Malaysia's M$240 billion ($57 billion) Employees Provident Fund has begun investing in domestic private equity. The country's biggest institutional investor - its assets under management are larger than Bank Negara's foreign reserves - faces a problem of long-term liabilities but a lack of long-term assets it can invest in at home.

The organization has earmarked M$1 billion ($263 million) for investments in private equity, says Dr. Roslan Ghaffar, deputy CEO of investments in Kuala Lumpur. However his team is unlikely to invest more than 10% of that by the end of this year.

"Private equity deals in Malaysia are not $10 million to $30 million ones like you find in other countries," he says. "Rather we're looking at $4 million to $5 million deals."

The EPF has recently hired professionals with PE experience to manage this business. The organization will manage this asset class itself, although Dr. Roslan says the EPF is open to the idea of investing through external PE funds as well.

All deals must be domestic, however. While Bank Negara has announced it would let the EPF invest up to 10% of its assets abroad, the organization must still coordinate that with other regulators such as the Ministry of Finance.

Dr. Roslan says the organization is keen to find new avenues of investment. "We have to attempt making higher returns," he says. The EPF's returns have fallen over the past decade; whereas in the 1990s it regularly paid members an annual dividend of 8% to 8.5%, last year it returned only 4.25%, which beats inflation but lags equity market indices. Moreover it is growing quickly, at M$20 billion a year. Given its huge size, which dwarfs the local capital markets, the EPF needs to look beyond domestic equities and fixed income.

For a detailed look at the EPF and other leading Malaysian institutions, see the August/September issue of AsianInvestor magazine.