Indonesia's GPs: Subscriptions wanted

That is nearly seven times the size of its first fund, which launched just four years ago.

“Only five or six of these fund-of-funds are likely to receive allocations, which means the rest will look to smaller funds currently being raised,” according to one LP, who has backed Northstar since its early days.
Northstar’s success has been built on a combination of backing from TPG and Indonesia’s rapidly growing economy, which enabled it to execute unusually large deals for a local player. Only four other firms of any standing have been around longer: Batavia Management, Saratoga Capital, Quvat Management and Ancora Capital.

But the strong demand for exposure to Indonesia has given impetus to a host of new GPs based out of Jakarta, looking to raise funds that focus either on Indonesia exclusively or on the wider Southeast Asian region.
KV Asia, headed by Karam Butalia, former global head of Standard Chartered Private Equity, is targeting a $500 million Southeast Asia fund, while Falconhouse, started by a former Quvat executive, hopes to raise $300 million. Capsquare Asia Partners and Forte Capital are also currently believed to be fundraising. Fairways Capital and Mahanusa, a domestic investment bank, have predominantly been involved in advisory work but both plan on launching funds. The latter is already working with French investor Artémis Group.

The spike in new funds – plus the sheer size of the latest Northstar vehicle – speaks volumes for the potential of the market. At the same time, though, experiences elsewhere in the region, notably Vietnam in 2007, caution against overexcitement. Carrying the weight of expectation on their shoulders, Indonesia’s GPs now have much to prove.

Strong fundamentals

The economics are on their side. Indonesia’s central bank forecasts GDP growth of as much as 6.8% this year, after a 6.1% expansion in 2010, and 4.9% in 2009, the fastest in the G20 after China and India. “China, India, Indonesia and Brazil allowed the world to grow after the global financial crisis,” Patrick Alexander, managing director at Batavia, said at AVCJ’s Singapore Summit in July. “If the West continues to grow at 2% and Indonesia grows at 5-6%, it will be among the world’s top 10 economies five years from now.”

In addition to natural resources, private equity funds are drawn to Indonesia’s consumer sector, with household consumption accounting for an average 61% of GDP in the five years to 2009 compared to 36% for China, according to the World Bank. The country’s young and increasingly wealthy emerging middle class already represents the largest global market for BlackBerry and the second and third-largest for Facebook and Twitter, respectively.

Equally striking, though, are the investment data. Indonesia’s gross capital formation as a proportion of GDP for the same five-year period is 26%; in China it’s 41%. The country’s relatively depressed investment level is visible in its need for infrastructure – power plants, airports, highways and hospitals. 

“Everybody recognizes that we need to get it rolled out but we haven’t done it because we lack someone who can bring the Indonesians and foreign investors to the table and negotiate a deal,” said Veronica Lukito, CEO and managing director at Ancora, also at AVCJ’s Singapore Summit. “We need at least four or five big infrastructure projects to roll out and set a precedent.”

It is worth noting that private equity investors have up to now been relatively coy. In recent years, only Northstar and Quvat achieved rapid closes on their institutional funds – and market watchers say that, in each case, a small group of credible LPs signed up, and this led others to rush in. The Ancora Opportunity Fund has yet to close, according to AVCJ Research. Saratoga Asia II closed in early 2009 at $152 million, less than half its target, after more than two years of fundraising. Batavia’s funds, which launched a few years before those of its peers, struggled due to poor global market conditions.

Investment activity has also been muted, with $449 million committed in six deals in the first half of this year, well short of 2010 full-year total of $1.2 billion. The stats, as with the $2.4 billion invested in 2008, are dominated by two or three mega deals.

“As much hype as Indonesia is getting right now, it seems like people are still cautious about actually pulling the trigger,” says Tom Lembong, co-founder and partner at Quvat. “It feels like there’s a lot of agonizing, hand wringing – by both GPs and LPs.”

Several factors are at work here. First, large transactions are difficult to find and execute, and most industry participants say asking prices are rocketing across the board. Second, although Indonesia is far more politically and economically stable than it was a decade ago, residual concerns may remain about the quality of the legal and regulatory systems – as evidenced by recent talk of restrictions on foreign ownership in the banking sector.

Third, this is not Indonesia’s first taste of private equity, which might explain the absence of the gung-ho approach that characterized Vietnam’s boom period. Prior to the Asian financial crisis, with China and India still to open their doors, Indonesia was one of the most popular markets in Asia. The industry then suffered its fair share of troubles but has emerged the stronger for it. As one local GP puts it, “Private equity in Indonesia is now on version 2.0. Version 1.0 was in the mid-1990s when most investors flew in and flew out.”

Finally, the local talent pool isn’t very deep and LPs are arguably less tolerant of first-time funds than they were back in 2006-2007. It is generally agreed that attracting and retaining able staff at middle management, analyst and associate level is a major challenge. And though this new batch of GPs may have high hopes of gaining business from LPs that miss out on Northstar, they must first prove able to meet institutional investors’ requirements.

One regional GP bluntly questions whether the likes of Falconhouse, Fairways, Forte and Mahanusa are capable of handling the capital calls, quarterly mark-to-market portfolio valuations and regulatory compliance that underpin private equity administration. This begs the question of whether all of the new entrants will manage first to gain momentum and then consolidate their positions.

Strategic considerations

Quvat stands out as an example of the challenges present in Indonesia’s still nascent private equity space. It emerged as the early leader, launching funds of $150 million and $350 million in 2006 and 2008, and building up a strong LP base comprising US endowments, sovereign wealth funds and fund-of-funds. Quvat reached a first close of $205 million on its third fund and then two of the five founding partners said they wanted to retire (one subsequently changed his mind). Even though the departure didn’t officially trigger the fund’s “key person” clause, Quvat suspended the vehicle and returned capital to investors. It has since focused on managing its existing portfolio.

Ancora also suffered a key person event earlier this year.
At the same time, questions are being asked of Northstar’s strategy. While most funds of that size focus on Southeast Asia, Northstar Equity Partners III is Indonesia-only and some market watchers wonder how it will manage to deploy the full $750 million. “Some LPs told me they didn’t want to re-up because of the fund size,” says one GP, who runs a Southeast Asia-focused fund.

Northstar is likely to pursue large deals. This represents a risk in that it pitches the firm against global players such as CVC and The Carlyle Group, but it has a strong track record. In 2007, Northstar bought a 71.6% stake in Bank Tabungan Pensiunan Nasional for $200 million and took the company public a year later. The bank currently has a market capitalization of $2.4 billion. Northstar’s biggest deal came in 2009 and 2010, when it bought 40% of Delta Dunia for $350 million, which in turn acquired Buma, Indonesia’s second-largest mining contractor. The Singapore Government Investment Corp. (GIC) and TPG invested $400 million in Northstar’s acquisition vehicle.

The question is can the firm repeat its success. “When they started picking up assets there was no competition and they had back-up from TPG,” the GP continues. “It will be more difficult this time around but they have all the ingredients.”

One of those ingredients is connections to Indonesia’s business and political elite. The Delta Dunia deal couldn’t have happened without willing sellers in the Widjaja family; Northstar founder Patrick Walujo may be a former Goldman Sachs banker but he is also the son-in-law of billionaire industrialist Theodore Rachmat. The reality of Indonesia’s private equity industry is that any investment in a large company is likely to be no more than a minority stake divested by one of the family-owned conglomerates.
CVC has already adapted to local conditions, completing two deals in the last 18 months in partnership with the Riady family’s Lippo Group. The private equity firm bought a 72.6% stake in Matahari Department Store from Lippo’s Matahari Putra Prima for in January 2010, and restructuring it into a joint venture between the two companies. In March, CVC paid $275 million for a minority stake in LinkNet, a broadband and cable TV operator owned by Lippo subsidiary PT First Media.

Local vs. global

Plotting the future of Indonesia’s GP landscape, local connections are all pervasive – whether it is sourcing a minority stake in the next big mining deal from one of the tycoons or identifying growth capital opportunities in family-run consumer businesses. While the global private equity firms have or are looking into setting up offices in Indonesia, the implication is that domestic operators able to find the right deals at the right prices will continue to attract interest.

“Some of the guys who have come and paid what they paid are thinking that the growth rate in Indonesia justifies this approach, but there are other ways into this business,” says Ancora’s Lukito. “The focus of people coming from the outside, the global PE firms, would be to seek transactions with established large players as they already have footprints.”

An explosion in domestic private equity firms along the lines of China or India is unlikely, but a healthy mixture of international and local players is a scenario that appears to fit well with the plans of most LPs. Kelvin Chan, managing director for Asia private equity at Partners Group, admits to reservations about Indonesian GPs’ short track records and notes that ties to powerful families are not always good for transparency, but he is clear about his firm’s strategy.

“We want more exposure to country or regional funds in Southeast Asia,” he says. “We want to diversify from China and India because valuations are high and competition is intense. Indonesia is a big domestic economy.” 

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• Topics
• Southeast Asia
• LPs
• TPG Capital
• Ancora Capital Management
• Capsquare Asia Partners
• Northstar Group