In the News: 2004

Lombard upbeat on Malaysia

Asian Venture Capital Journal
27 September 2004

Lombard Investments manages a $253 million regional fund from Hong Kong and a $245 million Thailand country fund from Bangkok, where it has been a key investor in partnership with the Thai government and local banks. Although Lombard has yet to make any investments in Malaysia, the firm recently expanded its focus to include opportunities in that country. AVCJ spoke to two of Lombard's Hong Kong-based investment professionals about their evaluation of the Malaysian economy and Lombard's future investment plans.

Lombard's approach and Malaysia's strengths

"At Lombard, when we look at a country like Malaysia that we haven't focused on in the past five years for reasons going back to 1998, we don't start from a standpoint of evaluating what Malaysia is good at, we start from a standpoint of looking at what we are good at and where can we add value,' says Bill Kerins, Managing Director at Lombard. "For example, we look at whether the economy is ready to really expand in the consumer goods and services sectors, which are two of our strengths, and we think Malaysia is ready to expand."

Geoffrey Lim, Vice President at Lombard and Malaysian by upbringing, welcomes the mood in Malaysia. "I've made many assessment trips to Malaysia this year, and I am constantly hearing from Malaysians how optimistic they are about their economy and politics," he remarks. "Malaysians and international investors seem pretty confident about the next two to three years."

This optimism and Malaysia's level of development favor Lombard's preference for services-sector investments, especially in financial services and consumer-related businesses: "middle-class domestic economy-focused sectors," in Kerins' words. "On an income per capita basis, Malaysia ranks significantly higher than Thailand, where we are doing very well. Malaysia's got a significant middle class," he adds.

Lombard's investment team also likes the stability that comes from Malaysia's other prime sectors, even if they may choose not to invest in them. These include natural resources, primary industries, and technology. "We like the stability and the economic diversification," Kerins says. "The fact that Malaysia is resource rich is interesting more as a backdrop to the steady economic growth that Malaysia is experiencing in other key sectors." "Compared to trading entrepôts, Malaysia has a lot more depth," adds Lim, who also pays tribute to another of the country's resources, its highly skilled and motivated workforce. "A lot of the human capital has been built up over decades in key industries. And we find that very attractive."

Both point out, however, that this interest and appreciation are in part due to the government's recent pro-investment initiatives, and a continuing momentum for reform. "If you worry about extremely low liquidity in the Asian public equity markets, you must be concerned about countries like Indonesia and the Philippines," Kerins points out. "Malaysia's just above these countries in terms of public market
liquidity. It's not desperately low but it's still low. But we think there's a good chance that the changes under Badawi could lead to more liquidity and a more active economy in about three to five years."

The China challenge and the future for ASEAN

Kerins and Lim are not overly concerned about any competitive threat from China. "If you go back to the late 80s and early 90s when everybody was talking ASEAN, ASEAN, ASEAN, people were scared to death of putting money into China," Kerins explains. "Since the Crisis, the ASEAN story was replaced by the China and India story. We're true believers in the China and India story, but what I think has gone unnoticed is the re-emergence of ASEAN as a competitive place to do business and an attractive place for financial investors to invest."

Comparisons between the two favor ASEAN, Kerins feels, though China is still a crucial factor in the equation: "Looking at Southeast Asia, we see a more stable growth base with fewer macro problems surrounding that growth. And relatively speaking, we see some trends emerging that will keep that growth going for some time. A few years ago, ASEAN looked at China as purely a competitor. Now China is a competitor but also a major market. The China consumption story is now getting huge and is driving growth throughout the whole region."

"It's all about climbing up the value chain," agrees Lim. "Raw materials still comprise a large portion of ASEAN exports to China, but not nearly as significant as ten years ago. Instead there's a larger portion of higher value products, although these products are still mostly intermediate products. There's certainly room to move up the value chain as far as ASEAN exports are concerned, and we think ASEAN businesses are trying hard to move in that direction."

And with the right management in place, and the right competitive advantages pursued, Kerins concludes, the deals to be had are extremely attractive: "If you look at Drypers, which was done by Navis a few years ago, that I think was a very intelligent private equity deal. It's not often that you come across gems like that, but I think that in Thailand, Malaysia and so on, there are some companies with brand names that are going across borders, and they're going to use expansion capital very carefully, and we are very interested in that."