MDV playing crucial debt venture role in ecosystem
By Karamjit Singh June 3, 2013
- Set up in 2002 with RM1.6bil, has helped close to 500 companies since
- Issued loans amounting to RM800mil in 2012, expects 50% to be repaid this year
VENTURE debt is not as sexy as venture funding but it is equally important and will likely keep you afloat when you get your first big contract – ‘big’ here being relative to the size of your company.
“We have helped a lot of companies and just last year gave RM800 million (US$259 million) in loans,” says Zubir Ansori Yahaya (pic), managing director and chief executive officer of Malaysia Debt Ventures Bhd (MDV) since 2005.
MDV itself was established in August, 2002 to play the role of a debt financier.
In the United States, where it is called venture debt, the concept is very popular with around 40% of early stage financing done in this manner.
“And mind you, their interest rates are between 16% and 20% versus our 6% and 8% returns,” Zubir says.
Those low interest loans have helped close to 500 companies over MDV’s lifespan and around 250 companies in the portfolio at present.
And, yes, you read that right above: MDV gave out RM800 million in loans last year, yet Zubir expects half to be repaid this year.
This brings to attention some characteristics of an MDV loan. “These are ICT loans and they tend to be very short, sometimes up to six months with the most at between one and two years, while the longer term loans tend to be between three and five years,” says Zubir.
Hence the expectations that around RM400 million will be repaid this year.
The quick turnover in loans repaid also means that MDV has to work harder than most banks in looking for companies to give loans to. Most of its loans are in small amounts of RM5 million (US$1.6 million) and below, to its current portfolio of around 250 companies.
It does larger amounts too, which Zubir defines as RM35 million (US$11 million) and above. “We have between six and 10 companies in this category.”
Surprisingly, despite the number of companies MDV has helped over its lifespan, Zubir shares that the concept of debt venture is still not as well known.
It may be instructive to take a step back to understand how MDV was formed in 2002.
At that time, technology companies, especially Multimedia Super Corridor (MSC Malaysia) companies, were having a hard time getting a bridging loan from commercial banks to help them fulfil projects which necessitated upfront investments.
Not many companies had the cash flow or liquidity to wait for project payments to come in, but banks would not take their projects as collateral, leaving technology companies facing an ironic cash crunch whenever they got a sizeable job to fulfil.
This is when the Multimedia Development Corporation (MDeC) and in particular, MDeC executive Jiro Suzuki, started lobbying and educating the Malaysian Government about this critical gap in the nascent funding ecosystem. [MDeC is Malaysia’s national ICT custodian and manages MSC Malaysia.]
Thanks to a RM1.6 billion (US$519 million) loan from the Japanese Government, through the Japan Bank for International Cooperation (JBIC), MDV was born. It was Asia’s first ever scheme for project debt financing. Suzuki became MDV’s first chief executive officer. Subsequently, in 2007, the Ministry of FInance approved RM2.5 billion for MDV's Second Fund.
‘Sort of hybrid between bank and VC’
Zubir notes that most people cannot differentiate between venture debts and loans given out by banks.
“To put is concisely, the biggest difference is that commercial banks lend on the strength of the company; we lend on the projects received,” he says.
“Because of this, our biggest collateral are the projects they have, and hence we need to make sure that the proceeds of the project come to our account first, where we take our portion before releasing the balance to the company,” he adds.
In the early years, there was criticism that MDV took too long to release the money due to companies, but it has since rectified this.
Unlike banks and like VCs (venture capitalists), MDV also puts an officer on board of some of the companies, especially those it has given loans for RM35 million and above. “We don’t have a board seat but just sit in as observers,” says Zubir.
This was the case with Packet One Networks (P1) which received a loan of over RM50 million (US$16.2 billion). “They are a very well-managed company, and have paid back almost all the amount,” he adds.
Some of the companies MDV gives loans to are very small, and he notes that MDV’s presence helps these companies a lot.
Aside from loans, MDV offers advice and nurturing services too, which is why Zubir says, “We are a sort of hybrid between banks and VCs.”
A look through the profile of MDV’s senior management team reveals a seasoned team with deep multi-industry exposure.
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