How new is Malaysia's private equity (PE) industry? "We are at the beginning of the beginning," says Rohana Tan Sri Mahmood, chairman and partner of Ethos Capital, which calls itself the first non-institutional Malaysian-owned PE firm. If the name rings a bell, that's because Ethos Capital is the PE arm of Ethos & Co, the boutique consulting practice set up five years ago.

One of its founding members, Omar Mustapha, the managing principal and director, is also a director and partner at Ethos Capital.
"We first had a discussion about setting up a PE fund five years ago, but felt that the time was not right yet; we wanted to build a strong consulting practice first," says Omar, who speaks in measured words.

Malaysian Venture Capital Bhd or Mavcap's search for its second batch of Outsourced Partners Programme (OPP) late last year proved to be the catalyst for the birth of Ethos Capital. Together with two other general partners to round up the team, Mohd Nagib Abdullah and Tony Yong, Ethos Capital swung into action and is well on its way to hit its fund size of RM200 million by year-end. It has raised RM90.9 million from high net-worth individuals and institutions, both local and foreign.

It is worth noting that Ethos Capital hit past the RM5 million matching fund target Mavcap required of its OPP. Suitably impressed, Mavcap gave Ethos Capital another RM5 million to make its total contribution RM30 million. Not bad for a new firm, which, says one venture capitalist, "has no track record". The other two OPP firms got RM25 million each.

Talking about their individual track records, Rohana says the rich experience of the four partners complements the team as a whole. "In addition to bringing diverse industry experience, we also collectively bring experience in deal sourcing, execution and value creation." She feels strongly that Malaysia needs "home-grown" PE funds that are managed by professionals who have the skill, network and knowledge to operate successfully within the local context.

Rohana herself has a very extensive business network in Malaysia and the neighbouring countries and brings a strong pipeline of proprietary deal flows. She has extensive knowledge in a diverse range of sectors, including plantation, property and education where she sits on the board of Paramount Corp Bhd. Her experience enables her to identify key value creation levers when the team evaluates deals.

Omar has a deep business network in Malaysia. His affiliation with Ethos & Co provides Ethos Capital with access to proprietary deal flows. In addition to formulating business strategies, he also brings extensive industry knowledge in a broad range of sectors.
Nagib is the team member with the most experience in venture capital, having spent the last six years at Mavcap. He brings an extensive business network in the ICT industry and execution experience.

Yong, like Omar, a former McKinsey and Co consultant, is a chartered accountant and brings a blend of experiences in strategy development, sales, operations and finance which he accumulated while working in the US, China, Australia and Malaysia. Omar points out that Yong has a track record of driving performance improvement at multinational companies and leading regional companies that operate in the telecommunication, electronics, semiconductor and financial services sectors.

The team believes that its unique value proposition comes through access to proprietary deal flows from its networks and that of Ethos & Co. Its ability to create value is another area it believes it can make a strong contribution. "We are all ready to roll up our sleeves and get to work in our investee companies," says Omar, confident that Ethos Capital has what it takes to wring maximum value out of firms it invests in. An area he sees great opportunity in is the ongoing rationalisation of business portfolios and spinning off of non-core businesses among conglomerates. "There are tremendous opportunities to create value in these businesses which are otherwise too small to warrant adequate management attention within a conglomerate."
Below, Omar elaborates on some specific questions about the fund.

What is the focus of the fund?
Omar: Our target fund size is RM200 million and we expect to achieve this by December this year. Currently, our limited partners [LPs] have committed about RM100 million to the fund [Ethos Capital One]. The fund has a charter life of six years. The fund will be focusing on growth and turnaround opportunities that exist in Malaysia and pursue opportunities in neighbouring countries.

Our minimum deal size is RM10 million. We are able to do larger deals because we can invite our LPs to co-invest with us when we find attractive deals that require large investments. Our preference is to nurture the investment for two to four years before exiting via trade sale or public listing. Generally, we do not invest in public-listed companies. However, if we have a compelling case for taking a listed company private, we will consult with our LPs.

With markets at new highs and valuations high, don't you think you are entering near the peak of the current economic environment?
As a practice, we do not participate in public auction and we focus on deals that we can add value. When investee companies understand the value we bring [in terms of strategy formulation, market development and so on], they are more reasonable with valuation. There are many businesses in Malaysia that still have tremendous growth potential and value waiting to be unlocked.

What is your differentiator versus other PE firms?
Firstly, the general partners' deep network in Malaysia provides access to proprietary deals, so the fund rarely participates in auctions. These proprietary deals include small and medium enterprises [SMEs] as well as non-core business units currently embedded within large government-linked companies [GLCs].

Secondly, the general partners actively leverage on the strategy and consulting practice [of Ethos & Co] to create value in investee companies, focusing on stimulating growth and improving operations. Malaysia alone has more than 800,000 SMEs, many of which are seeking growth funding, business development support and professional managerial talent to complement the original founder entrepreneurs. In addition to receiving capital from our fund, the SMEs we invest in will also benefit from 'hands-on' management guidance to help operationalise management best practices that otherwise are only available to large MNCs. We believe this tight linkage between funding and consulting support is what is required to help nurture SMEs over a multi-year time horizon and position them for growth.

Thirdly, the fund is structured to allow LPs co-investment opportunities in the large deals which exceed the fund's single investment limit. Although our RM200 million fund size is relatively small, we are able to consider large deals because most of our LPs have expressed a strong desire to selectively co-invest with our fund in deals that fit their own investment thesis. Given the regional spread of our LPs, we are also well-positioned to look at regional opportunities on an opportunistic basis. Additionally, the fact that our LPs comprise significant high net-worth individuals allows the fund to tap their personal networks across the region to support the growth and expansion of our investee companies.