AVCJ at 25: Patrick Walujo of Northstar Pacific Partners

With an $820 million fund at its disposal, Northstar Pacific Partners has nearly three times as much capital to deploy as in the previous cycle, but its target deals are expected to remain more or less the same. Instead, the Indonesian GP hopes to a larger fund corpus will allow it to become a little more selfish when divvying up co-investment.

"If you look at our deals, they have not really changed," says Walujo. "We have invested nearly $2 billion together with our co-investors. About $700 million of that was from the funds we manage, meaning we have provided more than $1.3 billion of co-investment opportunities to our partners. Our strategy has evolved as our assets under management have grown and, going forward, Northstar-managed funds will represent a bigger share of our deals."

Delta Dunia, Northstar's largest transaction to date, is a classic example. Working in conjunction with the founder of Bukit MakmurMandiriUtama (Buma), Indonesia's second-largest mining contractor, the private equity firm arranged a reverse takeover by listed investment holding company Delta Dunia in 2009.

The deal reflects Indonesia's development over the past decade. Delta Dunia started out as a textiles manufacturer, exporting rayon, cotton and polyester threads to Europe and the US. As the economy evolved, so did the business model: the textiles operations were offloaded in 2008 and replaced by property investments; a year later, the strategy changed again to focus on coal mining services via the acquisition of Buma. The opportunity emerged because Buma needed assistance refinancing $600 million in debt.

A consortium of investors including a Northstar fund purchased a large minority stake in Delta Dunia. TPG, Government of Singapore Investment Corporation (GIC) and China Investment Corporation (CIC) subsequently came in as co-investors.

In addition to demonstrating Northstar's previous capacity for co-investment, Delta Dunia underlines two factors that have been crucial to the private equity firm's success: a long-standing relationship with TPG and proprietary deal access through ties to domestic conglomerates.

After the shake-out

Northstar was set up by Walujo and Glenn Sugita in 2003 in the wake of massive asset sales by the Indonesian government as it repaired an economy scarred by the Asian financial crisis. The Indonesian Bank Restructuring Agency (IBRA) played a significant role: its initial mandate was to restructure distressed banks and administer the government's blanket guarantee program but this was subsequently extended to managing state holdings in these lenders and complete asset disposals. Walujo estimates that IBRA, which was eventually wound down in 2004, directly or indirectly controlled 80% of the economy.

Notable corporate divestments included the sale of a 40% stake in Astra International, the country's largest automobile manufacturer and distributor, to a Jadine Matheson-led consortium for $506 million in 2000. The company is now worth more than $30 billion. Farallon Capital Management, the US hedge fund, also made a highly profitable investment in Bank Central Asia after heading a consortium that bought a majority stake in the lender from IBRA for $541 million in 2002.

"The groups that invested at that time - primarily hedge funds and distress funds - did very well," recalls Walujo. "We started at the tail-end of this period. The asset sales helped get the economy moving again because more businesses were back in private hands. It was an interesting time to do something on our own in Indonesia."

Walujo returned to Indonesia from Japan having spent three years engaged in M&A and business development for Pacific Century Group Ventures, a company owned by Hong Kong businessman Richard Li. 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.

Gaining momentum

In the first three years of its existence Northstar invested on a project-by-project basis as well as doing corporate advisory work. "These were relatively small but high multiple investments," says Walujo. "It was opportunistic. At the time in Indonesia you could get hold of cheap assets no matter what the sector."

One of those assets was Adaro Energy, which has since gone on to become one of the country's largest coal producers by market value. Leveraging his relationship with Dattels, Walujo brought some TPG partners into the Adaro deal. The US firm was impressed with the execution and when Northstar decided to raise its first fund in 2006, TPG participated as an LP.

"When you look at our organization, we structure it much like TPG and our philosophies are quite similar in that we both pay a lot of attention to portfolio management and operations," says Walujo. "They only invested a small amount in the first fund. We teamed up not so much for the capital as for the expertise and endorsement from an international private equity firm. The fact that TPG selected Northstar lent significant credibility to what we were trying to build."

Investors in the first fund, worth $110 million, were predominantly individuals and groups that had supported Northstar during the project-by-project days and knew the team very well. The second vehicle, which closed at $285 million in 2010, saw a broadening of the LP base as foreign institutional investors, including the University of Texas endowment, became more interested in Indonesia.

The standout deals in the first two funds include Alfamart and Bank Tabungan PensiunanNasional (BTPN). With the former, Northstar supported the original co-owner of the convenience store chain when he bought it from Philip Morris. The US tobacco giant had picked up the business as part of a wider acquisition and had no interest in retaining it. One of Northstar's funds led a consortium to take a significant minority stake in 2007, exiting three years later for a handsome return.

Northstar and TPG jointly acquired a majority stake in BTPN for $200 million in 2008. The bank's market capitalization has since more than doubled to $3.1 billion.

According to Walujo, it has only been in the last 18-24 months that Indonesian private equity has really gained momentum. During this period Northstar closed its third fund at $820 million and also formalized its relationship with TPG through a share swap agreement. The specifics of the arrangement are not public but the TPG is said to have a 10% stake in Northstar, which owns less than 0.5% of the US firm. AshishShastry, formerly a partner with TPG in Singapore, has joined Northstar as a managing partner, while Walujo and Sugita are now senior advisors to the US firm.

"It is a very solid relationship. We have learnt a lot about private equity from TPG and they have learned a lot about Southeast Asia from us," says Walujo. "Interaction between Northstar and TPG is very strong and we expect that to continue."

A handful of investments have been completed out of Fund III, including listed tire producer Multistrada and a $200 million commitment to Triputa Agro Persada, a palm oil producer. Both are essentially a play on Indonesia's essential strengths: rising domestic consumption, low-cost production and natural resources.

Multistrada relies on exports for three-quarters of its revenue but domestic sales are rising 40% per annum on the back of strong demand for cars and motorcycles. Triputa, meanwhile, marks the culmination of a five-year search for palm oil opportunities that offer strong growth prospects, capable management and a reasonable entry valuation. Each company is a lowest cost producer, Walujo says, which means they can remain competitive regardless of price cycles.

Family ties

What makes Tiputra particularly interesting is its ownership and, by extension, the reach of Northstar's founders into the Indonesian business elite. The company is run by Theodore Rachmat - who is also Walujo's father-in-law - and Benny Subianto, two of the country's wealthiest individuals. Both men were formerly senior executives at Astra and the way in which their careers interlink with domestic business success stories speaks volumes for the value of relationships in deal-making.

Rachmat's uncle, William Soeryadjaya, founded Astra and Soeryadjaya's son Edwin also worked there and went on to set up Saratoga Capital with Sandiaga Uno. Alongside Subianto and Garibaldi Thohir, son of MochamadThohir, another Astra founder, they comprised the five-man team that created Adaro.

"Obviously it is a useful thing to have," Walujo says of his family connection to Rachmat. "He is a man of high reputation and he has a strong network in Indonesia. We have no direct economic ties - he has not invested a single dollar in our funds - but being associated with him definitely helps."

It does not, however, guarantee Northstar deal flow. The private equity firm almost always invests alongside partners - usually management teams, as was the case with Buma and Alfamart, and sometimes with other financial players. Walujo stresses that management teams do not look at Northstar as a generic private equity player offering an alternative to other forms of funding; rather, they study the individuals sitting across from them and decide if they would make good business partners.

"For many transactions there is some competitive dynamic with other firms, but in most situations we do not get the deal because we pay the highest price," he says. "We relate well to our counterparties because we have deep local knowledge in Southeast Asia. Working with a decision maker who understands your culture, and whom you can call at any time, makes you feel as though you are being treated fairly."

In a similar context, pre-existing relationships might open a few doors, but they do not necessarily result in an invitation to enter. "While they offer advantages, people are not going to bend over backwards and make an irrational deal just because of a strong relationship."

• Tweet  
• Facebook  
• LinkedIn  
• Google plus  
• Save this article  
• Send to  

• Topics
• Southeast Asia
• People
• Expansion
• Buyouts
• Northstar Group
• Indonesia
• Southeast Asia
• Growth capital
• buyout