*

Saturday, October 25, 2008

> Just what is ValueCap?

By ANITA GABRIEL

WHAT a difference five years can make - or not.

Back in early 2003, the US economy was on the brink of a double dip in economic growth. Mounting tension between US and Iraq and the protracted military standoff between both nations were threatening to derail world economies. To cushion the impact on Malaysia and to cap the downside of the ailing stock market, the Government unveiled a string of pump priming measures. One of them enveloped the creation of fund management company ValueCap Sdn Bhd. With its originally-intended kitty of RM10bil (instead, it started out with RM5bil capital), it was hoped that the fund would add some robustness to an otherwise languishing market. The key barometer was then hovering around 635 points.

Early this week, again, against the backdrop of an even more jittery equity market and unprecedented financial crisis, Deputy Prime Minister Datuk Seri Najib Razak announced that Valuecap will get an injection of an additional RM5bil. Its mandate - to buy undervalued stocks, of which there are aplenty in a market that has year-to-date lost a stomach-churning 40% or RM430bil in value. The CI ended the week at 859.11 points having lost 5% in value over the week.

This was part of a wider package of economic stabilising measures, the details of which will be revealed not too long from now on Nov 4.

Shrouded in secrecy

Valuecap is jointly owned by Khazanah Nasional Bhd, Permodalan Nasional Bhd and Pensions Trust Fund Council (KWAP). Its key mandate - to undertake investments in equities listed on Bursa Malaysia.

Except for the launch of a wholly-owned fund management company i-VCAP earlier this year aimed to boost the market for exchange traded funds, the fund has resolutely and unwaveringly kept a low-key posture. Its key management led by chief executive officer Sharifatu Laila Syed Ali has also visibly stayed away from the spotlight.

Very little is known of the stocks in its portfolio universe unless one is diligent enough to pore through stacks of annual reports to detect its name in the list of substantial shareholders. Understandably then, that the call for greater transparency in ValueCap and its utilitisation of the funds was renewed and in fact became much more audible this week when it was announced that it would get an additional RM5bil fund to scoop up undervalued stocks. This more so as it is owned by two state-run funds that are relatively transparent in their respective investments.

The cry has become even more vociferous as it was announced that the additional funds of RM5 bil will come from the Employees Provident Fund which currently has over RM320 bil in its coffers.

Truth is, this is not the first time the EPF will play a role in ValueCap.

EPF’s role then and now

When the idea of Valuecap was first mooted by the Government in 2002, all key pools of capital in the system were considered. Obviously by virtue of its large pot of money, EPF was one of them and hence, it was initially perceived that it would play an equity role in the fund management company. As it turned out however, it opted to stay out and some say that decision was largely premised on the fact that ValueCap did not have a track record and as such, it was then deemed a risky venture.

In fact, when certain newspaper reports had speculated in late 2002 that EPF will be part of Valuecap, the fund had shot out a terse reply denying that it had appointed ValueCap to manage its investment fund and that it was involved in the KLSE to shore up the stock market. The EPF, in the statement, ensured that the investments were safe, not exposed to high risks and gave reasonable returns to its members for their retirement.

Instead, it is believed that the EPF provided a RM3bil loan to Khazanah and PNB, which by nature of them being state investment agencies, carried a government guarantee. KWAP had managed to tap its own fund for that purpose. These funds totalling some RM5bil was used to subscribe to a bond issued by ValueCap.

“It was clear then that the fund with a readily available or deployable liquidity was in fact the EPF. Khazanah at that point didn’t have the structure that it now has in place and similarly, PNB was constrained as it had beneficial owners in its unit trust holders. As such, both Khazanah and PNB didn’t have the same access to capital as EPF,” says an industry source.

“But EPF was not willing to take the risk by forking out capital into ValueCap then and so, it instead provided a loan to the two investment agencies,” adds the source. It is not altogether clear but it is believed that the loan has since been repaid.

Devil in the details

A close examination of the ValueCap’s balance sheet obtained from a Companies Commission of Malaysia (CCM) file search reveals that it has non-current liabilities of RM5.1bil, which probably represents the debt owing to the three parties. The funds were used to invest in securities.

Valuecap, incorporated in October 2002, has a paid up capital of RM50mil.

For the year ended 2007, the company made a net profit of RM1.102bil against a revenue of RM1.325bil. It has retained earnings of some RM2.408bil and had paid out dividends of RM50mil over that period.

The Fund’s size has blossomed from RM5.1bil to RM7.7bil as at end 2007.

Over the week, Second Finance Minister Tan Sri Nor Mohamed Yakcop had said that the EPF will make a profit from the loan it will provide to ValueCap.

Industry sources however say the nitty gritty has yet to be sorted out in that it is not finalised whether EPF will provide a loan or equity to ValueCap. “A few permutations are being considered. The details will all be announced soon,” says the source.

Just what is ValueCap?

Valuecap is generally regarded as a fund management company. It is debatable if that label is indeed accurate.

A fund management company invests the pooled funds of its clients but the capital and what it earns from the investments belong to the clients. Its earnings comes from the fee it charges its clients.

Valuecap however has three owners or three clients, which makes it more akin to a closed fund or perhaps even a hedge fund, remarks an observer. But the earnings Valuecap rakes in from investing the capital (in this instance, the capital is borrowed) belongs to it and those who own it, even while it continues to service the debt.

Very few doubt that ValueCap is a value proposition. With a deeper pocket and considering the pummelling the stock market has suffered year to date, a larger pool of funds will provide the company a wider net to bargain hunt. In fact, the 100 stocks on the index, as pointed out the KFH Research are trading at 9.9x earnings and have a dividend yield of 6.5%. Based on price-to-earnings valuation, the key barometer is trading at the lowest range of its 5-year average of 14.2x earnings.

Its impact on helping to cushion a sliding market however is expected to be muted considering the additional funds of RM5bil makes up about five or six days of total trading volume in the local bourse (based on average trading volume in the stock market over last two weeks).

The key question however is how sustainable is the Valuecap structure in the long run without its own permanent capital structure? Could it morph into something much larger than its original intent? - The Star.


My Journal hopes Anita Gabriel will be able to keep tabs on the audited accounts of this set-up and convey the information to the Malaysian public on a regular basis.I have earlier vehemently opposed the use of EPF Funds for ValueCap and so have the MTUC and the Opposition.

Read the full article with tables in today's Star newspaper.