In spite of Indonesia’s recent lacklustre economic performance, private equity investors seem to remain hopeful over the prospects of delivering alpha in Southeast Asia’s largest market. The private equity industry is evolving slowly but surely and more private equity firms are focusing greater attention on the country by spending time on the ground, building relationships with local entrepreneurs, trying to source and execute deals lured by some high profile recent successes.
While all these developments indicate bullish sentiments, according to the Asian Venture Capital Journal (AVCJ), this enthusiasm for Indonesia may result in unrealistic expectations amongst investors. After investment reached $1.3 billion USD in 2010 and $1 billion USD in 2011, investment dropped off. The 2014 total amounted to $354 million USD, according to AVCJ Research, approximately half the amount of 2013. Despite deal volume increasing steadily, of more than 30 investments completed in 2013 and 2014, at least half were early-stage ventures, according to the AVCJ report. While testament to the wealth of opportunities in Indonesia’s robust entrepreneurial ecosystem and startup space, this is encouraging for only a single segment of the private equity market: venture capital firms (VCs).
This is discouraging news for private equity firms, which seek deals that involve middle-market firms and larger players than what VCs deal with. Private equity investment in Indonesia since 2009 stands at $4.8 billion USD. By comparison, China’s economy is approximately 10 times larger but has seen 34 times more private equity investment over the corresponding period, based on data available to AVCJ.
Reasons for the weakened dealflow can be attributed to the downturn in the commodities market, particularly petroleum (See Indonesia’s Oil and Gas Sector – Upstream Challenges) and its impact on the petrochemicals vertical as well as volatility that impacted emerging markets globally. Another factor impacting Indonesia’s private equity market is a scarcity of assets that are both investible and accessible. This is tied to the nature of corporate governance and ownership in Indonesia.
The corporate ownership environment of Indonesia is an environment with a strong ethnic Chinese element, with heavy influence from the bamboo network (connections between businesses operated by overseas Chinese in Southeast Asia). Many Indonesian assets are held by family-owned conglomerates under no pressure to divest them. This enables them to run auction processes and seek high valuations. Alternatively, they seek out strategic partners to grow and build these business assets.
Even if these established family conglomerates retain their oligopoly, middle-market players and 'hidden champions' may emerge to disrupt this arrangement, and require external investors to sustain growth, offer access to new markets and technologies as well as facilitate succession planning. This could explain the keen interest in Indonesia, with several international private equity firms now having in-country teams for the first time, such as Affinity or Carlyle, alongside the bank-linked firms, the local firms and the very recent return of Middle Eastern fund interest.
Increasingly, in the absence of good, quality assets, there is now a mid-market focus, with a concentration of deals, particularly by the local firms, happening in this space, and with deal sizes in the range of $25 million USD to $100 million USD. However, reported deal volume is not high – around 10 a year – and this has decreased in the past year.
The private equity firm Warburg Pincus announced recently that it is going to make its first investment in Indonesia by building and developing retail malls in the country with local operator Nirvana Development. The firm is set to create hypermarket anchored retail malls around Indonesia in a development deal worth $125 million USD. According to the Wall Street Journal, the firm will also have an option to invest a further $75 million USD in Indonesia. This money would focus on shopping malls across the second and third tier cities in the country (See Indonesia’s Commercial Property Sector in Temporary Slowdown).
Indonesia's Salim Group is raising $1 billion USD from a group of private equity firms including Northstar Group and TPG partly to repay debt. Gateway Management, a Singapore-based fund backed by former Standard Chartered bankers, will also participate in the fundraising, which will be backed by Salim Group's Hong Kong-listed investment firm First Pacific. The financing is structured to give investors access to shares in Salim Group companies including Indomaret, a minimarket operator owned by Indomarco Prismatama.
The local firms, and those firms that have raised funds with a Southeast Asian focus, will be here to stay unlike prior private equity interest in Indonesia. However, there is a real sense, more so in 2015, that targets need to be carefully considered and returns may be lower, or there will be a need to hold investments longer term.
Saratoga’s strategy of being local has allowed it to invest in the consumer market (such as PT Mitra Pinasthika Mustika Tbk (MPM)), infrastructure (e.g. Tower Bersama Infrastructure Group (TBIG)), along with Provident Capital, and natural resources sectors. While the local firms have strong Indonesian management teams and do buyout deals, most private equity firms are seeking minority positions or joint ventures with majority control, and others are looking more at private investment in public equity (PIPE) deals, which allow a more ready exit; PIPE examples are KKR’s initial 9.5% deal in PT Tiga Pilar Sejahtera Food Tbk (TPS), then subsequently raising its stake to 25% in 2014, and various firms, including Carlyle and Southern Capital, in the telecommunications tower sector (such as PT Solusi Tunas Pratama Tbk (STP).
One area of particular interest to firms has been the fast-moving consumer goods sector (See Indonesia’s Fast Moving Consumer Goods (FMCG) Sector), although with consumer confidence having been in a state of decline throughout 2015, this sector may now be falling out of favour.
With the changing macroeconomic conditions, the key is identifying exceptional companies, working with the families and bringing value to the growth of the business. This course, which some private equity firms have been taking in the past year or so, invariably lends itself to joint ventures and a shift in investment sectors. A recent sector that is currently receiving interest is media and broadcasting, although structuring deals can be challenging because of the 20% foreign ownership limitation; and recently, telecommunications infrastructure and data centres have been of interest (e.g. Providence Equity in PT Komet Infra Nusantara). In all of these sectors, deals are ongoing (e.g. CVC’s proposed disposal of its shares in Link Net, a broadband and cable subscription service). Real estate also became a focus in the past year, but because of valuations and land-ownership issues no deals have proceeded. The e-commerce sector has also drawn a lot of recent interest, but regulatory restrictions make doing such deals difficult unless they are made through equity-linked securities.
While there is no single general theme, low risk is perhaps the driver in Indonesian deals, as it is an emerging market, and this explains why, despite a lot of interest, deal closure remains low. Perhaps more important is the family issue, where the second-generation offshore-educated family members are more accepting of private equity, understand the value private equity can bring and take a longer-term view with private equity firms to build up enterprises into stand-alone businesses that are ultimately listed.
Private equity is really here to stay in Indonesia this time around, given the investment in teams, specific fundraising for Southeast Asia, the fact that local private equity firms are now considered a mainstay of dealmaking, and the recognition by family companies that private equity offers more than funding. That said, such funding may now be more likely in view of the squeeze on bank lending. However, scarcity of assets, compliance issues and exits all make finding and closing suitable deals harder, and competition for deals is now intense.
The issues that have given rise to a low-volume private equity market, such as compliance, valuations, due-diligence issues and legal certainty, will remain. Considered approaches to these issues means that they are not insurmountable, and those private equity firms with Indonesian experience, with local or Singapore-based management teams and patience will continue to do deals. Maintaining a local network, identifying the jewels and persuading the families to open the doors will be key, which is why those on the ground in Indonesia are generally closing more deals than those based offshore. Also integral to future success will be the likes of showing management expertise, technology access, new markets and synergies with international networks.
Global Business Guide Indonesia - 2016
Bourse Name: Bursa Efek Indonesia (IDX)
Main Index: Jakarta Composite Index
Market Capitalisation: 4,872 trillion IDR (December 2015)
Annual Performance: -11.47% (2015)
Record High: 5,523.29 (April 2015)
Number of Issuers: 523 (2015)
Top Stocks by Market Capitalisation: HM Sampoerna, BCA, Telkom, Unilever, BRI, Astra International, Bank Mandiri, Gudang Garam, BNI.