Malaysian sovereign wealth fund Khazanah Nasional will unveil a plan this month to deliver more cash to the government by pruning its stakes in non-strategic assets and dialing back its offshore presence in spots such as London, sources told Reuters.
This underlines the urgent need for Prime Minister Mahathir Mohamad to raise money for government coffers, depleted by a fiscal deficit and a massive debt from a multi-billion dollar scandal at state fund 1Malaysia Development Berhad (1MDB).
Under the new strategy, set to be announced at Khazanah's annual review on Feb. 28, the $39 billion fund will look to trim stakes in some companies identified as non-strategic to 15-25 percent - near the typical holding levels of pension funds, two of the sources told Reuters.
Khazanah is also looking to reduce its physical presence in overseas locations such as London, Mumbai and Silicon Valley, two other sources said. It is considering offloading some of its foreign properties and tech investments too, they added.
"They are not desperate to raise money, not in the way that erodes value. It would be very structured and gradual but it will be done, because the immediate objective is to raise money," one of the sources said.
Khazanah, traditionally more of a strategic investor, declined to comment on the Reuters story.
However, a source close to the discussions said Khazanah was "bringing the level of focus on commercial assets higher than before. Strategic assets are equally important and the fund will need to make these more efficient and profitable".
The sources, who declined to be identified due to the sensitivity of the matter, added that Khazanah's aim is to manage its holdings as a portfolio investor rather than as an active direct investor.
COMMERCIAL VS STRATEGIC
Following an internal review since a management revamp last year, Khazanah has earmarked its investments in over 100 firms spanning more than 20 countries under two categories, strategic and commercial, sources said.
Companies such as state utility Tenaga Nasional, struggling Malaysia Airlines, which it took over four years ago, Malaysia Airports Holdings and Telekom Malaysia have been identified as strategic holdings and their ownership is unlikely to change, the sources said.
The rest of its portfolio could see cuts, such as 27-percent owned CIMB Group Holdings, 36-percent owned telecoms player Axiata Group and the fully-owned engineering infrastructure and services conglomerate UEM Group, they said.
In November, Khazanah announced a deal to sell a 16-percent stake in IHH Healthcare (IHH), reducing its stake in the Asian hospitals group to about 26 percent.
"For the first time, I'm seeing real gumption on the part of Khazanah," a senior Asia M&A banker at a U.S. investment bank said. "It's asking portfolio companies what's the commercial returns in their businesses?"
"Malaysia is food for M&A bankers. The country needs money and a lot of Khazanah sell-downs will have to happen," the banker added.
Sources said Khazanah's assets could attract interest from Japanese players, other Asian investors and global funds.
The fund's foreign investments, accounting for about 45 percent of its realizable asset value by geographical exposure as at December 2017, could also face the ax, the sources said.
Khazanah's 60:40 venture with Singapore's Temasek, M+S Pte Ltd, is in advanced talks with investors to sell office space, a hotel and retail components of the DUO property development located just outside the city-state's financial district, other sources added.
The deal could fetch as much as S$2 billion ($1.47 billion) and an announcement could come in the next few weeks, they said.
M+S said it has appointed JLL as an adviser on overall real estate matters regarding the DUO property and declined to give any further details.
The performance of Khazanah has been muted over the past few years, with the value of its portfolio rising 29.4 percent over 2012-2017, while Temasek's rose 43.2 percent to $227 billion in the five years to March 2018.
Prasenjit Basu, chief economist at CrossASEAN Research and a former co-head of research at Khazanah, said the changes at the fund indicate a complete re-setting of priorities.
"That IHH, a jewel in its crown, has been divested, suggests that Khazanah will move away from strategic stakes in foreign companies and focus more on paying dividends to the government," Basu said. "From being a "private equity"-type investor, Khazanah will become a portfolio investor."