Ahmad Husni said that although private equity was an ideal financing source for developing economies, Asia did not possess the critical mass of such resources to produce a sustainable pipe line of deals in the information and communication technology (ICT) and bio-technology industries.
“Asia, as yet, do not have the pool of talent and institutionalised knowledge and technology that have accumulated over the last several decades in the west,” said Ahmad Husni in his speech at the third Islamic Venture Capital and Private Equity conference today.
“(They are) not enough, anyway, to support a large and vibrant private equity and venture capital industry. We will, insya’allah, get there but not for the foreseeable future. This is reality,” he added.
The second finance minister’s remarks follows a World Bank report which said that Malaysia is lacking in investment in human and physical capital, leading to domestic savings greatly exceeding domestic investment.
The bank noted that Malaysia, like its fellow middle-income neighbours Indonesia, Thailand and Philippines, is trying to move out of the middle-income trap but said it requires investment in infrastructure, equipment, education and skills in levels far exceeding what they are currently experiencing, which is well short of the Republic of Korea, Japan, and Singapore when they were at similar per capita income levels, when they were at the same development stage.
Ahmad Husni, however, highlighted the attractiveness of Asia Pacific as an investment destination for private equity flow due to more vigorous deal activity in the region compared to Europe and north America in the past few years.
“In the period between 2003 till 2007, the level of deal activity in the Asia Pacific region was 8.6 times higher than the period between 1995 till 1999,” he said.
“This compares very favourably to Europe’s 2.9 times and north America’s 2.7 times,” he added.
The second finance minister also cited a global private equity report that estimated the total amount of private equity capital — which was committed but not yet invested by the end of 2009 — at more than US$1 trillion (RM3.09 trillion).
Ahmad Husni said that private equity was an ideal source of financing for developing economies as it was not highly subject to volatile market forces and was more efficient compared to foreign direct investment (FDI), besides offering a greater spread of risks if pooled.
“In other words, the behaviour of private equity and venture capital can, in fact, be perceived as a hybrid between FDI and portfolio capital,” said Ahmad Husni.
He noted that the forecast expenditure for Asian economies was between US$20 trillion to US$30 trillion for the next ten years.
“The Asian economies require an enormous amount of funds...between US$20 to US$30 trillion, (which is) not only for the traditional developmental infrastructure works but also for commercial enterprises which are above and beyond the requirements of an emerging economy,” said Ahmad Husni.
He pointed out that the private sector would drive 19 entry point projects under the Economic Transformation Programme, where venture capital and private equity funds could help the private sector to finance the projects.
“These projects carry a total private sector investment of RM151 billion. The private sector will be a catalyst for these projects,” Ahmad Husni told reporters later.
“Seven out of the 19 projects will take off any time while the rest are in their final stages,” he said, adding that the budget deficit in 2011 would not exceed this year’s level of 5.6 per cent.
The second finance minister also stressed that Malaysia must be able to offer a wide range of investable asset classes in a bid to attract house funds that were usually invested in the west.
“As an international Islamic financial centre...Malaysia must be able to structure investment vehicles that are sufficiently attractive to house funds that were traditionally invested in western economies but are now looking for better returns in Asia,” he added.
Many investors, however, are mindful of the constraints in Malaysia including the lack of a world class workforce and education system, policy inconsistencies, bureaucratic red tape and the widespread acknowledgement that four decades of affirmative action has affected the country’s competitiveness.
A recent report by the Economist Intelligence Unit also noted that political resistance has delayed radical reform measures required to restructure the economy to a high income one.
Ahmad Husni further acknowledged that research and development in Asia had yet to achieve the same standards as advanced nations.
“We must note that Asia’s research and developmental efforts, both in the private sector and academia, have yet to reach the level of the advanced economies,” he said.
The ranking of public institutions in Malaysia has dived throughout the past years to the point of dropping out of the top 200 universities in the QS World University Rankings this year.
