Indonesia's GP landscape: Slim pickings

AVCJ Research has records of two dozen private equity investments of $75 million or more in Indonesia between 2008 and 2014. Only seven of these were by brand-name global or pan-regional players, and four were split between CVC Capital Partners and TPG Capital. There have been 11 more deals in this size bracket since then. Seven featured the likes of KKR, Warburg Pincus, General Atlantic, and Capital Group, as well as TPG and CVC.

Progress may be relatively slow, but a growing number of big ticket investors appear to be making their mark on Indonesia. The same cannot be said of domestic GPs. In 2011, there were four established PE firms in the country: Northstar Group, Saratoga Capital, Quvat Management, and Ancora Capital. Today the number remains the same: Northstar and Saratoga remain, while the other two have been replaced by Falcon House Partners and Capsquare Asia Partners.

“In terms of raising capital in an institutionalized manner, the number one problem is the talent pool isn’t that deep. You don’t find many Indonesians in consulting firms and investment banks, which is where a lot of PE talent originates,” says Patrick Walujo, co-founder and managing partner at Northstar. “Second, it isn’t clear whether the market needs additional funds at this moment. Even without more Indonesian GPs the market is still robust, we see a lot of regional GPs becoming more active.”

Other industry participants agree wholeheartedly with the observation about talent. Indonesians who could feasibly make a pitch to foreign institutional investors generally require some level of overseas education and work experience. Many who meet these criteria come from wealthy families and end up working in the family business. The exceptions aren’t necessarily drawn to mid-market private equity.

“There is a shortage of talented people who are well connected, and most of them get snapped up by the big guys and the established local players as their on-the-ground talent in Indonesia,” says David East, partner and head of transaction services as KPMG Indonesia.

Limiting factors

However, human resources is not the only limitation. Whenever attention is drawn to how small private equity is as a proportion of GDP in Indonesia compared to China and India as well as developed markets, it is usually followed by observations about the distinctive nature of the country’s economy. Specifically, the way in which power is concentrated in the hands of family-owned conglomerates. 

Mark Thornton, managing director of Indonesia Private Equity Consultants, believes these family groups make their own PE-style investments, distorting the market and hindering independent GPs. The GPs say this is overplayed. Walujo notes that Northstar has never lost out to one of these groups in a competitive situation, while Brian O'Connor, founding partner at Falcon House, says mid-market firms like his see plenty of deal flow from first or second generation entrepreneurs who are looking for professional growth capital and institutional value-add.

Falcon House and Capsquare emerged during the fervor of 2011 when close to a dozen private equity firms were trying to raise debut Indonesia funds. Both proved they have staying power. Falcon House closed its first fund at $212 million in 2013 and then hit the hard cap of $400 million on its second vehicle last year. Capsquare raised around $80 million for its first fund and is said to be in the process of raising a new pool of capital. 

“Today’s fundraising environment is more challenging compared to 2011 and 2012,” says O'Connor. “Specifically, the macro story might be perceived as less compelling to some investors, many LPs are also waiting for exits that demonstrate the market’s return potential, and the overall pool of capital available for first time and younger funds is shrinking. However, the expected impact of the success of tax amnesty and far reaching economic reforms over the past years is likely to change this equation.”

While the government’s policy agenda has helped spur confidence, it is not shared by all LPs, who weigh the positives out of Indonesia against the merits of historically more reliable markets in the region.

“I don’t think there is the same level of interest in Indonesia as other major Asian markets – whether that’s a holdover from the bad old days of the Asian financial crisis or more recent disappointments. Even these one-off mega hits like Matahari Department Store [a CVC investment from 2010] are not enough to get people excited about a country fund, so many just put their money with one of the pan-regional guys,” says Doug Coulter, a partner at LGT Capital Partners.

He adds that most LPs spend little time in Indonesia, particularly given the opaqueness and complexity of the market. It doesn’t get a lot of mind space relative to other jurisdictions, and as such, the generally lower allocations should not come as a surprise.

Silver lining?

Nevertheless, Indonesia remains an attractive proposition in terms of demographics – more than half the population is under 30 years of age – rising urbanization, and the proportion of disposable income that is channeled into consumer spending. There is certainly no shortage of activity at the apex of consumer and technology, with a handful of independent or captive GPs established in the last few years and now operating in the Series A space.

Northstar’s Walujo admits that expectations for the economy were very high in 2011 and these haven’t been met, with Indonesia enduring a torrid 2014-2015 as a combination of wweaker commodities prices and instability in the broader global economy took their toll. But he suggests that the consumer sector in particular is worth reconsidering.

“Interest in consumer businesses has fallen in recent years because growth has slowed, but the reality is the macro has stayed intact in this and other sectors. It is a good time to invest in areas when people are not looking at them. The challenge for us is to make sure we understand the drivers behind the development of a sector and analyze the areas we want to invest in,” Walujo says.   

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• Topics
• Southeast Asia
• GPs
• Expansion
• Buyouts
• LPs
• Fundraising
• Indonesia
• Saratoga Capital Group
• Northstar Group
• Falcon House
• Capsquare Asia Partners