Thursday 28 Mar 2024
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This article first appeared in Corporate, The Edge Malaysia Weekly, on September 26 - October 2, 2016.

 

THE scions of three prominent businessmen in Malaysia are pooling their personal and family funds to find the next big thing in the start-up world and pump the money into it.

Earlier this year, Lionel Leong, 28, the son of Mah Sing Group Bhd group managing director and chief executive Tan Sri Leong Hoy Kum, teamed up with his friends — Raja Hamzah Abidin, 28, the son of former federal territories and urban well-being minister Datuk Seri Utama Raja Nong Chik Zainal Abidin, and Rachel Lau, 30, the daughter of the late Lau Boon Ann, who was a non-executive director of Top Glove Corp Bhd — to co-found RHL Ventures, a private equity firm that invests in early-stage and growth-stage start-ups across Southeast Asia.

“The three of us have known each other for over a decade. We were always going to start something together. We never knew what, to be honest. It turned out that we all ended up [with a career] in investing. So, that was the obvious skill we had and that’s how RHL came about,” Lau tells The Edge in an interview with the three co-founders. The company’s name is derived from the initials of Rachel, Hamzah and Lionel.

It is hard to ignore the phenomenon of technology-driven businesses in this part of the world. For Leong, RHL allows access to tap those ideas.

“We have seen a lot of entrepreneurs come up with great business ideas and then turn those ideas into successful enterprises like Grab [the largest tech start-up in Southeast Asia] and as investors, we see plenty of opportunities, many in early-stage phases,” he says.

“We are seeing a lot of private deals [being carried out]. We, individually, have invested in many. We decided it was time to pool our family funds and invest in privately held start-ups in Southeast Asia. We all have different skill sets to help improve their business and ultimately increase their value over the long term.

“The idea is to champion the growth of private companies, especially start-ups. We are trying to get into companies that will eventually give multiple returns with great potential for growth.”

Lau concurs, acknowledging that the only way to get in cheap is to get in early.

“We came about because we wanted to be a part of this excitement. Anthony (Tan, group CEO and co-founder of Grab) is a good example of what you can do in Southeast Asia. We wish we had invested in him but we didn’t. We saw the opportunity pass us by. So, we decided to start RHL to not miss out on a good opportunity again,” she says.

Hamzah points out that institutional investors control most of the public equities, like pension funds, in Malaysia and regionally.

“There’s not much for private investors to play with. People are looking for smart, private money to come in and we feel that we can champion the cause there. Whether it is companies in Malaysia or the region, we are open. It is just finding the right ones. Because of our background, we can be patient. We won’t chase the deal and get burnt,” he says.

RHL hopes to invest in one or two start-ups this year. “If we can do one or two deals this year, we will be happy,” Hamzah remarks.

Lau says the private equity firm has yet to deploy capital, although it is not for want of trying. “We encountered difficulties when it came to valuations [quoted for companies]; the point is that most companies in Southeast Asia have weak financial knowledge. There is no basis for the valuations they are asking for.”

Nevertheless, Lau is optimistic about the chances of a deal coming to a close soon as more companies have lowered their valuations from six months ago.

According to her, global market volatility, which has led to a tightening of liquidity, has helped drive valuations downwards.

“We started the firm in February but due to the unrealistic valuations [for the few assets it was interested in investing in), we told ourselves we will take time out and invest only if we see the right opportunity and only at the right valuations. This is starting to work in our favour. People are more willing to negotiate once you back up [how you value their company] with research.

“We have gained a pretty good reputation. A lot of venture capitalists (VCs) hooked us up with other VCs and start-ups. We have 10 to 12 partners that consistently show us deals,” she says.

Lau points out that there is no competition between RHL and the VCs as the latter have higher risk appetite and look at deals of over US$20 million.

“It is a two-sided thing. Because it has been so friendly, they know that if they show us deals, we will eventually push deals to them too,” says Leong.

“The network [of VCs] here is generally very friendly. Even VCs that look at deals like our ticket sizes are more than happy to share deals with us, such that we take a 50% stake and they take the other 50%,” says Hamzah.

Lau says RHL has also started talking to companies in the US and Europe on the potential of bringing some of their ideas over to Southeast Asia.

“There is a possibility of us working on that as well. It is a different ball game altogether. These companies are in the late stage. So, our strategic involvement will be much smaller. In those instances, it is more of a financial deal, as opposed to taking a strategic role in their business. What we can do is help open up the Southeast Asian network, connecting them with existing friendly players. GrabTaxi in Southeast Asia, Didi Kuaidi in China, Lyft in the US and Ola in India are good examples of a strategic alliance among late-stage start-ups.

“A lot of VCs have started doing that. They link the international expertise and investments [of global companies] to the local investments they have made,” she remarks.

Unlike big private equity firms that make big-ticket investments and look to invest in late-stage companies, RHL’s target investment size is between RM500,000 and RM4 million per transaction.

For targets that are just too large for RHL, Lau says it pools capital either with friendly investors or an existing network of people who have committed capital to the firm. “There are no hard and fast rules about how much we can take.”

According to Hamzah, RHL can be flexible as the opportunity arises in terms of the types of businesses and the holding period for an investment of five to seven years. “We want to invest in a company early and hopefully guide it to an exit later on, whether it is a trade sale or an initial public offering.”

But there is one thing RHL will not do. “We don’t do seed-stage investing. We stay away from giving money to an idea. We have to see some traction in terms of revenue or market share or customers and the company must have operated for at least one year,” says Hamzah.

Of particular interest to RHL are companies in the financial, property, technology and healthcare sectors. “Lifestyle consumer-related [companies] that resonate with our age group. We believe whatever we buy is most likely what our age group buys,” says Leong.

The current structure of the firm has Leong, Hamzah and Lau at the helm, followed by a board of advisers comprising Tan Sri Leong; Raja Nong Chik, who is also managing director and founder of Rasma Corp Sdn Bhd; Tan Sri Lim Wee Chai, chairman and founder of Top Glove Corp; and Francesco Barrai, senior vice-president and convertible bond investor at hedge fund manager DE Shaw.

Marlon Sanchez, managing director and head of prime finance distribution for Asia-Pacific at Deutsche Bank, will be replacing Stephen Carney, regional head of equities at HSBC Private Bank, as adviser.

“We talk and send them [the board] reports every month,” says Lau, who is currently the vice-president of Hong Kong-based Heitman Investment Management, which oversees about US$35 billion. She has been involved in many successful investments.

Leong is the director of operations at Mah Sing while Hamzah is the head of business development at Rasma Corp.

Not surprisingly, Lau handles the financial aspects of potential investments while Hamzah and Leong look at the operational aspects.

“On a day-to-day basis, we are still active in our respective full-time jobs. At night, Hamzah and I meet a lot of clients. Once we ask for information, the crunching [of numbers] gets done during the weekends by all three of us. Thanks to Skype, we do a lot of conference calls, even on holidays,” says Leong. “But eventually, one of us will transition full-time to RHL and we will build a legitimate [private equity] fund.”

 

How RHL chooses its investments

According to Lau, RHL looks at start-ups that show a potential for growth in value. “Growing demographics should also translate into a bigger market. To add to this, the company must have good financial discipline. You don’t need money to buy growth.

“The company must have a sustainable business with a comfortable profit margin. You can grow but you have to grow without losing too much money. We like companies that have expanding margins. Tech firms are scalable and asset-light,” she explains.

Hamzah adds, “Yes, the company must have a manageable burn rate so that we can see a road map to profitability.”

Lau says RHL has no intention to be involved in the day-to-day running of a business. “We just want to take strategic roles. We are not going to take active management in their companies and we have no interest in taking them over. There is a minimum stake, which is 10%, which we want. And we do want a seat on the board so that we can share our know-how.”

However, Hamzah is quick to add that RHL will look at a less than 10% stake on a case-by-case basis. “I mean, if we had bought just 5% of Grab a couple of years back, we would be very rich now,” he laughs.

 

 

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