Malaysia’s Khazanah Is Spreading Its Reach Abroad

The $45 billion sovereign wealth fund, headed by Azman Mokhtar, is stepping up its portfolio investments in Asia and beyond, and helping Malaysia’s major companies go international.


Being an Asian sovereign wealth fund with cash to spare has its benefits. Just ask Azman bin-Haji Mokhtar.

A little more than two years ago, Azman, head of Malaysia’s Khazanah Nasional, heard from the fund’s analysts in China that e-commerce giant Alibaba Group Holding was looking for cornerstone investors to put the company on the path to an initial public offering. He didn’t hesitate: Khazanah invested a total of $400 million in two fundraising exercises, for a stake of 0.6 percent in the Chinese company. It participated alongside Temasek Holdings, the sovereign wealth fund of neighboring Singapore. When Alibaba went public with its record $25 billion IPO last September, the Malaysian sovereign wealth fund saw the value of its stake increase more than fivefold. It has since sold some of its shares, pocketing a profit of more than $1 billion, and continues to hold an undisclosed stake in the Chinese company.

“It was a fantastic investment, and it was the result of the very good relationship our team in Beijing had built up with Alibaba,” Azman tells Institutional Investor in an interview at Khazanah’s offices on the 33rd floor of Tower Two of Kuala Lumpur’s landmark Petronas Twin Towers.

Azman is looking to cultivate more such relationships across Asia and diversify Khazanah’s $45 billion portfolio. The fund’s assets, which were almost exclusively domestic when Azman took over as managing director in 2004, now have a heavy regional accent. Roughly 40 percent are international, mostly in other Asian countries. Singapore has the biggest share at 9.6 percent, followed by Indonesia at 6.9 percent and China at 5.3 percent.

“We have been quite orderly in our investments outside of Malaysia,” says Azman, 53, who previously worked as an investment banker and analyst, including a stint as head of research for UBS in Malaysia from 1994 to 1998, when he led his team to place third in II’s All-Asia Research Team. Proximity to headquarters is crucial because Khazanah’s chief insists that his staff play an active role in monitoring any investments that they make. “It took us quite some time to go from 1 to 40 percent,” he recalls. “I tell my staff, ‘Can you go there and come back for dinner?’”


Azman’s strategy is to buy into companies that, like Alibaba, cater to Asia’s growing middle class; the fund typically invests shortly before an IPO. In Indonesia, for instance, Khazanah’s investments include a minority stake in Blue Bird, the leading publicly listed taxi and limousine services provider. In the Philippines the fund holds minority stakes in BDO Unibank, the country’s largest retail bank, and in low-cost housing builder 8990 Holdings.

Khazanah was founded in 1994 by former prime minister Mahathir Mohamad as a holding company for the state’s controlling interests in major Malaysian companies, with the aim of promoting economic development in sectors such as telecommunications, technology, infrastructure and energy.

When the Asian financial crisis of 1997–’98 sent the Malaysian economy reeling, Mahathir used Khazanah to restructure troubled companies in its portfolio and take over other heavily indebted companies that were deemed to pose systemic risks. Chief among those was Renong, a privately held infrastructure builder that owed banks — both state-owned Malaysian institutions and foreign lenders — more than 26 billion ringgit (then worth about $6.5 billion). Khazanah restructured Renong and later folded it into UEM Group, which today is a profitable state-controlled infrastructure builder. But even after Renong, Khazanah acted mostly as a custodian of its holdings rather than an active manager.

Azman brought a firmer hand to the tiller when he took over Khazanah in 2004. He first focused on two of the firm’s largest holdings, Telekom Malaysia and power distributor Tenaga Nasional, which were struggling to recover from the financial crisis. Azman shook up senior management of both groups, appointed new CEOs and set performance targets. Tenaga has thrived, boosting net income to RM6.45 billion ($2 billion) in the financial year ended August 2014 from less than RM1 billion three years earlier.

Azman appointed Abdul Wahid Omar to overhaul Telekom Malaysia. The new CEO cut costs at the telecommunications outfit, segregated the company’s mobile and fixed-line businesses into separate units and expanded abroad by buying mobile operators in India, Indonesia and Singapore.

Abdul Wahid later moved to Malayan Banking, the country’s largest lender, as CEO; today he serves as the government’s minister for economic planning.

Telekom Malaysia’s profits dropped by 24 percent last year, to RM831 million, but the company managed to post revenue growth of 5.7 percent, with Internet and data sales rising 11.9 percent and 3.7 percent, respectively. “Growing Internet and data revenues continued to offset a 4.1 percent fall in revenue from fixed-line voice,” says Nidhi Dhruv, a Singapore-based analyst at Moody’s Investors Service, which gives the company an A3 debt rating, with a positive outlook.

“We took up and lived the mantra of execution: ‘Execute or be executed,’” Azman says. “We changed CEOs — not too often, but often enough and at the right times.”

The reform and restructuring have paid off. At the end of 2014, the tenth year of Azman’s stewardship, Khazanah’s portfolio stood at RM110.8 billion, up 9 percent from a year earlier and 3.3 times its value a decade before.

Yet Azman faces one of his toughest restructuring challenges. In August the government announced it would nationalize Malaysian Airline System by having Khazanah buy the 30 percent it didn’t own. The airline had been unprofitable for three years and faced severe financial pressure following two disasters: the disappearance of Malaysia Airlines Flight 370, which vanished in March 2014 with 239 passengers and crew on a flight from Kuala Lumpur to Beijing, and the shooting down of a Malaysia Airlines plane over Ukraine last July, claiming 298 lives.

Azman acknowledges that Khazanah has had little success in its efforts to reenergize the national flag carrier. Three years ago the fund took a minority stake in private discount carrier AirAsia, which maintains a strong reputation despite suffering the first fatal accident in its 18-year history in December. Azman then initiated a share swap between the two airlines with the aim of forming a strategic alliance that would build upon each other’s strengths, but objections by Malaysian antitrust regulators and airline unions caused the deal to fall apart. “I took a risk in pushing for this,” Azman says. “It was rejected in a way, but it’s okay. You have to keep on pushing.”

One thing Azman says he will never give up on is looking for new investment and business opportunities in strategic sectors that hold the most growth potential. Currently, about 24 percent of the fund’s assets are invested in media and communications, 17.4 percent in energy and power, 14.5 percent in financial institutions, 13.3 percent in health care, 10.5 percent in real estate and 3.9 percent in infrastructure.

To broaden the fund’s search for new investments, Azman has established regional offices in Beijing, Mumbai, Istanbul and San Francisco, cities in regions where he sees the greatest growth opportunities. But expansion doesn’t necessarily mean more Alibaba-style investments. Khazanah is encouraging the 70 companies it controls to expand regionally and globally.

“We are pushing the companies to go out there,” Azman says. “If you talk about the Southeast Asian region, you will find many Malaysian companies. Though we are not a big country, you will find that we are full of fairly diverse and ambitious companies. They are scaling the world, and that’s a good thing.” •

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Follow Allen Cheng on Twitter at @acheng87.