MalaysiaÆs EPF to move into private equity

Private equity and property added to pension fundÆs portfolio as it contemplates setting up a private equity division of its own.
MalaysiaÆs Employees Provident Fund is to ramp up its investment in both international property and private equity in an attempt to boost returns from its rapidly growing asset pool.

According to the fundÆs deputy chief executive of investments, Roslan Ghaffar, the Rm260 billion ($70 billion) EPF is to expand the scope of its investments in the coming 12 months, adding private equity, property and international equity exposure to its existing asset allocation.

ôWe currently have about 80% of funds invested in domestic fixed income with the rest in domestic equities,ö Ghaffar says. ôBut at the tail end of last year we started looking at new areas, and I expect that to continue into this year.ö

The mammoth EPF asset size is currently growing at about 7% per annum, and already comprises about 20% of the Kuala Lumpur Stock Exchange market capitalization, meaning further investment opportunities in the local market are limited.

As a result the fund has started looking at domestic private equity as a source of new investment opportunities, Ghaffar says, and about Rm98 million of its Rm250 million budget has already been invested.

ôWe'll be looking at more unlisted companies in Malaysia,ö he comments. ôBut by their very nature theyÆre not very liquid investments, so any decision will be taken on its particular merits.ö

Ghaffar says the EPF is currently talking to a number of international private equity groups about potential investments. It is also in the process of recruiting in order to set up its own fully-fledged private equity division, he says.

The institution has recently made $30-40 million investments in both a global PE fund run by US-based Ripplewood Investments and the AIG Asian Infrastructure Fund. The EPF originally gave these organizations tentative mandates in the late 1990s, but had to pause them when the government imposed capital controls in 1998. The EPF wants to expand this programme to other PE managers overseas.

The EPF is in the process of expanding overseas on the back of the recent relaxation of capital controls by Bank Negara, MalaysiaÆs central bank. It has mandated Aberdeen Asset Management in Singapore to run $100 million in Asian equities, and expects to fund this mandate in the next month or so. The EPF recently formalized a global custody relationship with Bank of New York.

This mandate coincided with the governmentÆs drive to attract foreign money managers into the domestic institutional market. But it has blocked foreigners from directly competing in the retail space, so Aberdeen has been the only foreigner to get a local institutional license.

Ghaffar notes that the EPF would like to work with global fund managers on the basis of meeting EPFÆs needs, but notes that the political reality is that the EPF must cooperate with the Securities Commission and other regulators. So it is unclear whether the EPF will be in a position to provide offshore mandates to other players at this time.

The organization is, however, looking now to experiment with hedge funds and structured products overseas. ôOf course we donÆt mind talking to the hedge fund guys. ItÆs all about return û we have a spectrum of risk and weÆre happy to invest within that,ö Ghaffar notes.

In the longer term, Ghaffar adds that the EPF could consider expanding into overseas property and corporate finance. But it will take the EPF some time to research hedge funds and structured products, and these would require additional asset allocations and approvals from the board of directors
Each year the EPF pays contributors a share of what it makes in investment income in the form of a dividend, of which 2.5% is guaranteed. In 2004 it returned 4.75%, and while no announcement has yet been made for last year, Ghaffar says he expects it should be ôas good as if not slightly betterö.
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