Khazanah: Commercial and Strategic Success?

Ashby Monk

Peter Stein of the WSJ interviewed Azman Mokhtar, who is the Managing Director of Malaysia’s $30 billion SWF, Khazanah Nasional Bhd.  It’s quite an interesting read, as Mokhtar talks candidly about the fund’s strategic and political motivation. According to Mokhtar:

“We like to think you can have the best of both worlds…Unabashedly, we go out and want to create jobs.”

And so the fund has been investing in sectors that are strategically important to Malaysia’s development:

“Health care, leisure and tourism, technology and sustainable development are among the areas Khazanah targets…It owns large swaths of the corporate sector through stakes in the country’s airline, its post office, its national car maker and other businesses.”

Indeed, only 20% of the fund’s assets are invested outside of Malaysia. And, it seems, this 20% is also invested in accordance with the country’s strategic needs. For example, the SWF recently invested close to $3 billion in a hostile takeover of Singapore’s Parkway Holdings, which is a healthcare provider that fits in with Malaysia’s ambition to become a hub for quality medical services in the region.

All this reminds me a great deal of Mubadala and its Chief Operating Officer, Waleed Al Mokarrab Al Muhairi. Indeed, I’ve talked quite a bit about Mubadala’s strategic ambitions and its role within Abu Dhabi’s 30 Year Vision. Also, this integration of commercial and strategic objectives goes to the heart of what the organizers of the recent Columbia event were targeting. As I noted last week:

“… one of the presenters specifically suggested that SWFs could be important in “transferring technology” to the developing world or “creating jobs”.

After all, the first foundation for the fund is “long-term nation building”; Khazanah is totally transparent about this strategic focus.

For SWFs in general, I’d be inclined to critique this strategy on the grounds that, over the long-term, any fund focused on development will likely pay a price for this in financial returns (since the fund’s investment decision-making is as equally focused on “jobs” as it is on “profits”). And, as a result, the SWF could end up losing some of its domestic legitimacy due to a perception of “wasted resources” through loss-making investments (even if the fund is nonetheless successful at creating jobs or bringing technologies from abroad). And, so, in general, I would push the sponsoring government to seperate the two functions and allow a variety of special purpose vehicles to focus on either commercial or strategic success (but not both). This would ensure that domestic expectations are effectively managed, and the fund can maintain its legitimacy long enough to finish what it started.

However, what’s most interesting about Khazanah is that this fund has, remarkably, done a very good job of combining commercial and strategic objectives. Indeed, the SWF apparently has a CAGR of 13%. That’s unreal. (Actually, is it real? It’s almost too high to believe.) Remarkable!

The real question, then, is how Kazanah manages to achieve this enviable return. It’s clearly a well-governed fund, but Peter Stein seems to suggest that it uses its domestic clout to, in effect, crowd out some of its competition:

“Khazanah’s state-backed heft can be controversial when it is wielded against private-sector players. When upstart budget carrier AirAsia Bhd. wanted to build a new airport to accommodate its burgeoning traffic and avoid high landing fees at Kuala Lumpur International Airport, it met opposition from Khazanah, the biggest investor in both Malaysia Airports Bhd., the company that runs KLIA, and Malaysia Airlines. The government brokered a compromise under which Malaysia Airports is building a new budget terminal for AirAsia’s use near KLIA, with AirAsia participating in the design.”

This case may leave you a bit circumspect, as one would have to question whether the the Malaysian fund is indeed a development catalyst if the fund’s high returns are at the expense of private sector growth.

Still, it’s hard to deny the fund’s impressive track-record. And this track record has been enough to convince the government that it needs another “development SWF”: 1Malaysia Development Fund Bhd (1MDB). This new fund has $3 billlion in initial capital and is forging partnerships with other funds around the world to bring investment to Malaysia, such as Mubadala.

In sum, Malaysia is clearly on the cutting edge of SWF design, forging international partnerships, facilitating development at home and investing strategically, all the while maintaining remarkable financial returns. I think somebody needs to do an in-depth case study of this fund so we can really get a sense for how this is achieved, as the “Khazanah model” could be a useful tool for the developing world. For example, Egypt is reportedly using Khazanah as a model for its new SWF. Any takers?

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This website is a project of Professor Gordon L. Clark and Dr. Ashby Monk of the School of Geography and the Environment at the University of Oxford. Their research on sovereign wealth funds is funded by the Leverhulme Trust and The Rotman International Centre for Pension Management.

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