EXCERPTS of an interview with Khazanah Nasional Bhd managing director Tan Sri Azman Mokhtar.
Q: Khazanah has spent RM74.7 billion across 144 investments from 2004 until last year, and also made 77 divestments worth RM48.1 billion, which resulted in gains of RM22.3 billion. What are your plans moving forward; will it involve an expansion of the current business portfolio or are there any new industries that the company is looking at? What is Khazanah’s direction for the future?
A: This is the 12th year of the Khazanah revamp, which started in 2004. What has been achieved is well recorded. Every year, in January, we announce our performance in some detail at our Khazanah Annual Review.
This has been happening for the last 12 years, and at the last review in January this year, we announced that the Khazanah portfolio had more or less trebled in the 11-plus years since the revamp started in June 2004 — our portfolio grew from RM50.9 billion to RM150.2 billion, and on a net worth adjusted basis (that is, total assets less total liabilities), from RM33.3 billion to RM109 billion, as at end 2015. Alhamdulillah, that’s a rate of growth of 10.7 per cent per annum compounded over that period, which stacks up well against various peer comparisons.
A total of RM23.5 billion of cumulative profit before tax was achieved during the period between 2004 and last year — a 4.7-fold increase compared with the RM5 billion in profit before tax achieved for Khazanah’s first 10 years ending 2003. This translated to a 13.8 times increase in cumulative taxes and dividends paid of RM9.9 billion for the period between 2004 and last year, compared with the RM781 million for the first 10 years ending 2003. As per Khazanah’s financing model, this was achieved essentially without net additional funds being injected, and hence, there has been a clear financial value-add over the period.
The increase in our portfolio has really been through the organic growth of existing investments and the growth in the value of our investments. We’ve achieved this with a risk profile that is manageable, and this is important because you can grow, but sometimes, you are unable to sustain it because you do it in a very risky way.
One major measure for us is asset cover, which is how much assets we have, relative to our liabilities. This is an important risk management ratio, and demonstrates that we have been able to treble our portfolio value while maintaining our asset cover at more than three times.
Khazanah’s mandate goes beyond just financial targets, and in that regard, there has also been significant progress made in developmental outcomes.
Some notable examples include the establishment of new industry clusters, such as the creative industries, life sciences, leisure and tourism, and education services; establishment of new economic zones, such as Iskandar Malaysia; job creation; building a regional and global footprint; restructuring of key national companies; supporting and driving major national reform programmes and policy formulation where appropriate; as well as undertaking, through our core companies, major national infrastructure projects.
In 2004, we were tasked with looking at not just Khazanah companies, but a broader set of GLCs (government-linked companies). We came out with the 10-year GLC Transformation Programme, which officially started in July 2005, and in August last year, we successfully graduated the companies under the programme. A lot of effort was put into the 10 years in terms of strengthening governance, value creation and internationalisation, among other things.
Most of the companies emerged from the 2008 crisis in relatively good shape and have since participated in helping with private investment.
They have been catalysts for national development in many respects.
For example, we’ve supported domestic stimulus efforts, especially since 2009, when Datuk Seri Najib Razak became prime minister. One of the first things he did in response to the 2008 crisis was to drive a domestic stimulus package.
Private investment was a bit slow at that time due to global conditions, so GLCs stepped up to the plate. There was a whole series of initiatives around leisure and tourism, creative industries, Iskandar Malaysia, and national projects like klia2 and the Penang Second Bridge, among others.
We have also made significant societal contributions, principally through our work in CSR (corporate social responsibility), Yayasan Khazanah scholarships and through a RM3 billion endowment fund in Yayasan Hasanah that focuses on five key areas — education, community development, environment, arts and heritage, and knowledge development.
More than RM575 million has been spent benefiting many recipients since 2006, with the largest allocation of more than 50 per cent going to the education sector, including scholarships under Yayasan Khazanah. Under the knowledge development sector, a major contribution is the Khazanah Research Institute, which was set up in 2014.
Going forward, the board of Khazanah has seen it fit to renew my contract for a fifth term, which is quite daunting in some ways because you really don’t want to overstay, nor do you want to “understay”.
This fifth term will actually take me to June 2019, Insyaallah, which, at that point, has two significant milestones — firstly, 2019 will be the 25th year of Khazanah, and secondly, the period from the beginning of the Khazanah revamp in 2004 to June 2019, which is just on the eve of 2020, may be seen historically as the period bridging the Asian financial crisis and 2020.
It is a period that has seen quite a bit of change and some turbulence domestically and internationally, in markets and economies, and in the emergence of “new normals”.
While we believe much has been achieved, there are still gaps, and the pace and demands of change and competition from globalisation and liberalisation, technology disruption and greater stakeholder expectations are relentless and increasing. In many ways, the progress over the years has prepared us for this, and I believe we are immersing ourselves in this period of great challenge — and opportunity — from a position of some strength, Alhamdulillah.
Building on this track record of good governance and solid performance overall, a key area of focus not often seen from the outside, but is absolutely critical from a sustainability standpoint, is to build a strong and benign institution.
This means strengthening our governance and stewardship practices, our talent pool, our networks and relationships, and ultimately, our corporate culture, to always be in service to and worthy of the trust of the nation. Still quite a bit to do.
Q: How is the company’s business overseas?
A: Regionalisation and internationalisation is an important aspect of what we do. When we started in 2004, Khazanah was very much domestic-based. More importantly, on our doorstep were Indonesia, Asean, China and India, which offered plenty of opportunities. So, we went out in a measured way, starting nearby with Indonesia in 2004/2005.
We then went into China and India, and as we got a bit more comfortable, we started to look at the Middle East, with which Malaysia, as an OIC (Organisation of Islamic Cooperation) country, shares some cultural and common heritage.
We chose Saudi Arabia, which is the largest economy in the Gulf region, and that’s done quite well. We also chose Turkey, which is technically in the broader Middle East, and that has done very well.
You can see there’s a certain sequence — first, nearby areas, such as Indonesia, in areas such as banking, telecommunications and infrastructure. We then moved further outwards, and in the last few years, we went into San Francisco because of Silicon Valley. Our reasoning is that San Francisco and technology is exposure that we need.
It’s an international game, and while our companies have done well, they themselves could potentially be disrupted by technology.
This disruption is already happening in the sectors where our companies operate in, such as telecommunications, financial services and healthcare.
Our point of view is that, not only do our existing companies need to upgrade, but we are also looking at companies that we think are potentially disruptive.
We opened our London subsidiary late last year, and with that, we have completed our global network, which includes Beijing, Mumbai, Istanbul and San Francisco. With this network, we’ve covered the areas we want to cover. The focus of London and San Francisco is more on the technology and innovation side. In developing our network, we also look to bring investments into Malaysia.
When we started the revamp in 2004, the portion of our portfolio attributable to foreign operations was fairly small at under 10 per cent (by what we call “see-through” value, and even smaller at a very nominal one per cent for foreign incorporated investments).
As the portfolio has trebled, the foreign component is now at 45 per cent and 19 per cent respectively, in terms of see-through and foreign incorporated value. While over the last 11-plus years, the portfolio overall has grown at a compounded rate of 10.7 per cent per annum, foreign investments have actually significantly outperformed at a compounded rate of growth of 18.3 per cent.
This reflects the profitable and financially valuable nature of foreign investments to date.
Furthermore, foreign investments have other major and positive strategic and portfolio attributes, including diversification benefits, reducing any potential crowding-out domestically, and building regional and global presence, partnerships and networks, which, in turn, have helped in major foreign direct investment into Malaysia, especially in Iskandar Malaysia and certain key sectors. We should also highlight that at the same time, we have been active domestically, supporting both existing core companies as well as developing newer growth sectors.
Q: Lately, we have seen Khazanah intensifying its focus on high-potential IT companies. Will this continue to be the focus in the near future? How far do you see Khazanah being able to repeat the success that it achieved with the investment in Alibaba?
A: The journey thus far has seen value creation through the work on GLC transformation, expanding into new high-growth geographies, principally in Asia, through corporate restructuring, mergers and acquisitions (M&A), and divestment — in other words, through both organic growth and restructuring, as well as M&A. We recognised around five years ago that the next phase of growth will also need to address the issues of technology, innovation and disruption. It is a powerful megatrend that is both a challenge and a great opportunity.
Our move to San Francisco in 2013, and investments in technology and biotechnology companies in various places, including China, were with this in mind, along with our work domestically through various innovation and science and technology platforms, especially. One of our first major investments in technology internationally was actually Alibaba in China, which we got into relatively early. We put in about US$250 million and made, on top of that, about US$1 billion. Out of this, Alhamdulillah, we’ve realised about three quarters of that gain, and some of it, we’ve invested globally in technology companies, as you have seen.
Q: Most of the technology/Internet-based companies that Khazanah has invested in are from abroad. Do you have any plans to invest in local companies and entrepreneurs?
A: We have to get plugged in internationally, especially in a fast-moving, globally competitive sector such as technology. At the same time, we actively search for and invest in good local technology companies. For technology investing, we have several investment styles, for example, through funds for early-stage companies and directly for later-stage companies, more often than not, in non-control positions in order to back entrepreneurs. We recently invested in Aemulus, a listed company based in Penang that is exporting high-technology automated test equipment in the semiconductor industry. Apart from Aemulus, we have been investing in Malaysian technology companies through local funds due to the companies’ smaller size. In addition, Celcom, for example, has a programme where they support entrepreneurs developing applications, while Axiata has a venture fund for Bumiputera entrepreneurs. Khazanah also has several direct and indirect venture funds into technology and biotechnology.
Furthermore, in several other technology-related sectors, for example, the creative industries, the setting up of Pinewood Iskandar Malaysia Studios has also catalysed other investments and technology transfers, including through world-class and cutting-edge entities, such as Imagica from Japan, Imaginarium from the United Kingdom and University of Southern California’s School of Cinematic Arts, in tie-ups with local entities.
We’re also trying to groom more entrepreneurs. From the 1998 crisis to 2004, we focused on stabilising our companies. Following that, we sold non-core assets, and hopefully, this would have created entrepreneurs. We actively seek the right balance, which is important for the country because in certain things, institutions can take the lead, but in other things, entrepreneurs should take the lead and we can back them.
TIME dotCom is an example that is often cited. As a result of holding the asset after the Asian financial crisis — we already had Telekom Malaysia (TM) — we decided to let go of TIME dotCom through a restricted bidding process. We scanned the market and invited four or five Bumiputera and local entrepreneurs. The winning bid came from a relatively unknown young team in their early 30s, with a fairly impressive business already worth maybe RM30 million to RM40 million in data centres, selling to the likes of Google. We thought this was quite impressive, and they won the bid fair and square.
However, they were taking over an asset 10 times larger than their own. We told them not to go to the bank because we remembered past lessons; we didn’t want to ruin them with high personal debt levels if they don’t succeed. Instead, we structured a three-year earn-out mechanism, which allows the entrepreneur’s shareholding in Pulau Kapas Ventures, Khazanah’s holding company for TIME dotCom, to increase from 38.8 per cent to 70 per cent if financial targets are achieved. Within three years, the entrepreneur had successfully taken control, and we’re very proud of this. It shows that the earn-out model, when carefully put together, can be a big catalyst for change. Before this, there were also divestment cases that were done on a careful arm’s length basis, for example, Crest Petroleum (from the then UEM-Renong Group), which has grown to be a significant part of Sapura Kencana. Another example would be the sale of TIME Engineering Bhd, which is now known as Dagang Nexchange Bhd.
We’re in the market to find more and more of these situations, but Khazanah also plays an important role as the custodian of national and strategic assets, hence, it obviously has to be done with great care and, perhaps, some skill. For example, in several strategic sectors, such as highways or airlines, which are important national assets, we can’t simply give them away without due cause. There were private parties who came forward, saying, “We can do this and that”... We listened, but also said, you have to show proof. We have to look at potential parties being both fit and proper.
Q: This begs the question — the role of the state — how involved should the government be in business, and at what level should it step back and let businesses prosper? Another question is whether GLCs should be crowding out others.
A: We spend a lot of time and analysis thinking this through, that is, the risk of crowding out and its opposite or antidote, crowding in, which is another name for catalysing. Under what circumstances should Khazanah or GLCs get involved and when do we sit out or divest out? Proper analysis and execution will determine whether it’s crowding out (which is negative), or crowding in or catalysing economic development, which is positive. The objective criteria rest on two tests: whether such an investment or undertaking is considered core, and even if it’s core, whether the GLC is indeed properly competitive.
This has several further implications. First of all, what is core? For us, it is clearly by virtue of several key attributes, including being strategic, of public interest, public good or natural monopoly status. This would include the North-South Expressway, the electricity utility and network, the high-speed broadband and fixed-line telecommunications network, and airports. There is also the chicken-and-egg situation, where the private sector is either not willing or able to start the initial set of investments into newer sectors, either because of high risk, high capital outlay, complicated coordination problems, or all of the above. Iskandar Malaysia and the aftermath of the 2008/2009 global financial crisis, when private investment stalled, are good examples of Khazanah and GLCs taking up the initiative in catalysing economic growth to significant positive effect.
This is the reason for Khazanah’s involvement in Iskandar Malaysia, where we invested in, among others, EduCity, theme parks, hospitals, wellness centres and movie studios. It takes a lot of capital, organisation and patience, as well as endurance, especially where the private sector was not willing or, perhaps, not able to do all this on its own. Our efforts in Iskandar Malaysia helped create the initial impetus of economic traffic, jobs, technology and skills formation, and foreign partnership, which, in turn, would attract the private sector to come in and participate. We have some listed companies there, for example, UEM Sunrise, but they’re only one player among many property players. We think that’s not crowding out; that’s a form of crowding in.
Another related effort is to divest what we call non-core or non-competitive assets. As an example, why should GLCs own a travel agency — unless you’re Tabung Haji, as that would be their core. Also, why should we own a second telco like TIME dotCom since we already have TM? Many GLCs have actively divested non-core assets such as these during the GLC Transformation Programme.
We should also highlight that some of these assets were, unfortunately, companies that were not able to sustain themselves under private-sector ownership. Ironically, they had to be revived under careful government-linked-investment-company-led restructuring. These companies include Celcom, Renong and MRCB (Malaysian Resources Corporation Bhd), which were successfully revived, as well as the likes of Proton and MAS, which are still struggling.
This suggests that there is no direct correlation between ownership and performance as such, and the issues are more complex than just ownership. In our experience, what is more important is to be clear that it is performance that matters more, not ownership per se.
For the economy at large, what is healthy is a good balance between and co-existence of both institution-led companies as well as entrepreneur-led companies, anchored on strong performance, with good governance being the key.
Q: Are you planning to let go of any of your assets?
A: As mentioned, over the years we have divested quite a lot, like TIME dotCom, Pos Malaysia, Proton. So, this is ongoing based on our framework of exiting non-core and non-competitive assets, as we have mentioned.
Q: How many of these are your non-core assets? What about Bank Muamalat?
A: By now, not that many. If you look at the figures on divestments since 2004, a portion of the RM48 billion in proceeds has been from the divestment of non-core assets. Today, many of our businesses are core. Some of the businesses that we groom will, at some point, eventually become non-core. For example, we have been building leisure and tourism assets, some of which, in principle, we can divest at a certain stage, or restructure and create REITs (real estate investment trusts). Our hospitals are another instance where we can and have tranched the property asset as REIT. Other people might want to invest because it is a stable investment, and we can recover some of the capital and put that in new areas. So, there are many ways of divesting or partially divesting.
Bank Muamalat is considered non-core because we already have CIMB as our flagship financial institution. Secondly, we are not the major shareholder. We own only 30 per cent. We track what the major shareholder wants to do, and if it aligns with our plans and notion of value, we have no problem in selling.
Q: Apart from IT companies, do you have any new investments in the pipeline?
A: We are constantly on the look-out. Khazanah’s criteria are always twofold — we have to, first and foremost, discharge the commercial mandate, so whatever investment we make must generate some returns, and secondly, the investment must have a strategic developmental element.
In the act of investing, one area that is rightly topical and which we are constantly on the lookout for is what is sometimes referred to as “impact investments”, which means they are not only financially attractive, but also have a high social development and inclusion quotient.
For example, we found this company in the Philippines called 8990 Holdings that builds affordable housing, and interestingly, 92 per cent of their clients have no bank accounts. They’re growing at 40 per cent, ROE (return on equity) is also 40 per cent, and yet, they can service a segment that banks don’t think is bankable. We invested in a 10 per cent stake, and now, the share price has gone up 40 per cent. We’re also studying the model to see if we can apply it here, as well as in places such as Indonesia and India, where we have a presence.
Tomorrow: Part II
In the second and final part of our exclusive interview, Azman delves into the Bumiputera empowerment agenda and strengthening of institutions within Khazanah, as well as the kind of legacy he wishes to leave behind