By Ms Darawati Hussain, Chairman of Malaysian Venture Capital & Private Equity Association July 2011 WORKSHOP ON FINANCING FOR ASEAN MSME IN THE 21 ST.

By

Ms Darawati Hussain, Chairman of Malaysian Venture Capital & Private Equity Association

July 2011

WORKSHOP ON FINANCING FOR ASEAN MSME IN THE 21ST CENTURY

CONTENTS

2

Page

Introduction to MVCA 3

Private Equity as an Alternative Asset Class 9

Insights into PE Investing 15

The Malaysian Challenge 22

INTRODUCTION TO MVCA

OUR MISSION & OBJECTIVES To promote, develop and maintain the venture capital industry in

Malaysia as a source of equity financing for business enterprises principally for the start-up and/or development of small and medium sized enterprises.

To promote cooperation among members, encourage joint efforts and business undertakings as well as to provide a regular forum for the exchange of views amongst members and also foreign industry players and regulators.

To represent, express and give effect to the views and opinions of persons or companies engaged in the venture capital industry, including making representations to all governmental or public authorities or bodies.

To develop and encourage the highest standard of professional ethics in the venture capital industry.

4

To promote private sector’s participation in the VC/PE industry and thus, expanding the fundraising opportunities for the Fund Managers.

To develop and expand the VC/PE industry in Malaysia by increasing the number of VC/PE firms and VC/PE Funds as a supporting engine to innovation.

To develop the skills and experience of the local VC/PE companies by providing a larger funding platform and thereby, encouraging the companies to invest regionally and globally.

To increase the number of VC/PE professionals and introduce more structured human capital development programmes in Malaysia for talent development and succession for the VC/PE industry.

To support Government-backed programmes to produce quality entrepreneurs and technopreneurs

To support Government initiatives to promote Malaysia as the hub of Islamic VC/PE which will be an integral part of the strategy to turn Malaysia as the hub for global Islamic finance.

OUR TARGETS

5

INDUSTRY OVERVIEW

INDUSTRY PARTICIPANTS 2010 2009 % Change No of Registered VC Funds or Companies 58 59 -1.69% No. of Registered VCMCs 55 55 0.00% No. of Investee Companies 389 445 -12.58% SHAREHOLDING STRUCTURE 100% Local Ownership 102 104 -1.92%Joint Ventures 9 9 0.00%100% Foreign Ownership 2 1 100.00%

VENTURE CAPITAL INVESTMENTS As at Dec 2010 As at Dec 2009 % Change

Total Committed Funds Under Management RM 5.9 billion RM 5.3 billion 11.45%

Total Investment RM 3.4 billion RM2.6 billion 31.05%

Investment in Investee Companies RM 453 million RM 597 million -24.12%

Divestments RM 89 million RM 43 million 106.98%

Source: Securities Commission

6

Source: Securities Commission

INDUSTRY OVERVIEW

7

Source: Securities Commission

Number of Islamic Venture Capital Firm: 2

The number of venture capital professionals currently stands at 160 people. This number is based on professionals with at least 4 years experience in the venture capital industry.

28 venture companies were divested in 2010 compared to 21 in 2009. However, only 1 VC-backed company was listed on ACE Market of Bursa Malaysia in 2010.

INDUSTRY OVERVIEW

8

PRIVATE EQUITY AS AN ALTERNATIVE ASSET CLASS

Non-traditional/Alternative assets include:• Real estate• Private equity• Venture capital• Hedge funds• Commodities• Others, e.g. wines, antiques, art

Common features of alternative assets:• Less liquid than traditional assets• Caters to institutional or high net

worth individuals• Has mid-to-long term investment

horizons (3 years or more)

WHAT ARE ALTERNATIVE ASSETS? Traditional asset classes available to investors include equities and bonds

Alternative assets simply describes NON TRADITIONAL asset classes

Asset Classes

As

se

t C

las

se

s

Pu

bli

cP

riv

ate

Equities

Derivatives

Real Estate

Debt Securities

Cash

Fixed Income

Private Equity &Venture Capital

Others

Commodities

10

HOW A PRIVATE EQUITY & VENTURE CAPITAL FUND WORKS

INVESTORS(e.g. GLCs)

PE/VC MANAGEMENT TEAM

(e.g. CIMB PE & VC)

PE/VC FUND CO(e.g. CIMB PE

Fund 2)

100% Preference Shares

PORTFOLIO COMPANY 3

x% equity

z% equity

PORTFOLIO COMPANY 2

PORTFOLIO COMPANY 1

y% equity

11

PRIVATE EQUITY IN A BUSINESS LIFECYCLE

Expansion Stage

Early Stage/Start up

Seed Stage

Sales Growth

Late Stage IPO/MBO/MBI/LBO

Distressed situation

Mezzanine

Own funds

Angel Investors

Venture Capital

Own funds

Angel Investors

Expansion Stage

Early Stage/Start up

Late Stage IPO/MBO/MBI/LBO

Turnaround

Private Equity

PEVC

Time

Seed - For initial concept for R&D of a product

Early - For product development and initial marketing; the company may be in the process of being organised or may have been in business for a short time, but has not yet sold its product commercially

Expansion - For growth and expansion of a company that has built up a short track record; used for increasing production capacity, market/product development and/or additional working capital

Growth/Mezzanine - Financing to help a company go public/trade sale

Late Stage - Financing in form of loan/equity to enable MBOs or MBIs of an existing product/business

Turnaround - Financing to re-establish a business which has encountered some performance difficulties

12

20 Year US PE & VC Performance Benchmark

0

5

10

15

20

25

Ear

ly/S

eed

VC

Bal

ance

d V

C

Late

r S

tage

VC

 All

Ven

ture

Cap

ital

Sm

all B

uyou

ts

Med

ium

Buy

outs

Larg

e B

uyou

ts

Meg

a B

uyot

us

All

Buy

outs

Gen

eral

ist

 All

Priv

ate

Equ

ity

S&

P 5

00

NA

SD

AQ

Private Equity and Venture Capital Annual Returns

*Source: Thomson Reuters, through

31/3/2008

13

IRR

13

PRIVATE EQUITY AND VENTURE CAPITAL-BACKED COMPANIES

Company

Company

CompanyCompany

In the United States, Europe and Australia...

Closer to Home...

14

INSIGHTS INTO PE INVESTING

16

Extremely In-depth Investment ProcessDeal

Sourcing

PreliminaryDeal

Assessment

In-depthStrategic

Due Diligence

Accounting, Tax and

Due Diligence

Legal Documentation

Growth potential

Attractivenessof industry

Strength ofmanagement

Competition

Financials

Indicative valuation

Detailed Financial Evaluation

Tax Compliance

Contingent Liabilities

Material Contracts andAgreements

Licenses

Deal structuring

SharePurchaseAgreement / subscription agreement

Shareholders’Agreement

Others – Put/Call Option agreement etc.

Network

Monitoring / Business Plan Implementation

16

5-year businessplan and projections

Product and pricingstrategy

Marketing strategy

R&D strategy

Customers

Suppliers

Competitive strength

HighQuality DealsOnly

Business process improvement

Active participation at Board and Management level

Preferential Rights

100 25 12 5 3Numberof deals:

T = 0 T + 2 wks T + 16 wks 3 – 5 yrsTime: T + 6 wks T + 12 wks

16

INVESTMENT CRITERIA

Right Fit – Willingness to admit and work with a PE/VC Investor

Opportunities for value enhancement

Attractive margins

Relatively low cost position

Strong product or service branding

High or increasing market share

Integrity of management

Proven business model

Strong industry fundamentals

17

Common Risks Encountered by the Fund ManagerType of Risk Selected Examples

Business Risk

• Misrepresentation by the entrepreneur• Risk of misalignment of interest of the entrepreneur with passive investors• Lack of management performance• Lack of management focus• Risk of misalignment of management interest with passive investors• Product development risk (including achievement of commercial break-

even)• Technology risk• Financial risk• Operational risk (not related to management)

Liquidity Risk• Illiquid investment in private companies• No readily available secondary market

Country Risk• Change in regulation or government policy• Foreign-exchange risk

Market Risk• Interest rate risk• Global economic cotangent effect

Private equity investments aim to achieve alpha returns, by combining thorough pre-investment due diligence

with subsequent proactive participation in the business.

18

Monthly basis• Monthly performance report (including

management, operational, financial and industry performance).

Regular basis

• Review all aspects of the business and implementation of post-acquisition initiatives.

• On-site visits to ensure company’s operations and performance are in line with expectations or projections.

• Attend board and management meetings.

Quarterly basis• Report to a risk oversight committee (including

business model, competition & current position, exit strategy, risk & risk mitigation initiatives).

Post-Investment: Proactive Monitoring Initiatives

To ensure:

Alignment of Interest

Focused Efforts towardsGoals

Optimal Performance

Operational Efficiency

Corporate Governance

Transparency

1919

Post-Investment: Role at BOD and EXCO Preferential and veto rights over key decisions items such as: Replacing CEO, CFO and members of senior management Alteration to the terms of employment conditions Changes to pre-agreed business plans: including new business focus,

marketing & strategy Capital expenditure above agreed figure Property/equipment leases above set value Annual CAPEX Operating budgets Issuance & repayment of debt Dividend policy Entering or accepting contracts above pre-agreed quantum Right to conduct special audit as and when necessary

2020

2121

Pre-acquisition Post-acquisition

CAGR: >22%

CAGR: >30%

Revenue

Net Profit

Careful selection of new stores increases revenue

Business performance improvements via implementation of action plans

Operational efficiency contributed to higher net margins

• Improvements in organizational structure to ensure efficient decision making process

• Improvements in procurement procedures to obtain best prices

Case Study 1: Post Acquisition Initiatives for a F&B chain

THE MALAYSIAN CHALLENGE

WHERE WE AREGNI Per Capita 2009 US$ Thousand GDP Growth

M&A as % of GDP

Sources: Economy Watch, IMF, Bloomberg, World Bank, Malaysia Productivity Corporation

Productivity Levels, 2009 US$ Thousand Per Worker

High Income

Economies

23

GDP BY SECTOR Source: Bank Negara Malaysia

24

POPULATION BY COUNTRYSource: World Bank

25

Current Income

$7000

~$15,500

~$17,500 Average Annual

Growth of 6.5%

Middle and Lower Income

Economies

High Income Economies

2010 2020

Per Capita Income

USD

THE NEED TO GROW

26

FUNDING LANDSCAPE IN MALAYSIA

BANKING INSTITUTION’S SME LOAN APPROVAL RATE; %

FINANCING OUTSTANDING AS END-MAY 2009 (RM BILLION)

Source: Bank Negara Malaysia

27

INNOVATION MODEL

Technology Technology

Market (to be

Identified)

Market (to be

Identified)

Science (Basic

Research)

Science (Basic

Research)

Market IdentifiedMarket

Identified

Technology Grants

Technology Grants

Risk CapitalRisk CapitalMalaysia’s Strategic

Positioning and Market

Niche

Aggressively pursue market driven innovation and capture short- to-medium term opportunities for value creation

Aggressively pursue market driven innovation and capture short- to-medium term opportunities for value creation

Continue to actively support and facilitate technology driven innovation for medium to long term benefits

Continue to actively support and facilitate technology driven innovation for medium to long term benefits

Technology Technology

Science Grants

Science Grants

Risk Capital Risk Capital

10 – 15 years

3 – 5 years

3 – 5 years

Market Driven

Innovation

Technology Driven

Innovation

Source: Ministry of Science, Technology and Innovation

28

(Pn) Darawati HussainChairman

(Pn) Ariza NorhalimSecretariat

Malaysian Venture Capital & Private Equity Association26-3, Medan Setia 2, Plaza Damansara, Bukit Damansara

50490 Kuala LumpurTel: 03-2096 2094Fax: 03-2095 8992

Email: [email protected]

OUR CONTACTS

29