GP profile: Northstar Group

The success of Bank Tabungan Pensiunan Nasional (BTPN) was built on scale. Having acquired a majority stake in the Indonesian lender for around $200 million in 2008, Northstar Group and TPG Capital drove an aggressive expansion strategy that saw 600 new branches open within 18 months. It was part of a concerted effort to target the country’s underserved small and medium-sized enterprises (SMEs).

By the time Japan's Sumitomo Mitsui Banking Corporation acquired 24.3% of BTPN in 2013 at a valuation of IDR37.5 trillion ($2.6 billion), the bank had more than 1,100 branches and a network of 69,500 community lending groups. Between 2011 and 2013, assets and net profit grew 26.7% and 41.3%, respectively. Northstar and TPG exited across several transactions as Sumitomo Mitsui gradually increased its stake, completing one of Indonesia’s most lucrative PE investments.

“We wouldn’t do that today – it doesn’t make sense to open so many physical branches,” says Patrick Walujo (pictured), co-founder and managing partner at Northstar. “We are still investing in the consumer sector in Indonesia and we are still investing in financial services, but we are doing it in a different way. We are in the process of acquiring a small bank – Bank Artos – and we are working with management from BTPN to turn it into a fully digital bank. Digital represents a huge opportunity for us.”

The private equity firm’s technology-enabled philosophy applies to almost every aspect of Indonesia’s services sector, reflecting a broader industrial evolution. But financial services – whether it involves recalibrating an existing lender or working with a technology platform like Go-Jek as it seeks to disrupt the space – offers the most telling insights into how Northstar wants to rebuild itself in the image of a modern emerging market economy.

“Increased penetration means tapping into digital communications to serve the population in a more efficient manner,” adds Choon Hong Tan, the private equity firm’s co-CIO. “Over the past five years, we have seen a rapid rise in smart phone penetration and the use of e-wallets. This is creating a new platform for financial services.” 

Building up

Northstar came into being on the back of an earlier shift in Indonesia’s economy. In 2003, the country was still wearing the scars of the Asian financial crisis, and large swaths of its financial and corporate infrastructure were climbing back from the brink. The Indonesian Bank Restructuring Agency (IBRA) ended up becoming the direct or indirect owner of a huge portfolio of assets. It wouldn’t hold them forever, so private investors – Walujo among them – waited for divestments.

Walujo had returned to Indonesia from Japan having spent three years with Pacific Century Group Ventures. Before that he was a banker at Goldman Sachs in London and New York, where he came under the wing of Tim Dattels, who subsequently moved to TPG as a senior partner in the private equity firm's Asian operations. Walujo teamed up with Glenn Sugita and pursued a combination of small investments – on a deal-by-deal basis – and M&A advisory work.

They hit pay dirt with coal producer Adaro Energy, bringing several TPG partners into what turned out to be a lucrative pre-IPO transaction. When Northstar raised its debut fund in 2006, TPG participated as an LP. Five years later, TPG acquired a minority stake in Northstar, which in turn received a smaller interest in the global private equity firm’s Asia business. They continue to co-invest in some Indonesia-based deals.

“It’s like playing sports – if you play with the best, you end up playing better,” says Walujo. “Working with TPG gave us all kinds of different perspectives. If I had to name the single most valuable thing, that would be it. In addition, when we raised Fund I, Indonesia was still a scary place for many in private equity. The TPG connection offered some level of assurance that at least we knew what we were doing.”

Northstar raised $110 million for that fund, a relatively concentrated but high-performing portfolio. Notable deals included Alfamart, a convenience store chain carved out from Philip Morris in conjunction with local management, and BTPN, which was a co-investment with TPG. As the firm gained momentum, its fund sizes grew, and its LP base became broader and more institutional. Northstar closed its second vehicle at $285 million in 2010 and a third at $820 million in 2011.

Fund III also saw an expansion into Southeast Asia, with a view to applying lessons from Indonesia in other markets. For example, the GP was approached by Thai Credit Retail Bank, which wanted to implement BTPN’s SME-focused model in Thailand. Northstar put in a new CEO – an Indonesian based in Thailand who used to work for GE Capital – and claims to have helped the bank achieve the highest interest rate margins in the country. An exit came in July after a seven-year holding period.

Until 2013, Indonesia was the golden child of Asian private equity, anchoring emboldened Southeast Asia strategies put forward by numerous global and regional firms. They were seduced by rapid economic growth, youthful demographics, and an emerging consumer class. Valuations rose accordingly. Then the commodities boom ended, exports slumped, emerging markets were hit by US tapering efforts, the current account deficit soared, and the rupiah went into freefall.

Northstar’s fourth fundraise was tougher than its third, a final close of $810 million coming in late 2015 after a near 18-month process. The impact of currency depreciation is visible in the portfolios of most GPs active in Indonesia circa 2011. For example, Michelin’s acquisition of an 80% stake in tire producer Multistrada Arah Sarana in January returned the capital Northstar invested in the business, according to filings. If the rupiah was still at its 2011 level, the multiple would have been 1.7x.

Shifting focus

The first two funds were invested against a backdrop of macroeconomic recovery, a commodity upcycle and limited competition for deals. None of these phenomena still held true by the end of the Fund III investment period, but by then Northstar was already starting to adapt.

“In the early days, private equity investors were quite heavy on commodities and benefited from the rise of China,” Tan observes. “Since then, commodities have become tougher to invest in, and while the economy is growing, it’s not at 8-9%. If you go into an asset intensive business at a high valuation, you may have difficulty in terms of exiting at the right multiple. As a result, the focus has shifted from commodities to consumer and financial services.”

Fund III is still in exit mode – assets sold in the past 12 months include BFI Finance as well as Multistrada and Thai Credit Retail Bank – while Fund IV is more than two-thirds deployed and has delivered two realizations, both of which could be seen as early dividends from the change in strategy. The first is Bank Tabungan Pensiunan Nasional Syariah (BTPS), a subsidiary of BTPN that specializes in shariah-compliant lending. Northstar invested ahead of the company’s IPO last year.

“We are financing productive low-income females and providing working capital to small companies. It is the biggest shariah bank in the region by far in terms of profitability. It is growing leaps and bounds and it has nothing to do with the macro,” says Walujo. “If you look at where people are making money in Indonesia, it is not from traditional businesses; it is in segments that are growing much faster than the overall economy.”

The second exit is said to be Go-Jek, a ride-hailing and online-to-offline services platform that has grown from a start-up to a $10 billion behemoth in the space of nine years. Northstar first invested in the company’s Series B; it is said to have made a partial exit in the Series F, which is expected to reach $2 billion across multiple tranches. The PE firm declined to comment on the situation.

Go-Jek is a significant part of the Northstar story in several ways. Not only is it the key value driver in Fund IV, but it offers a blueprint of how the GP is seeking to engage with a new generation of entrepreneurs. Northstar’s involvement with the company predates the Series B; Go-Jek founder Nadiem Makarim previously held a senior position at Kartuku, an offline payment services provider backed by Northstar. Go-Jek’s Series A was led by NSI Ventures, a VC arm of Northstar that became fully independent last year and rebranded as Openspace Ventures.

Go-Jek claims to have facilitated two billion transactions worth a cumulative $9 billion in 2018, while its payments and food delivery services processed $6.3 billion and $2 billion, respectively, underlining how diversified the business has become. Northstar leveraged its experience in financial services to advise on the development of Go-Pay, the payments offering. In 2017, Go-Jek went full circle when it acquired three transaction processing businesses, including Kartuku.

“The next step of the evolution is to deepen penetration and access to financial services. Given our track record in the sector, we endeavor to connect our entrepreneurs and partners,” says Tan. “Go-Pay no longer just serves a closed-loop ecosystem of drivers and merchants. It has penetrated offline merchants and expanded transactions beyond Go-Jek merchants. This is a precursor to scaling up as the default means of payment for the mass market in Indonesia.”

Early-stage insight

This makes for a good fit with Northstar’s broader digital economy mandate. The private equity firm’s 15-strong team has accumulated knowledge with each deal, but a network of venture capital relationships is invaluable to staying on trend. For example, Northstar is an investor in Go-Ventures, the VC arm of Go-Jek.

“Partnering with Go-Ventures gives us a better view of the early-stage tech sector, and over time, should allow us to make more investments in that space. It also helps us get comfortable with going in early, before valuations get too high,” says Sunata Tjiterosampurno, Tan’s co-CIO. “If you don’t have the necessary background, or you don’t know the founders, you cannot move fast. With digital deals, you have to move faster than on PE deals – and you don’t necessarily get as much detailed information.”

Northstar’s technology investment activities already extend into Vietnam, where it has backed e-commerce platform Tiki, online education business Topica, and co-working space operator UPGen. Tiki and Topica have received multiple rounds of VC funding, according to AVCJ Research’s records.

Nevertheless, Indonesia remains the key market, and the rise of venture capital and technology-enabled business models is unmistakable. Two-thirds of the $7.4 billion deployed in the country since the start of 2017 has entered the technology space. This compares to 22% for the preceding three years. Over the same two periods, VC investment has risen from $1.15 billion to $3.9 billion.

“Indonesia is not yet mature enough to deliver a healthy flow of buyout transactions, it is still largely a growth capital market,” says Tan. “There is a lot of activity around emerging companies and this has impacted our investment strategy. We increasingly see the need to play across the capital lifecycle, not just doing large or mid-cap deals. This in turn forces us to be more active in developing the ecosystem and building relationships with entrepreneurs at an earlier stage.”

It should be stressed that Northstar has no plans to become an early-stage investor, confine itself to pure-play internet businesses, or stop sourcing deals through ties to the family conglomerates that dominate traditional business segments. The portfolio currently includes exposure to Indomaret, a Salim Group-controlled convenience store operator of similar size to Alfamart, and to Kino Indonesia, a mid-market fast-moving consumer goods business.

Rather, the plan is to combine experience gleaned from years of exposure to the consumer and financial services sectors and address opportunities through a prism of technology. “There are many brick-and-mortar businesses that can benefit from these trends,” Walujo explains. “However, if we back a retail business, we better make sure it is equipped to compete with non-traditional players.”

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• Topics
• Southeast Asia
• GPs
• Indonesia
• Northstar Group