Malaysia’s asset owners see the potential for investing more in alternative asset classes such as private equity, private debt, real estate, and infrastructure but the path to higher allocations is paved with regulatory and operational challenges.
Regulatory hurdles, market constraints and the lack of competent specialists to manage alternative investments were among the key issues highlighted by institutional investors at AsianInvestor’s Malaysia Global Investment Forum held in Kuala Lumpur last month.
“We think of the risk [of investing in alternative assets] as relative to risk [capital] charges as opposed to risk per se,” Esther Wong, chief investment officer for Prudential Malaysia, told delegates during a panel discussion.
Risk capital charges refer to the different amounts of capital insurers need to hold against investments according to their perceived riskiness.
Private equity, she noted for instance, requires a higher risk-adjusted return to cross the investment hurdle rate as opposed to infrastructure, mainly because risk capital charges on private equity are relatively higher, making it relatively less appealing for insurers, she said.
Private equity attracts a 35% risk capital charge as opposed to 20% for a public stock listed on the Bursa Malaysia, which attracts a 20% capital charge, according to Malaysian regulations.
AsianInvestor has previously reported that under the Solvency II regime in Europe, private equity allocations have also taken a hit in UK and Europe.
Ong has previously also told AsianInvestor that alternative assets are difficult to value, since they are typically more illiquid than traditional investments, which poses further challenges.
In addition, she prefers investing in alt assets inside Malaysia because the firm's liabilities are ringgit-denominated and hedging foreign investments can cost money and eat away at yields, reducing the appeal of such investments.
Within the alternatives space, Ong said she prefers infrastructure because it offers stable income and yield that is often better than what is seen in traditional bond markets.
In the near term, however, the newly installed government of Mahathir Mohamed has said it will review some of the infrastructure projects advanced by the previous Najib Razak administration.
The possibility exists that some of these projects could be scrapped or renegotiated, according to media reports. That could keep asset owner appetite for such investments in check -- at least for the time being.
Ong, nevertheless, retains a positive long-term outlook on infrastructure and renewable energy, in particular solar and wind power. “While they [renewable energy sectors] have long gestation periods, they are also environmentally friendly, so it’s a win on the environmental, social and governance principles as well,” she said.
And while real estate has traditionally been the go-to asset in the alternatives space for most institutional investors, the asset class's prospects in Malaysia are not very promising.
Prudential has directly owned properties but the yields available, in particular from commercial property, have not been very good due to a supply glut.
A Knight Frank sentiment outlook report on Malaysian real estate released in February this year noted that pessimism prevails over the office and retail sub-sectors, with more than 50% of respondents expecting a rise in vacancy rates.
About 49% of respondents also expected yields to remain stagnant across all property sub-sectors.
“Given the depreciation and capital charges, it is not an easy class to invest into,” Ong said.
The risk charge on self-owned property is 8%.
Shahril Ridza Ridzuan, chief executive officer of Malaysia’s Employees Provident Fund, emphasised the importance of having a competent team to manage alts investing.
“It requires a lot more manpower to invest in private assets than in public equity or bonds, especially given that the information flow [in private markets] is very limited," he said on the same panel. "You have to build a very strong team – that is one of the key lessons we have learnt [from alts investing],”
A strong corporate structure, along with a strong finance team able to handle the tax issues that arise when institutions invest in foreign markets are key to building alts-investing expertise, he said.
For those that don’t have the requisite skills to invest in alts, investing via funds is an option, added Prudential’s Ong.