Kumpulan Wang Persaraan (KWAP), Malaysia’s federal employees’ pension fund, is looking to add private credit investments to its portfolio holdings, as it pushes further into private markets.
A revamp of its strategic asset allocation in November 2022 brought the portfolio target balance between public and private assets to 80/20 from 90/10, and approval was given to start the process of investing in private credit as a new sub-asset class.
"In the last 8 months [we have] been educating ourselves on the subject, meeting major global private credit GPs,” Hazman Hilmi Sallahuddin, chief investment officer at KWAP, told AsianInvestor.
He elaborated that KWAP is going to play in the senior debt space, the safer segment of the asset class. These private credit investments will be commingled in fund vehicles, with the most sophisticated and developed US market as the likely main target.
“We hope to be able to do at least one private credit deal before the end of this year, but because it is new territory for us, we are going to invest first in an established private credit fund,” Sallahuddin said.
“From there, let’s see how we will fare. But in terms of allocation, everything has been formalised and we are just waiting for the final regulatory approval."
Since changing the target balance between public and private assets to 80/20, the share of private assets in the portfolio has already climbed from 10% to around 13-14%, according to Sallahuddin.
In 2022, KWAP participated in about 16 private equity (PE) transactions. This year, the pension fund is on track to do more than 30 PE deals alone, an admittedly aggressive private markets investment program, the CIO said.
KWAP observed two trends this year. First, PE fund raising is more challenging, and second, deal making is also a bit slower. This scenario was not unexpected, as the markets were moving away from cheap money due to higher interest rates, meaning most investors were being more conservative.
“But for us, we see this as an opportunity and good vintage year to go in, because valuations are expected to correct in the next 1-2 years,” Sallahuddin said.
“Given that the investment period for PE funds is typically around five years, we are proceeding with our commitment now because we expect that these funds will make the investment, maybe next year or two years down the road, when the valuation is sufficiently attractive to provide optimal risk-adjusted returns.”
Furthermore, KWAP is increasing the number of direct PE investments mainly through co-investment with existing fund managers, or GPs.
“Historically, we had 6 direct investments but in the past one year and next three months, we hope to be able to close up to 7 direct investments,” Sallahuddin said.
As for real assets in the private markets, KWAP is also aiming to do more real estate investments.
Meanwhile, renewable energy and data centres are a focus for infrastructure investments. In the latter case, investments can be considered infrastructure if funds are going toward the data operator occupying a building, as well as real estate if funds are used to purchase the building that houses the data centre.
While KWAP has ramped up its private markets activity, current foreign exchange rate volatility bids the pension fund to balance and pace its overseas investments.
“That’s why putting capital in funds is usually preferred because capital calls are not immediate. Typically, the fund call will be around 20% of the fund size per year, so then we can pace the conversion from ringgit to [US] dollar appropriately, and at the same time we also deploy more investments domestically,” Sallahuddin explained.
During the strategy revamp in November 2022, the upper limit on overseas assets was also raised from 20% to 30% of the total portfolio.
KWAP’s total assets under management was MYR184.5 billion ($38.5 billion) as of July 2023.
You can learn more about KWAP’s investment strategy and portfolio construction when the pension fund's senior investment professionals will speak at AsianInvestor’s upcoming events Malaysia Global Investment Forum in Kuala Lumpur November 7 and Southeast Asia Institutional Investment Forum in Singapore November 22.