AS low oil prices and a soft economy put Ekuiti Nasional Bhd’s (Ekuinas) plans to exit its investments on pause, the state-owned private equity firm is buckling down while waiting out the challenging market situation. But the clock continues ticking for it to realise the return on some of its investments.
In general, a typical private equity fund’s exit horizon is anywhere between four and seven years. According to CEO Syed Yasir Arafat Syed Abd Kadir, Ekuinas’ investment horizon is typically between three and five years.
“As an investor, Ekuinas is subject to market volatility, and now is not the most conducive time to exit,” he tells The Edge in an interview. “A balance between certainty and returns would need to be struck.”
The soft market has seen a planned listing of Ekuinas’ education business on Bursa Malaysia deferred and divestment of equity interest in a listed company put on hold.
According to Syed Yasir, the first tranche of its direct investments amounting to RM1 billion will expire in end-2017. One of the investments was offshore support vessel player Icon Offshore Bhd, in which it held a 42.57% stake as at May 26.
Selling its stake in Icon Offshore and exiting at this time is a challenging endeavour as its share price has fallen 84% from its initial public offering (IPO) price of RM1.85. It closed last Friday at 30.5 sen.
Nevertheless, Syed Yasir says, he would not deem Ekuinas’ investments as being stuck as the company has realised RM1.4 billion in dividend income, interest income and divestments since 2009. Furthermore, any divestment plans will only be finalised when Ekuinas thinks their investment value has been optimised, he adds.
“Ultimately, you can’t time everything right … it comes down to [having] a sound business foundation, which I think we have demonstrated with Icon Offshore. If you look at the company’s performance vis-à-vis the other market players, it has been doing relatively well,” Syed Yasir says.
On the listing of Ilmu Education Group Sdn Bhd, which has been delayed since end-2015, he does not rule out the possibility of it happening next year if the market improves over the next six months. However, other options are also being explored as the exit timeline for this education assets is tied to the expiry of Tranche 1, he says.
“A lot of parties have shown interest [in Ilmu], but I don’t think we have committed to any of them yet,” he says, adding that the ultimate question to tackle is “when we want to exit versus the value that we receive [for the asset]”.
Ekuinas has invested RM569.7 million in Ilmu, which it says is one of Malaysia’s largest private education groups with seven institutions and almost 35,000 students. According to Ekuinas, Ilmu’s revenue in the financial year ended Dec 31, 2015, was RM431.2 million.
Focus on exit strategy
Seven years after the government launched Ekuinas, Syed Yasir believes that now is the right time to look at exiting some of its investments. But the current market sentiment has forced the private equity firm to look at other means of divestment as the IPO route may not be the best option, he says.
“Exiting [our investments] will be a big focus for us over the next few years,” says Syed Yasir. “There are a couple of portfolio holdings that are ripe for exit, for example, our food and beverage and casual dining assets.”
In the meantime, Ekuinas is intensifying its efforts to create value as a way to counter the market headwinds.
Syed Yasir sees opportunity to scrutinise operational efficiencies, citing Icon Offshore as an example. He says Ekuinas has begun working on cost optimisation ahead of Icon Offshore’s peers and before oil prices started tumbling in mid-2014.
However, a prolonged wait to execute its exit plan may hurt its returns. Ekuinas has set a minimum internal rate of return (IRR) target of 12% per year and a maximum of 20%. Given that the IRR is essentially a function of time value of money — the idea being the sooner a sum of money is received, the more valuable it is — a longer wait would lead to a depressed IRR for an investor.
An investment that will come up for exit assessment soon is Orkim Sdn Bhd, a clean petroleum product (CPP) tanker company. Ekuinas is now into its second year of investment in the company with RM416.3 million in capital deployed. The company is doing well, according to Ekuinas.
“What went wrong for a lot of market players is that they went into more volatile segments like chemicals,” Syed Yasir says. “The CPP segment is not as sexy but more stable … there is high defensibility.”
He declines to put a timeframe to its exit strategy for Orkim, but says Ekuinas typically looks at a possible exit from an investment by the third year.
Another investment being primed for an IPO is Al-Ikhsan Sports Sdn Bhd, a home-grown bumiputera sportswear retailer that is the fund’s first venture into the retail sector. Ekuinas acquired a 35% stake in the company for RM68.6 million in July.
However, the company still has “quite a fair bit” to go before it is ready for listing, Syed Yasir says, adding that it could be in five years’ time.
The retailer was founded in 1993 and at present, commands a 36% market share in Malaysia. It has 119 outlets in Peninsular Malaysia. Last year, it posted normalised earnings before interest, taxes, depreciation and amortisation of RM23.2 million on revenue of RM257 million, according to Ekuinas.
“There’s room for improvement in terms of its margins. [The focus is to] institute more solid foundations in the company,” says Syed Yasir. “What we want to do is ensure it has enough professional managers and its processes and corporate functions are strong enough to support the next level of growth.”
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