A massive RM120 billion war chest was promised under the Ministry of Finance’s Government-Linked Enterprises Activation and Reform Programme (GEAR-uP) to transform Malaysian businesses. Yet the companies that actually power the economy have not seen a dime.

Consider a 30-year-old manufacturer in Penang looking for RM20 million to automate its factory. It may have customers, assets and decades of operating history, but the cheque may be too small for a large fund, too risky for a conventional bank loan, or too labour intensive for advisory firms whose fees depend on successful completion.

That is the problem.

Malaysia does not have a shortage of capital. It has a problem getting the right capital to the right companies.

Malaysia’s mid-tier companies (MTCs) represent roughly only 0.8% of registered companies. Yet they contribute an estimated 36% of gross domestic product (GDP) and employ 16% of the national workforce.

Recognising the need to invest more at home, six government-linked investment companies (GLICs) have pledged RM120 billion in domestic direct investments between 2024 and 2028 under GEAR-uP.

The RM120 billion is a broad commitment and is not specifically earmarked for MTCs. But within the wider push, dedicated programmes such as Khazanah Nasional’s Dana Impak and KWAP’s Dana Pemacu are helping channel capital towards growing Malaysian businesses, including the mid-market. Making capital available, however, does not necessarily mean viable MTCs can access it.

The financial plumbing in between remains weak. Three bottlenecks explain why.

Large funds face an inescapable cheque size problem. Directly assessing a RM20 million growth equity investment into an unlisted manufacturing firm in Penang requires much of the same due diligence, legal structuring and monitoring as a RM200 million commitment into an infrastructure asset or public equity investment.

The economics therefore push large investors towards bigger transactions.

To bypass this bottleneck, GEAR-uP delegates capital to external fund managers.

But delegation does not remove the problem completely. Even RM1 billion disappears quickly when individual investments run into tens of millions of ringgit. Managers, too, need investments large enough to justify the work and generate attractive returns.

Compounding this issue further is sector bias. Large-scale institutional mandates are frequently engineered around high-growth themes such as energy transition, advanced manufacturing, semiconductors, healthcare and digital infrastructure. A software company or semiconductor designer fits neatly into mandates. A profitable manufacturer that wants RM 20 million for brownfield automation may not.

That creates a mismatch. The “missing middle” is formally defined by regulators mainly by company size, while much of the institutional capital intended to address it is organised around sector themes.

The UK offers one possible response. Evergreen investment vehicles that can hold minority stakes for longer periods rather than forcing every investment into the conventional fund cycle. The premise is simple. If conventional fund economics make smaller companies difficult to finance, the solution is to change the structure through which the capital reaches them.

The issue extends beyond the structural limits of institutional funding. It is also a mismatch between the type of capital available and what MTCs can absorb.

Bank debt requires predictable cash flow, collateral and debt service coverage. Yet companies investing heavily in expansion, technology or restructuring may experience temporary margin pressure precisely when they need financing most.

Private equity solves the timing problem but can create another one. Owners may be reluctant to give up equity, board influence or control simply to raise capital.

Private credit is one attempt to bridge this gap. It offers capital without requiring owners to give up equity and can be more flexible than conventional bank lending. Under the GEAR-uP initiative, Khazanah Nasional’s Dana Impak has tapped Navis Capital Partners and Granite Asia as private credit partners.

A private credit investor could finance a Penang-based metal fabricator while its margins compress as it retools during transformation, provided there is sufficient visibility on ultimate repayment and downside protection.

But a lender still needs confidence that it will be repaid. The more a company is asking an investor to bear the risk that a major factory upgrade, restructuring or technology investment may not work, the less suitable a conventional senior loan becomes. A longer maturity does not make that execution risk disappear.

This exposes a deeper gap. Who bears transition risk without demanding either bank-like downside protection or traditional private-equity-like ownership control?

The answer may lie further along the risk spectrum, through junior, hybrid or patient capital that can absorb greater volatility without requiring outright ownership.

France has tackled a similar problem through transformation loans designed to absorb modernisation risk. While Malaysia will require its own adaptation, the underlying principle still holds. We need risk capital that supports transition without demanding outright ownership.

The capital exists. What is often missing is the right kind.

Malaysia has no shortage of companies seeking capital or advisers capable of raising it. What remains thin is the network connecting the two.

In deeper private markets, advisers know which investors write which cheques. Investors know which advisers bring credible companies. Founders have more routes into that network.

Malaysia may not have a shortage of advisers. It does, however, have a shortage of transaction volume large and frequent enough to support a robust specialised mergers and acquisitions (M&A) advisory industry.

At RM15 million to RM50 million, the economics are difficult. The fee is small, but the work is not. An adviser still has to prepare the company, value it, find investors, manage due diligence and negotiate a transaction that may never close.

Capable advisers therefore opt out. With fewer advisers, fewer companies are brought to market. Fewer companies mean fewer transactions, further weakening the economics of specialised advisers.

This becomes a vicious cycle.

The capital exists. The companies exist. What is thin is the plumbing between them.

Germany’s national succession infrastructure points to another possibility. Creating organised routes connecting owners, buyers and advisers can make viable businesses easier to discover, particularly as the generation that built many of its industrial businesses approaches retirement.

There is, of course, a simpler explanation for the funding gap. Some companies may simply be structurally uninvestable at scale.

Parts of Malaysia’s unlisted mid-market operate in low-margin contract manufacturing, rely on low-cost imported labour and have heavy customer concentration. When combined with founder-centric control, weak financial reporting, and an unwillingness to grant board seats or exit rights, the investment case can quickly become unattractive.

Critics would argue that forcing state capital into this segment weakens market discipline, trapping capital in low-productivity firms that private investors have already rejected. On this basis, the funding gap is not a market failure. It is the market pricing risk correctly.

That criticism is important. Malaysia should not use institutional capital to rescue every mid-sized company, nor should investment targets override commercial discipline.

But this risks treating the mid-market as a broadly homogeneous universe of unviable firms. It overlooks high-potential MTCs with real operational capabilities, export potential and sound economics that fall through the cracks simply because of the structural bottlenecks discussed above.

This matters beyond finance. Bank Negara Malaysia’s 2025 Economic and Monetary Review attributes subdued wage growth partly to too few high-skilled jobs, slow movement towards technology-intensive production and reliance on low-cost foreign labour.

Seen through that lens, the missing-middle problem is really a productivity problem.

Growth capital can fund the automation, capacity and professional management that move a firm away from low-cost labour. A working M&A market can keep that capacity operating when the founder retires rather than allowing the business to disappear with its owner.

Capital that reaches viable MTCs is not a subsidy to low productivity. It can finance the exit from it.

Many of Malaysia’s strongest MTCs were established during the manufacturing and export booms of the 1980s and 1990s. Their founders are now approaching retirement.

Malaysia does not need every MTC to receive institutional funding. Nor should state capital rescue businesses the market has correctly rejected.

The objective is sharper. Viable companies should not be stranded because the cheque is too small, the funding instrument is misaligned or the plumbing between companies and investors is too fragmented.

The good news is that Malaysia does not have to reinvent the wheel. The UK shows how longer-term investment structures can make smaller equity investments more viable. France’s pioneering transformation loans show how financing can absorb more of the risk involved in modernisation. Germany’s shows the value of organised networks that connect ageing business owners with buyers, advisers and capital.

Malaysia has already mobilised the capital. The harder task now is building the routes to ensure it reaches the companies capable of turning that money into national productivity, better jobs, and a more competitive national economy.

Krystle Chan is a finance professional with experience across investment banking and public markets. Pearl Lee is an investment professional with experience across real estate and private credit.