Private equity hotspot: Funds provide a new financing mechanism for local firms

Although private equity (PE) has faced the challenges of lower leverage and poor image since 2008, Indonesia is attracting a growing number of foreign and homegrown dealmakers. “PE is drawn to Indonesia given the strong growth prospects,” Destry Damayanti, chief economist at Bank Mandiri, told OBG. “Given Indonesia’s still shallow financial sector, there is strong demand for credit, and thus opportunity for alternative funding channels.” Fundraising is reaching new levels and the number of deals is multiplying, while the traditional complexity of exits in Indonesia’s still shallow capital markets seems to be easing with several successful listings and strategic sales over the past few years.

SECTOR SCOPE: Still far from challenging the dominance of bank funding for mid-sized and larger firms, Indonesian PE accounts for less than 1% of GDP, according to local fund manager Saratoga Capital. Yet more insulated from global trade and growth slowdown than its more export-oriented neighbours, Indonesia is widely viewed as the next hotspot for PE, ranked as one of the top 50 most attractive PE investment destinations in the IESE Business School’s benchmark Global Venture Capital and Private Equity Country Attractiveness Index. As such, private equity fundraising has grown from $778m in 2008 and $570m in 2009 to over $1bn in 2012, according to figures from the US-based Emerging Markets PE Association, a sign that the PE industry is slowly developing to fill a much-needed funding gap for Indonesian corporates.

FUNDS RAISING: As the leading global PE players descend on Jakarta in search of deals and raise funds dedicated to South-east Asia and Indonesia in particular, they have to contend with an increasingly vibrant home-grown PE fund management community. In a seemingly watershed year of 2012, when local PE funds raised roughly $1bn, a growing pool of funds is searching for mid-sized deals in Indonesia. The first local PE firms on the market since 1998, Saratoga Capital was founded by young entrepreneur Sandiaga Uno and the founder and former owner of Astra International, Edwin Soeryadjaya. Uno estimates it has invested $600m through its two previous funds and returned five times the amount to investors. Its early deals have included coal producer Adaro, independent power producer Medco Energy (in conjunction with the IFC), Mandala Airlines and telecoms infrastructure operator Tower Bersama Group. The firm has led the largest leveraged buy-outs since the Asian financial crisis with Adaro, acquired in 2005 for $973m with backing from Citigroup, Goldman Sachs and US-based hedge fund Farallon Capital Management. With roughly $2bn of assets under management, Saratoga is aiming to raise over $400m for its third fund in 2012, up from $300m for its second fund, to invest in sectors including resources, energy, infrastructure, telecoms and consumer goods.

BREAKING RECORDS: Northstar Pacific Capital, established in 2003 by two Indonesians, geared up fundraising the fastest since 2011, when one of the largest PE firms globally, Texas Pacific Group Capital (TPG), acquired a stake through a share swap, giving Northstar 5% of TPG, which gained 20% of the local firm. The firm broke records in 2011 when it raised a record $820m for the third Northstar fund, of which 20% had been invested by 2012. The largest Indonesian fund to date, the third fund was oversubscribed. The previous two funds had already invested some $1.2bn, including $400m of the firm’s own capital. The third fund closed a number of deals in 2012, including stakes in consumer lender BFI Finance in May, 25% of stock broker Trimegah Securities and a majority stake in tyre producer Multistrada Arah Sarana, both in September.

A number of other PE groups also raised significant funds in 2012. Ancora Capital, which was established in 2007, has been an active investor in Indonesia and is currently investing out of its second private equity fund. The firm focuses on growth equity investments in the middle market, primarily in the domestic consumption sectors, in addition to building on its long expertise in natural resources. Yawadwipa, established in 2011, started fundraising for its $1bn “Java fund” in 2012, and announced plans to buy a majority stake in Bank Mutiara. Newly established Falcon House announced plans to raise $200m for its first fund in 2012, mobilising $25m from the International Finance Corporation and $60m from the US Overseas Private Investment Corporation.

INTO THE FRAY: TPG has not been the only global PE player to focus on Indonesia, despite challenges in developed economies to find both opportunities and exits. US-based KKR & Co raised $500m for its new South-east Asia-focused fund in 2012 and recruited a former president of Bank Internasional Indonesia to chase deals. UK-based CVC Capital has led the largest PE buy-out in Indonesia to date, with its Rp7.2trn ($720m) acquisition of retailer Matahari Petra Prima in 2010. Other firms seeking Indonesian opportunities based in Singapore include the Carlyle Group, which closed its fourth Asia fund in 2012 worth $3.5bn, Blackstone, Starwood Capital Group, Aureos Capital, which is raising $200m for its second ASEAN fund, and Bain Capital. While Carlyle concluded its first deal in Indonesia in October, other firms like KKR and Blackstone had yet to do so by late 2012, a sign that finding the money to invest may be easier than the investments themselves. “It is easier to raise money than to find deals,” Fauzi Ichsan, managing director and senior economist at Standard Chartered Bank, told OBG.

SMALL BUT GROWING: The value of PE deals has grown steadily despite a trough in 2009, with growth in the total value of deals averaging 50% annually in the four years to 2010. “If you compare the yields of PE compared to those of corporate or government bonds, they are much more attractive, so this rush to fund PE deals is normal,” Anton Gunawan, chief economist at Bank Danamon, told OBG. The 40% year-on-year slump in the value of deals to $650m in 2011 was caused by the largest deal to date in January 2010, the $800m sale of Matahari department stores by Lippo Group to CVC Capital. Another landmark deal came in December 2010 when TPG and Singapore’s Investment Corporation acquired a $400m stake in Delta Dunia, the country’s second largest coal mining contractor. The two paired up again in September 2012 to buy a large minority stake in oil producer Triputra Agro Persada for $200m.

While there were only nine deals over $100m between 2006 and 2011, the lion’s share of deals have been mid-sized, complicating global PE funds’ search for opportunities large enough for investment. Major corporates requiring over $100m have alternative funding options, such as corporate debt issues, which do not dilute existing shareholders’ controlling stakes. Local PE funds have focused on more mid-sized deals.

OF INTEREST: Deal flow thus far has focused on sectors such as mining, financial services, infrastructure and consumer goods. A 2012 survey by Bain Capital of PE managers in Asia Pacific found nearly 80% of respondents expecting PE deal activity to rise in coming years, with 86% of those surveyed finding consumer goods as the most promising sectors, followed by energy and health care with 64% mentions each. By contrast, financial services and infrastructure were seen as the least attractive. The year 2012 witnessed a growing number of larger mid-sized deals: Carlyle concluded its first deal of $100m deal for a quarter stake in telecoms tower operator Solusi Tunas Pratama in October, while Affinity Equity Partners invested $100m for a minority stake in motorcycle distributor Mitra Pinasthika Mulia in November. Meanwhile, Lippo Karawaci has been seeking to sell between 20% and 49% of its Siloam Hospital for $200m to $300m, eliciting interest from Blackstone, KKR, Bain and UAE-based Abraaj Capital.

GREAT EXPECTATIONS: Despite the industry’s nascent state, Indonesian PE has already recorded several successful exits, through both initial public offerings (IPOs) on the stock exchange and strategic sales. While Indonesia does not impose capital gains taxes, assets sold are subject to a transaction tax of between 0.1% and 10%, depending on value, while foreign investors must comply with a 20% dividend tax unless exempted by a bilateral treaty. Saratoga achieved the largest IPOs to date, selling a 35% stake in coal miner Adaro in a $1.31bn IPO in 2008, the largest IPO at the time, and structuring a $232m IPO for telecoms infrastructure provider Tower Bersama Group in late 2010. While these early successes are encouraging, CVC Capital’s bid to sell its stake in Matahari for twice its original investment two and a half years prior, announced in September 2012, reflects PE funds’ expectations of high returns.

While the value of deals and assets under management remains a small fraction of both stock market capitalisation and GDP, the prospects for PE in Indonesia are indeed bright. Global PE firms will need to expand their human capacity regionally to find deals amidst growing competition, while home-grown funds will maintain an edge in closing mid-sized deals that account for the lion’s share of opportunities in Indonesia. Should the value of PE funds expand to 3% of GDP in the medium term, as expected by firms like Saratoga, this form of equity finance will play an increasingly significant role in scaling up successful Indonesian businesses.