Capital Markets Malaysia (CM), a capital market promotional entity under the Securities Commission Malaysia (SC) has launched a corporate venture capital (CVC) programme to get more companies, especially local public listed companies, to invest in startups and small and medium enterprises.
Legal framework for CVC
It is unclear if the SC is going to come up with any guidelines including tax incentives similar to the present tax incentives for CVC set ups. Management fees and carried interest received by the registered fund managers are tax exempt whereas investors investing in a venture fund are able to claim tax deduction against the actual capital deployed after holding them for a duration.
If the company intends to raise funds from others and manage such a venture fund, the company will likely have to hire an in-house fund manager and apply to be licensed as a fund manager under the existing regime.
But if the company is investing into an existing registered venture fund it may likely able to apply and enjoy the same tax incentives under the present tax incentives.
Also, if the company is managing its own investment (i.e balance sheet investing) it may likely won’t have to register as fund manager as there is no requirement to register a CVC set up at the moment.
Legal vehicles and structures for CVC and a few examples
Direct investment, strategic partnership, accelerator or incubator to forming a joint venture with other partners are some of the common legal structures that the corporate planners team will have to figure out when suggesting to their board on a CVC set up.
Direct investment from the company may be the most common way, but we have also seen strategic partnerships where the company invites an existing venture fund to help source and manage the fund. FWD Group, a Hong Kong based insurance company has engaged Artem Ventures to run TIM Ventures, a RM45 mil insurtech and fintech space focused fund.
Based on the news, fund has invested in four startups including Senang, an on demand subscription insurance startup and Pewarisan an online digital will platform to date. The fund also gets its potential deals from its pre-accelerator programme FWD Startup Studio.
A few more notable local CVCs such as the Orbit Capital where Sunway CVC, the CVC arm of the Sunway group partners with Kejora Capital a venture capital and Malaysian Venture Capital Management Berhad, a government fund on fund and Petronas Ventures, a CVC arm of Petronas an oil and gas company.
It’ll be interesting to see how the new funding landscape will look like if we have more investors especially in the pre-seed and seed stages.
Whether the CVC may be set up as a special purpose company to invest directly into the startups or by engaging a third party as a joint venture or an outsourced fund manager, such a company should get the necessary advice from the usual professionals including tax adviser and venture capital lawyer.
[Note: Izwan & Partners acted for Artem Ventures on the TIM Ventures venture fund set up.]