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Private Funds: A Perspective From Malaysia – Fund Management/ REITs

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1. Introduction

According to the 2021 Annual Report of Securities
Commission Malaysia (“SC”),
despite the challenging environment faced by the Malaysian economy
due to Covid-19, the wholesale funds industry recorded a total net
asset value of RM79.45 billion at end-2021, an increase of 17.44%
from RM67.65 billion in 2020. 

A “wholesale fund” is defined under
the Guidelines on Unlisted Capital Market Products under the
Lodge and Launch Framework (“LOLA
”) as a unit trust scheme established
where the units are to be issued, offered for subscription or
purchase, or for which invitations to subscribe for or purchase the
units are to be made, exclusively to sophisticated
 and any other person as may be determined
by SC. As of 31 May 2022, there are 430 wholesale funds lodged with
the SC.1 “Sophisticated
” means accredited investors, high-net
worth entities or high-net worth individuals as defined under the
Capital Markets and Services Act 2007
(“CMSA”). A fund of such nature may be
generally known as private funds in other jurisdictions.

There are different types of wholesale funds in Malaysia, namely
local wholesale funds, foreign wholesale funds, Islamic local
wholesale funds and Islamic foreign wholesale funds. We will focus
our discussion on local wholesale funds in this article. 

2. Fund Management Company

As prescribed under Sections 288(2) and 289(1) of the CMSA, only
a management company approved by the SC can act as a fund
management company. A fund management company must comply with,
amongst others, the following criteria:

  • be an entity incorporated in Malaysia; and

  • always have at least RM10 million of shareholders’

3. Establishment of a Wholesale Fund

The LOLA Guidelines set out the requirements to be complied with
by any person intending to establish a wholesale fund in Malaysia.
A local wholesale fund can only be established by a fund management
company holding a Capital Markets Services Licence for the
regulated activity of fund management in relation to portfolio

A wholesale fund can be formed either under a trust structure or
a custodial structure.

When establishing a wholesale fund, the fund management company
or the operator of the fund must, amongst others:

  •   ascertain the size of the wholesale
    fund, investment objectives, financial situation and particular
    needs of its investors;

  • take into account its resources, expertise, experience and its
    overall capability to carry out its duties in accordance with the
    acceptable and efficacious business practices within the fund
    management industry;

  • ensure that the name given to the wholesale fund is not
    inappropriate, misleading or in conflict with the name of another
    collective investment scheme

  • determine the investment objective of the wholesale fund;

  • define the investment strategy of the wholesale fund including
    the investment parameters and types of investments to be made by
    the wholesale fund; and

  • ensure that the liabilities of investors are limited to their
    investments in the wholesale fund.

The fund management company or the operator is permitted to
allocate capital into one or more collective investment schemes
(referred to as “target fund”), provided that the
selection of the target fund is consistent with the investment
objective and chosen strategy of the wholesale fund.

The fund management company or the operator must also ensure
that the investments of the wholesale fund must not be detrimental
to the interest of the investors or contrary to public interests.
Further, the nature and structure of the wholesale fund’s
investments must not result in the circumvention of any regulatory
provisions or requirements that must be complied with. For
instance, where a fund management company pools in clients’
monies and invest through a special purpose vehicle in assets other
than (a) conventional and Shariah-compliant securities; (b)
derivatives; (c) money market instruments; (d) deposits in
conventional and Islamic deposit accounts; and (e) real estate
located outside Malaysia, this is considered as circumvention.

Further to the above, there are additional requirements to be
complied with when determining the types of investments to be made
by the wholesale fund. Key examples are as set out below:

Investment strategies Requirements
Where a wholesale fund invests 85% or more of its
net asset value
(“NAV”)2 in a CIS
The fund manager of that CIS must be suitably
authorised, regulated and supervised by a securities regulator
which (i) is a signatory to the International Organization of
Securities Commission (“IOSCO”)
Multilateral Memorandum of Understanding as listed in its Appendix
A; or (ii) has a bilateral agreement or arrangement with the SC, in
particular, with regard to co-operation on supervision,
investigation, enforcement and information sharing.
Where the fund management company or the operator
intends to use derivatives
The fund management company or the operator must
possess the necessary expertise and experience including
understanding the different implications of derivatives positions
on the overall investment strategy and ensure that derivatives
positions are fairly priced on a consistent basis while bearing in
mind the market liquidity of such positions.
Where the financing of the wholesale fund involves
extension of credit and other forms of lending or utilises
The fund management company or the operator must
(i) determine the borrowing parameters for the wholesale fund
(including the maximum amount of leverage, duration, and whether
secured or unsecured), the basis of leverage and risks
involved; (ii) have the necessary expertise and experience in
managing a wholesale fund which employs any leverage strategy; and
(iii) understand the impact of such leverage on the overall risk of
a portfolio and having the ability to monitor the use of such
Where the fund management company or the operator
invests in real estate outside Malaysia
The fund management company or the operator must
ensure that the real estate outside Malaysia is managed by a
manager that is licensed, registered, approved or authorised to
manage the foreign real estate in its home jurisdiction.

The LOLA Guidelines also provide that a trustee or a custodian
must be appointed for a wholesale fund and the trustee or the
custodian must be registered with the SC. The obligations and
rights of the trustee or the custodian shall be specified in a
trust deed or a custodial agreement, and such document shall be in
force at all times.

4. Lodgement of a Wholesale Fund

To lodge a wholesale fund with SC, the lodgement must be made by
the fund management company. All information and documents as set
out in the Lodgement Kit must be lodged. Information and
documents required to be lodged include, among others, the fund
name, structure of the fund, investment objective of the fund,
asset allocation and the fund’s launch date in Malaysia.
Thereafter, a wholesale fund can be offered to sophisticated
investors in Malaysia as soon as the required information and
documents are lodged online, and as long as the fund is launched
within 60 business days from the date of lodgement.

5. Key Obligations of a Fund Management

Valuation and pricing obligations

  • Except for investments in real estate outside Malaysia, a fund
    management company must ensure that the investments of the
    wholesale fund are fairly valued on a regular basis and in any
    event, at least once a month. Where a wholesale fund invests in
    real estate located outside Malaysia, valuation must be conducted
    at least once every 3 years.

  • Further, a fund management company must take all reasonable
    steps to ensure that the wholesale fund and the units in the
    wholesale fund are correctly valued and priced. In any event of an
    incorrect valuation or pricing of the wholesale fund or the units
    in the wholesale fund, immediate remedial actions must be taken to
    rectify the same.

Liquidity and dealing obligations

  • A fund management company must determine the frequency of and
    any limitation on subscriptions and redemptions having regard to
    the investment objectives, financial situation and particular needs
    of investors.

Registration obligations

  • A fund management company must keep a register of investors and
    enter into the register the details of the investors. For instance,
    where the investor is an individual, the name, address, and the
    number of the identity card issued under the National Registration
    Act 1959 or passport number (for foreigners).

  • In addition to the above, the fund management company must
    enter into such register (i) the number of units held by each
    investor; (ii) the date on which the name of each investor was
    entered in the register; (iii) the date on which any person ceased
    to be an investor in the wholesale fund; and (iv) any other
    relevant information or particulars of the investor.

  • As prescribed under the LOLA Guidelines, all information
    entered into the register must be kept for a minimum of 7

Reporting obligations

  • A fund management company must inform its investors of
    significant and material changes to the investment objective,
    investment strategy as well as any changes to the material
    information previously provided to the investors.

  • A fund management company must also ensure that prices, fees
    and charges be made available to investors periodically.

6. Perspective

Private investment funds have become increasingly popular as a
means to raise and deploy capital. According to
the McKinsey’s Global Private Markets Review
, after a year of pandemic-driven turbulence that
suppressed fundraising activities, private markets rebounded across
the board. Global private markets assets under management
(“AUM”) reached an all-time high of
US$9.8 trillion in the first half of 2021, 33% higher than the year

According to the report issued by the Institute for Capital
Market Research Malaysia in December 2021, AUM for the Malaysia
private equity industry has been growing at a sluggish pace of 6.7%
annually from US$3.7 billion in 2010 to US$6.8 billion in December
2020, compared to Singapore (18.6%), Japan (14.9%), South Korea
(29.6%), and even ASEAN region as a whole that has recorded growth
of over 14.8% over the same period.

The report highlighted that Malaysia faces a unique set of
challenges in the private equity industry. One of the key
challenges is the absence of alternative fund structure with
greater flexibility in capital contributions and profit
distributions. Measures adopted in neighbouring jurisdictions in
addressing such issue include variable capital companies under the
Singapore’s Variable Capital Companies Act 2018 and limited
partnerships under the Hong Kong’s Limited Partnership Fund
Ordinance. In comparison, Malaysia permits only relatively rigid
fund vehicle structure, which would have hampered the
attractiveness of Malaysia in the setting up of private funds. As
highlighted above, a wholesale fund can only be set up in Malaysia
under a trust structure or a custodial structure.

It may be timely for the policymakers to review the regulatory
regime in Malaysia to push ahead a friendlier and more attractive
regime for private funds. Given its strategic location within the
ASEAN region, Malaysia will be well-positioned to benefit from the
growth in private capital AUM in Asia, if a modern and transparent
legal framework is put in place, supported by attractive tax
incentives and robust business environment.


1 SC’s Wholesale Fund Summary of Statistics as at
30 June 2022

2 Part 1, Chapter 4, Paragraph 4.03 of the LOLA
Guidelines provide that for the purpose of determining the
wholesale fund’s NAV, the valuation of the assets and
liabilities must be based on a process which is consistently
applied; and objective and capable of being verified by

3 Part 1, Chapter 4 of the LOLA Guideline

Originally Published by 30 August 2022

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

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