Mystery of Malaysian 1MDB's US$2.3b Cayman Islands fund

[SINGAPORE] Some US$2.3 billion ($2.9 billion) belonging to Malaysia's state-owned fund 1Malaysia Development Bhd (1MDB), ploughed into unidentified Cayman Islands funds, is being managed by little-known Hong Kong firm Bridge Partners, The Business Times has learnt.

The revelation comes at a time when 1MDB is under fire for placing funds in hedge funds abroad, particularly since almost all of its assets - power generation and landbank - are based in Malaysia.

The said funds were invested by Malaysia's state-backed fund through Brazen Sky Ltd - a wholly owned unit incorporated in the British Virgin Islands (BVI) - in a segregated portfolio company (SPC) called Bridge Global Absolute Return Fund managed by Bridge Partners, according to documents obtained by this newspaper.

1MDB has also been pressured to reveal the names of the Cayman Island funds and fund manager, but has not done so.

The documents also reveal that, through the SPC, the monies were invested into six classes of shares of unlisted open-ended funds focused on the energy sector.

While Bridge Partners is a licensed fund manager, it is still unclear as to why 1MDB would outsource its monies to such a modest outfit. The move is also at odds with the Malaysian sovereign wealth fund's mandate to drive key projects in its home base and woo foreign investments into Malaysia.

"Why is a state-owned fund hiring a small firm run by a very smallish team to manage its funds which it may not have complete control over?" asked a market watcher.

Based on its website, Bridge Partners, which specialises in offshore private funds, is led by managing director Mr Lobo Lee Kwok Ning, who has 20 years' experience in equity investments and derivatives. He was previously senior vice-president of Hong Kong Exchanges and Clearing Ltd.

The firm's asset management team has two other directors.

Documents also reveal that a Swiss private bank in Singapore produced portfolio statements on these funds, possibly to indicate that the funds are genuine. It is unclear why the bank felt the need to do that, as such reports are typically issued by the fund manager - in this case, Bridge Partners.

Bridge Capital and Brazen Sky first came into the picture two years ago following a convoluted and perplexing tie-up between 1MDB, then helmed by chief executive officer Shahrol Halmi, and obscure firm PetroSaudi International (PSI), headed by Tarek Essam Ahmad Obaid, a Saudi royalty.

1MDB's tie-up with PSI - 1MDB PetroSaudi - is the fund's first joint venture since it was set up in 2009, not too long after it raised RM5 billion ($1.9 billion) through a bond issue.

The Malaysian-backed fund ploughed US$1 billion cash for its 40 per cent into the US$2.5 billion joint venture firm domiciled in BVI. PSI forked out no cash, only oil and gas assets for its 60 per cent share, which according to documents was valued at US$2.7 billion.

Sources said that, in the early stages of the deal, some 1MDB board members were concerned about the value and quality of the assets being injected and had preferred instead for PSI to fork out at least 50 per cent cash for its portion to match 1MDB's cash outlay.

The pact flopped and, following a series of complex manoeuvrings, issuance of Islamic debt facility and asset flippings, 1MDB's wholly-owned 1MDB International Holdings ended up with a 49 per cent stake of PSI's PetroSaudi Oil Services Ltd (PSOSL). The stake was valued at US$2.2 billion.

1MDB then sold all of 1MDB International Holdings, whose sole asset was the PSOSL stake, to Bridge Partners for US$2.3 billion, turning in a profit of some US$95 million.

To satisfy the purchase, Bridge Partners issued six interest-free promissory notes with a one-month expiry data. 1MDB then invested the proceeds by subscribing for all the shares in Brazen Sky, which in turn reinvested the sum into the SPC.

Documents also reveal that Mr Shahrol, 1MDB's then-boss - who left in March last year to join another government unit - had the sole discretion to decide where the funds would be reinvested.

1MDB has been in the line of fire after its latest financial accounts showed that it carried liabilities of some RM40 billion. It also would have been in the red by as much as RM1.8 billion, if not for a RM2.7 billion revaluation gain on land it got from the government.

The fund, chaired by Malaysian Prime Minister Najib Razak, has been dogged by controversy since its inception five years ago and has had to frequently allay fears that the billions of dollars in its coffers - mostly raised through borrowings and ploughed into controversial investments - are safe.

More recently, following calls by the Malaysian media for 1MDB to bring the funds totalling some RM18 billion back to Malaysia, the fund responded by saying that "substantial portions" of the overseas funds have been brought back and used for energy and property projects and earmarked for future investments.

BT's attempts to contact 1MDB and Bridge Partners for comments were unsuccessful.