It was a nice show of support from the investment community that assembled at the Ritz-Carlton Kuala Lumpur last week for Mavcap's announcement of its new outsource partners. Mavcap (Malaysia Venture Capital Management Bhd) is the wholly owned venture capital subsidiary of the Minister of Finance Inc (MoF).
Sighted among the crowd were representatives from CIMB and BI Walden. There was also former Malaysia Technology Development Corporation CEO Datuk Anuar Md Nor, who now runs a research consultancy called Bison Partners Consulting and is applying to be an outsource partner.
All were gathered to witness the unveiling of the three new outsource partners — Ethos Capital One Sdn Bhd, Expedient Equity Two Sdn Bhd and DTA-Plato Capital Sdn Bhd — which collectively received an RM80 million investment commitment from Mavcap. The occasion was also to announce that Mavcap had repaid its parent MoF RM100 million in June. This marks the first of five annual repayments for the RM500 million loan from MoF that led to the birth of Mavcap in 2001. So it is one down and four more to go for Mavcap.
But, according to its chairman Datuk Abdul Samad Alias, who made the announcement and signed the cheque, Mavcap may face problems meeting its loan obligations next year. Market conditions "are not favourable", says Samad, and Mavcap and MoF are in discussions to convert part of the loan into a grant. "A ratio of 50:50 would be ideal," he adds.
According to senior vice-president Husni Salleh, the actual loan amount is RM450 million as RM50 million has been converted into paid-up shares of Mavcap. The loan is interest-free and annual repayments of RM100 million were scheduled for 2007 up to 2010, with the final repayment of RM50 million in 2011.
De facto investment holding company
While Mavcap has done extremely well to even be able to return RM100 million, there are mixed feelings here. According to industry observers, the money should not have been given as a loan in the first place. "You should never give investment funds as a loan," says a veteran of the venture capital industry. And while Salleh says a penalty will be imposed should Mavcap default on any loan repayment, the venture capital veteran thinks that as a wholly owned subsidiary, Mavcap has little to fear in terms of repercussions. "What can MoF do?" he asks. "They can't sue Mavcap. Doing that would be like suing yourself."
A partial conversion of the loan to grant will undoubtedly help. Samad justified this by saying Mavcap is not a purely commercial venture capital company. "We do developmental investments as well. We would like the early-stage investments to be converted to grants while the late-stage investments can remain as loans."
Samad also says that Mavcap is increasingly operating like an investment holding company. "We do not have a finite timeline for our fund like other venture capital firms," he says. The industry veteran thinks converting Mavcap from a venture capital to investment holding company makes sense. "A change in status to investment holding company means that its investments are held in perpetuity, which will give Mavcap some stability," he says. "It can then focus on its nation-building agenda, which is to nurture the national ICT and venture capital industry."
And then there were three
But it is also Mavcap's nation-building agenda that has caused concern among some venture capitalists (VCs). While almost all private VCs are in agreement that Mavcap, as a government-linked company, has the financial means to spearhead the development of risky early-stage investments that will stimulate deal flow further down the line for private sector VCs, this developmental role is not acceptable when it comes to its outsourced funds. When Mavcap announced the sequel to its first Outsource Partner Programme (OPP) last year, it said that it was looking for seven partners to whom it could outsource funds.
Last week, only three were announced. Mavcap said that they were in discussions with a few more potential partners. An OPP alumni, Jerry Chin, who heads Photonics, says he is in the process of applying to be in the next batch of outsource partners.
A check with several VCs revealed that some of the strings attached to the outsourced funds made it unattractive to them. One such condition is that 50% of the outsourced funds must be invested in Malaysia and comprise ICT companies. "We should not be restricted to any country or sector but be flexible as long as we can generate return on investment," says one VC, adding that another major issue is that no divestments are allowed to be reinvested. "This is unacceptable," says another VC. "We should use the gains from our exits for reinvestment. This is the main reason why some VCs do not want to apply to be outsource partners."
Outsource partners are also expected to raise at least RM5 million on their own. But unless the fund is large enough, like Ethos' projected RM200 million, Mavcap — with its RM25 million commitment — would likely emerge as the majority shareholder of any outsource fund. Moreover, its terms and conditions have made it hard for some potential partners to find co-investors. "Putting in developmental criteria and then asking partners to raise matching funds is a contradiction," says one industry observer. He suggests that a more reasonable approach would be for the funds outsourced to the private sector to be managed on a purely commercial basis while Mavcap's own direct investments should be developmental in nature. "Otherwise," he says, "Mavcap will be competing with its partners."
This suggestion is bound to gain support from entrepreneurs who have argued that, in a nascent venture capital market like Malaysia (where venture capital is driven by institutions and not entrepreneurs), the risk appetite is lower. Therefore, the government needs to play a more interventionist role by putting its developmental cap ahead of its commercial cap. And while Mavcap has received a lot of flak for its overly commercial approach, a senior Mavcap official tells netv@lue2.0 that the manner in which it approaches investment is actually dictated by MoF. "They are the ones giving us the money and telling us we need to repay them. How much of a developmental role can we play when we have such a condition hanging over us?"
Conclusion
Whether Mavcap operates as a venture capital firm, investment holding company or a developmental agency, the important thing is that its goals of helping nurture a vibrant venture capital and ICT industry are met. Not an easy thing to accomplish, but with RM1 billion of public funds at stake, allocated under the Eighth and Ninth Malaysia Plans, expectations for Mavcap to perform are high
