AVCJ at 25: Sandiaga Uno & Kay Mock of Saratoga Capital

When Sandiaga Uno first invested in Adaro Energy coal was dirty, unloved and trading well below $40 per ton. It was 2001 and the dotcom revolution was in full swing while Indonesia was still picking up the pieces following the Asian financial crisis.

"Coal was not very much in vogue at the time, but we thought that an integrated play like Adaro would be very much in favor after the crisis," says Uno. "We were lucky that we got involved early on."

Uno invested through Saratoga Capital, the PE firm he set up with Edwin Soeryadjaya in 1998. Initial activity, including the first commitment to Adaro, was informal with Saratoga serving as a vehicle to manage the founders' capital as well as funds raised from associates. They paid about $50 million for a 51% stake in Adaro and set about helping improve output and profitability. Coal production grew from 17.7 million tons in 2001 to 47.7 million tons in 2011, while losses were transformed into net profit of $552 million.

There was a partial exit in 2005 as an investor group that included Farallon Capital Management, Quvat Management, Malaysian tycoon Robert Kuok, Government of Singapore Investment Corp. (GIC), Goldman Sachs and Citi put in $450 million. Three years later Adaro listed, achieving a market capitalization of $3 billion. It is now worth around $4.5 billion.

Adaro was the making of Saratoga, yet Uno sees the transaction as fairly typical of the firm's early activity. It was also quick off the mark with forestry player Sumalindo and telecom infrastructure provider Tower Bersama Group, both of which are now listed companies.

"Nothing sells better than a success story and once we started realizing those returns, local family offices that hadn't been investing private equity started to form investment firms," Uno says. "We spot the trend early and build an investment thesis around it and we maintained first-mover advantage by calling the right transitions in the mid-2000s. The next transition is consumer products and services and we are already involved in this space."

Success led to a transition within Saratoga itself. After about eight years of operating like a family office Saratoga began to manage third-party capital on a formal basis, which required the introduction of global standards and a more disciplined investment approach. Kay Mock, formerly of GIC, joined as a founding partner in 2006 to lead this effort and the firm's second fund - though its first properly institutional vehicle - achieved a final close of $152 million on Valentine's Day 2009.

"I'd spent about 17 years of my life at GIC and enjoyed it immensely but I felt it was time to leave the mother ship," Mock says. "Indonesia had been overlooked as the people who left after the Asian financial crisis focused on China and India. I felt it was just a matter of time before attention returned and, based on the last few years, I feel vindicated."

The crowning vindication came earlier this year as Saratoga Asia III closed at $600 million, one third above target. By comparison, the firm initially sought $300 million for Fund II but found itself third out of the gate behind Quvat and Northstar Pacific Partners at a time when LPs weren't nearly as interested in Indonesia.

The recent fundraise was all the more impressive given that none of the institutions that backed the previous vehicle were able to re-up due to internal restrictions. For example, CDC Group, the UK government's development finance arm, couldn't participate because Indonesia is no longer classified as a developing country. This underlines the rapid growth the country has seen in recent years and it has implications for private equity investors who until a few years ago faced relatively little competition for deals.

There are various contributing factors: Indonesia is enjoying a period of political stability; GDP growth remains above 6.5% per year, driven by rising domestic consumption by a youthful population; the country is rich in natural resources, and although the commodities boom has lost its edge of late, it can still rely on long-term demand from its Asian neighbors; and Fitch Ratings and Moody's now rank Indonesia's sovereign debt as investment grade, which is encouraging capital inflow.

"Everybody now sees Indonesia as a place to invest, which offers some new exit avenues, but competition is heating up and valuations are rising," says Uno. "We are worried about overheating and the ability to maintain the type of proprietary sourcing we've been able to generate in the past. It's good and bad, but overall good."

Target markets

Saratoga invests across three sectors - natural resources, consumer and infrastructure - and allocations to each one will inevitably change. Natural resources was the mainstay of the first two funds and, while the sector continues to be important, rising valuations in the past few years have complicated deal-making. Although prices have fallen recently and several Indonesian family conglomerates are overleveraged, which could create opportunities for PE, Mock says it is unrealistic for investors to expect the 10x returns they got in the past.

"Everyone was caught off guard by the magnitude of the appreciation in natural resource prices - people were making multiples of their costs," he says. "On the back of that, domestic demand and the growth of the middle class has also surprised some investors. Tower Bersama, for example, feeds on phenomenal growth in mobile telephony. Telecom is still a sector that I feel optimistic about."

Of the other two sectors, consumer remains fundamentally attractive. It is rapidly expanding and fragmented, yet at the same time it is the sector that is most accessible to foreign investors and valuations remain a concern.
Infrastructure is to a certain extent the polar opposite. Earlier this year a Saratoga-led group acquired a majority stake in electricity producer Medco Power International for $112 million from parent group Medco Energy. Mock says this kind of opportunity doesn't come up very often, adding that it was only possible because of Uno and Soeryadjaya's relationship with Medco Energy's owners.

Saratoga targets control transactions and these can be difficult to secure in an economy populated by entrepreneurs who are loath to give up large amounts of equity when they anticipate further growth. Mock argues that opportunities are emerging in cases where company owners have reached a glass ceiling because they can't get access to banking financing or they face sizeable competitive threats. However, it doesn't foreshadow a wave of deals that meet the needs of larger foreign investors.

"It's good for Indonesia to attract more investment, but the reality is there aren't many deals of size," says Mock. "It doesn't have the same scale as China or India. The potential targets are already owned by the large families, most of them are doing well, and so there is no incentive to sell."

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• Topics
• Expansion
• Southeast Asia
• People
• Saratoga Capital Group
• Sandiaga S. Uno
• Kay Mock
• Indonesia
• Southeast Asia