Indonesia has over the last few years been heralded as the darling of Asia’s private equity market, buoyed by strong GDP growth and an anticipated demographic dividend period. In 2012, the country was famously viewed as the ‘sexiest destination’ among emerging markets in this field on the back of a series of notable investments by large global private equity firms (See Private Equity in Indonesia: More Deals Await Those Who Dig Deeper).
However, a recent dip in economic performance has since worked to dampen expectations for private equity opportunities in Indonesia in 2014. A downwards trend in the success of foreign private funds in acquiring stakes in major Indonesian companies has become apparent, with local business owners continuing to value their companies according to 2010 prices as opposed to levels befitting a market no longer experiencing the heights of a commodity boom. As of Q3 2013, international private equity firms had acquired stakes in only four Indonesian companies during the calendar year, a marked decline from seven in 2012 and 10 in 2011 (Bloomberg). Adding to growing negative sentiment among limited partners is the collapse of high profile deals such as the acquisition of Bank Danamon by Singapore based DBS Group Holdings due to the implementation of restrictive and unclear regulations.
In truth, the state of Indonesia’s private equity market falls between the lofty expectations of a few years prior and the current foreboding outlook. To reconcile these projections and arrive at a better understanding of where the market stands today, it is necessary to view Indonesia’s private equity market as one on the precipice of a new cycle. As discussed during the recent Private Equity & Venture Forum hosted by the Asian Venture Capital Journal (AVCJ) on 20th March 2014, this new cycle is subject to new challenges, such as a weaker rupiah and political uncertainty during an election year, but also makes available lucrative opportunities to those who know where to look.
The key to enjoying success in Indonesia’s private equity market remains relatively unchanged; finding the right local company to invest in. As explained by Mr Doug A. Coulter of LGT Capital Partners during a panel discussion at AVCJ 2014, the impact of poorer macroeconomic conditions can be offset by strategically entering the market upon unearthing exceptional companies to work with. This sentiment was echoed by fellow panellist Mr Tom Lembong, Co-Founder and Partner at QUVAT Management, in his statement that 70-80% of a general partner’s (GP) outcome in Indonesian ventures depends upon its ‘bottom up’ approach, or who it decides to work with.
This assertion may seem like an obvious one to make, but private equity firms must avoid the mistake of assuming that ‘finding the right local partner’ is synonymous with chasing after mega deals with Indonesia’s corporate giants. Though the gains made by CVC Capital Partners Ltd upon buying and selling Indonesian retail leader PT Matahari Department Store presents a tempting template with which to approach the market, international GPs are better served seeking out smaller opportunities in sectors with obvious room for growth. These entry points into the market tend to be subject to less competition from sophisticated local players and yet offer considerable returns as part of a high growth investment portfolio. Indicative of this trend towards smaller deals, the biggest purchase of an Indonesian company by an international GP in 2013 was KKR and Co.’s $35 million USD acquisition of shares in PT Tiga Pilar Sejahtera Food, a publically traded noodle maker.
Anecdotal evidence from Indonesia’s private equity industry suggests that an increasing number of local family-owned businesses are prepared to divest shares in subsidiary companies. Typically, the retirement of a patriarch sets in motion the passing on of leadership to the second generation; a period of reconsolidation that can result in subsidiary companies being made available for investment. This is particularly true for companies looking for capital investment but not yet ready to list publically. Furthermore, the transition to globally-oriented second generation leaders who are more open to divestment as a means of pursuing an aggressive growth strategy bodes well for the scope of opportunities to grow subsidiaries into fully-fledged, standalone business units.
This type of investment is very much in keeping with the strategy prescribed by private equity firms with experience in the region, in that it can often require smaller investment ($25 to $50 million USD) and a long term commitment to a project that extends beyond the usual three to five year involvement. Getting one’s foot in the door through smaller companies in industries soon to flourish with growing Indonesian purchasing power such as consumer goods (See Indonesia’s FMCG Sector), retail, and financial services can be achieved through means beyond investment in family-owned businesses. Similar opportunities exist in driving the expansion of companies that have enjoyed localised success in their provincial market but have yet to develop a nationwide presence.
The rising loan to deposit rate in Indonesia’s banking sector, which jumped to 90% in 2013 (Fitch) from 79% in 2012 , will also serve to open doors to private equity firms. With less liquidity and a tightening of their standards for capital loan approval, banks are expected to be more restrictive in providing financing, which should make it easier for PE investors to source deals (AVCJ, Volume 27 No 9). Certainly, there is room for private equity firms to move into the space vacated by the banking sector, which as reported by Chief Economist at Bank Mandiri, Mrs Destry Damayanti, still accounts for approximately 90% of additional financing for projects in Indonesia.
It is important to note, however, that the involvement of private equity firms in Indonesia does not begin and end with capital injection. Many local companies took advantage of Indonesia’s economic growth in the late aughts to build capital and increase liquidity, and are thereby well positioned to self-finance expansion. Private equity firms must therefore bring more to the table than money, and emphasise strengths in industry-specific know how, international networks, and/or access to technology. GPs with expertise in identifying management level talent are also sought after, as this remains a fundamental weakness of local businesses constrained by gaps in Indonesia’s pool of human resources. This type of experience can prove to be critical to a private equity firm’s ability to strike deals, given the presence of increased competition from strategic investors in the market.
In many ways, the current state of Indonesia’s private equity market mirrors that of the country’s business climate taken as a whole. Once the poster boy for opportunities in emerging countries, the market has lost some of its lustre with the slow pace of reform beginning to take a toll on the country’s once highly touted fundamentals. With that said, strategies that have proven fruitful in the past will continue to hold true in the immediate future. Private equity opportunities remain ever present in Indonesia however tapping into them requires taking a longer term view of the market and most crucially building a local network to be able to identify not only which companies to target but also when.
Global Business Guide Indonesia - 24th March 2014
Population: 255 million (estimated, 2015)
Currency: Indonesian Rupiah
Nominal GDP: $895 billion USD (IMF, 2015)
GDP per capita: $3,415 USD at Current Prices (IMF, 2015)
GDP Growth: 4.7% (2015)
External Debt: 34.77% of GDP (BI, Q3 2015)
Ease of Doing Business: 109/189 (WB, 2015)
Corruption Index: 107/175 (TI, 2014)