This article first appeared in Capital, The Edge Malaysia Weekly on April 15, 2019 - April 21, 2019
THE change in Malaysia’s government last year has piqued the interest of RRJ Capital, a top Asian private equity fund that has some US$12 billion in assets under management.
“We have spent a lot of time looking at Malaysia recently,” says Richard Ong, founder, chairman and CEO of RRJ Capital.
“We want to give Malaysia a fresh look in light of the new government. We would like to spend some time here to see where the opportunities lie and where there could be a meeting of minds. We feel there is an opportunity for us to team up with the government in public-private sector projects,” says Charles Ong, co-chairman and co-CEO of RRJ Capital and Richard’s younger brother.
With many dealmakers remaining on the sidelines and observing the country’s investment landscape — an environment that some say continues to be clouded by uncertainty — why are these seasoned dealmakers looking to put money into the country now?
Richard believes this happens a lot all over the world — the closer people are to the situation, the more pessimistic they get.
“That is always the case. Look at China. A lot of foreigners are going into China to buy big malls while domestic investors have shied away. They could be right or wrong … but, sometimes, depending on how close you are to the situation, that could be a reflection of your pessimism. For the longest time in Malaysia, most infrastructure projects were funded by the government. Given the changes that are happening, we think there is opportunity for more private-sector participation,” he says.
“Sometimes, coming without any baggage or legacy issues brings clarity to a situation. It gives a different perspective,” adds Charles.
Richard says, “We do feel that in Malaysia the top leadership are investor-friendly and working hard to attract foreign direct investment. However, the inertia imposed by the bureaucracy can be challenging for foreign investors and most would rather look elsewhere. Therefore, it is important that the top leadership and the bureaucrats work hand-in-hand to attract long-term FDI.”
The fund has earmarked about RM5 billion for Malaysia, the Malaysian brothers reveal in an interview with The Edge at the St Regis Kuala Lumpur.
“We are prepared to invest up to RM5 billion here. Areas of focus would be the insurance sector and infrastructure, including water, rail and airports. We have started doing due diligence on certain companies and these industries in Malaysia,” says Richard.
“Our focus has traditionally been on bricks-and-mortar businesses. We invest in businesses we understand well, whether it is healthcare, financial institutions, food, transport and logistics … defensive businesses that will somehow tie back to technology as well.”
“We are studying a lot of things,” says Charles, “because at the end of the day we are long-term investors. We have to look beyond the positives and the negatives of the current situation. We believe in the direction Asia is taking and that includes Malaysia. We believe there is opportunity for us to partner the new government for some projects.”
Richard shrugs off any suggestion that it might be sensitive to invest in certain infrastructure projects, given Malaysia and Singapore’s often touchy bilateral relations and Temasek Holdings’ investment in RRJ Capital.
“If you look at our fund, 55% is made up of US investors through US pension funds and about 25% is from Europe and the Middle East, with names like Shell, BP and Intel,” he says, adding that RRJ Capital’s internal rate of return is 20% in US dollar terms.
“We work with everyone. We co-invest with different people. It depends on whether investors share our view on specific investments. We have invested in Australia with our Chinese partners, for example, and in Europe with our Hong Kong partners. We are flexible. Our capital is very mobile,” says Richard. “We only have one fiduciary duty and that is [to create a] win-win situation — a win for my partners and for me. So, in Malaysia, it must be a win for the government and a win for me. We are not doing this for charity. So long as it is a win-win situation, it will work.”
But Richard stresses that exit options ought not to be restricted to a flotation exercise. “It is not good if the only option to exit is an initial public offering. IPO markets are fickle — sometimes they are open, sometimes they are not. The risk of not being able to exit has to be very low.”
RRJ Capital does not see its large investment size — US$300 million to US$400 million per deal — as a hindrance when it comes to an exit.
“In a global market, it is not difficult to exit if you buy the right assets. Generally, we shy away from small companies. The companies we invest in have to be fairly large with a decent, experienced management team. Our capital is meant to help them to grow. We do not have a huge team — only 30 of us — so we tend to stay very focused on what we invest in,” says Charles.
A typical private equity fund has a five-year time frame but the RRJ Capital duo maintains they are “long-term investors”, willing to wait twice as long.
“We can deploy the capital in a relatively short period and it is a long-term investment period. We are looking at 10 years … that is two general elections. That is a long time,” says Charles.
Seasoned dealmakers
The brothers have a wealth of experience in making deals. Richard spent 15 years at Goldman Sachs. He was a partner and co-head of Asia ex-Japan investment banking when he exited the bank in 2008 to start HOPU Fund — a US$2.5 billion private equity fund in Beijing. Three years later, he formed RRJ Capital.
Charles joined Richard a year after that. Prior to that, he had spent a decade at Temasek Holdings, serving as the Singaporean sovereign wealth fund’s chief investment officer and chief strategy officer, among others. In a previous stint with Deutsche Bank from 1998 to 2002, he oversaw its investment banking business in Southeast Asia.
Since joining forces in 2012, the brothers have struck some significant deals together.
These include €750 million in cash investments in ING Groep NV’s NN Group insurance business before the unit’s IPO on the Euronext Amsterdam stock exchange in 2014. From a listing price of €20, in what was the largest IPO in Europe that year, NN Group’s share price has risen 84% to end trading at €36.88 on April 9. RRJ Capital had a 9.95% stake in NN as at April 10.
Another big deal was buying into the largest liquefied natural gas exporter in the US, Cheniere Energy Inc. RRJ Capital first entered into this investment in 2014, and over time increased its bet on Cheniere to the tune of US$1.7 billion, resulting in an average cost of US$15 per share. Today, Cheniere is trading at US$67. Its clients include Petroliam Nasional Bhd, China Petroleum & Chemical Corp and Indonesia’s PT Pertamina.
Recently, RRJ Capital acquired airline caterer gategroup Holding AG — the No 1 global player in the field. Headquartered in Zurich, Switzerland, gategroup serves more than 700 million passengers annually.
Last year, gategroup reported 4.9 billion Swiss francs (US$4.92 billion or RM20 billion) in revenue and 343.9 million francs in earnings before interest, taxes, depreciation and amortisation. Although the acquisition price was not made public, a Bloomberg report, quoting people with knowledge of the deal, said the RRJ Capital acquisition valued gategroup at about US$2.8 billion.
Fourth fund to be set up next year
Thus far, RRJ Capital has established three funds. The first raised US$2.3 billion and the second US$3.6 billion. The third fund raised US$4.5 billion.
There are plans for a fourth fund but Richard says it will likely come onstream only next year. The aim is to grow capital under management to US$15 billion by next year from US$12 billion at present.
“The fourth fund will come after we finish a few more investments. Our last fund was US$4.5 billion and we still have US$1 billion in capital to deploy. We are looking a lot in Europe, Asia in general … Asean is going to be part of that strategy. We are also looking at newer areas where we can play into the consumer space, packaged food and auto parts such as electric vehicle batteries,” he says.
Although Malaysia fits into its plan, it was the change in government that prompted RRJ Capital to take a serious look. What if there is another change in government within the next 10 years?
“Well, we are not dependent on any government. We are not politicians. We are not politically linked,” says Charles matter-of-factly.
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