia. We are seeing more environmental, social and governance funds from Singapore looking to expand into the country because at the end of the day, it has the cost advantage.
“We do see more VC funds seeking to expand in Malaysia.
“This year, we have invested in six global VC funds: three from the United States, two from Europe and one from Singapore and they will set up an office in the country,” he said during the Securities Commission-World Bank Conference 2024 here yesterday.
Funding Societies Malaysia country head Chai Kien Poon said historically many startups begin their operations in Singapore due to the perception that the infrastructure and talent base there are better.
“However, after a couple of years, all these venture or private equity-funded companies will need to go out of Singapore as that market is not big enough for further growth,” he said.
Malaysia will usually be the first destination for many of the companies as it is culturally similar to Singapore.
“Lately, I have seen many Singaporean companies choose Malaysia as their first base of operations when they go to market, even though they may be registered in Singapore,” he said.
Meanwhile, World Bank senior economist Tatiana Didier said very few micro, small and medium enterprises (MSMEs) will benefit from direct financing through direct listings, crowdfunding platforms, peer-to-peer lending, VC and debt issuances.
As such, there is the need to expand the channels of indirect financing for MSMEs, for example microfinance institutions, leasing companies and factoring firms which can raise capital through capital markets as well as use the funds as refinancing facilities.
“As such, the scope of MSMEs that can benefit from funding in the capital markets will be widened.
“Moreover, research showed that when indirect financing is well-developed, not only will the scope of beneficiaries among MSMEs is enlarged, but the terms of their financing will also improve,” she said.
Didier flagged several challenges that come with such indirect financing for MSMEs. For one, there are concerns on whether they have enough assets to make it attractive for capital market investors.
“Another aspect is whether there is liquidity. This is an important aspect. Other issues are regarding the availability of information on MSMEs which are marked by capacity,” she said.
In addressing liquidity concerns in the market, Bursa Malaysia chief executive officer Datuk Muhamad Umar Swift said the local bourse looks to broaden the investor base.“We want to ensure that there is no regulatory arbitrage between our distinct markets: the LEAP Market, ACE Market and Main Market. It is quite different to list across these markets,” he said.
Didier said it is crucial to ensure that the initiatives created to develop enhanced financing access for MSMEs will snowball and close the financing gap.
It is estimated that there was a financing gap of RM290bil for domestic MSMEs in 2022.“Looking at the market as a whole in terms of fundraising, last year was only 1.5% of gross domestic product (GDP). The funding gap that we are talking about is 50% of GDP.
“Hence, how do we scale this up? When we think of policies and the role of the Securities Commission, which is on enabling the environment and financial infrastructure, it is not capital markets in general but the financial infrastructure for capital markets that actually cater to MSMEs’ solutions,” she said.
As an example, Didier pointed out that there are security intermediaries that are able to structure MSME-related products.
“There are also rating agencies, auditors, that are able to evaluate and look into information that is on SMEs. The launch of a five-year roadmap for MSMEs earlier this year outlined major initiatives in that area.
“There is also the need to look into whether there is a robust investor base for the products and the availability of appropriate regulations to make sure that the investors are there, especially institutional investors. At the same time, there needs to also be a risk management framework to be able to invest in those riskier assets,” she added.
Didier also highlighted that creating an enabling environment might not be enough to jumpstart the volume of financing through the MSME-related products and that there is the need to target direct support to some of those products.
“This brings in the role of guarantees to address the riskiness of MSMEs, the riskiness that underlines some of these instruments,” she said.
Apart from funding, Chai said education in the ecosystem, in preparing businesses for growth, is also another aspect that is lacking among MSMEs.
“Many times, as businesses reach a certain revenue size, they are approached by business consultants who encourage them to take on more debt to grow their revenue, and aim for listings on markets like Nasdaq.
“However, the reality is that this often doesn’t turn out well whereby these businesses probably spend a few million dollars on listing fees and they are not able to cash out.
“This is because they are technically not ready and when they list on markets like Nasdaq. Hence, we can facilitate the funding aspect, but education also needs to come in as well,” he said.
