Indonesia’s 237 million people and political stability are the attraction. An emerging middle class is driving domestic consumption and stimulating PE interest in consumer markets, especially financial services, retail and food and beverage. It is only in the past few years that international PE firms have looked seriously at Indonesian opportunities. High-profile investments such as Matahari Department Stores and GarudaFoods have raised the profile of PE and could encourage conglomerates and listed companies to look at divesting businesses to PE, particularly as many founders are passing the reigns to the next generation family members.
Deal origination is a challenge for international PE firms, who have been targeting the country from Hong Kong or Singapore, though they are increasingly seeing the importance of having eyes and ears on the ground and building local relationships. In September 2011 TPG Capital entered into a share swap with domestic buyout group Northstar Pacific to better source deals in Indonesia,2 but leading local funds such as Saratoga and Affinity have so far rebuffed suitors.
The deal process can be drawn out and the key is to identify willing sellers and get in front of the decision-maker. Even then, the negotiation process takes considerably longer than in developed markets. Due diligence can be a problem and investors need to check books very carefully as accounts are often not reliable and may have been structured to minimize tax liabilities.
There is pressure on the big PE funds to get deals done, but pricing could stand in the way. Indonesian vendors use a limited number of high-priced deals to benchmark their asking price, and if pricing expectations do not moderate, there is a danger that PE funds will withdraw from the market.
Market Analysis
Indonesia has established itself as one of Asia’s most stable economies. After growing at an average 5.3 percent a year from 2001 to 2008,3 growth in 2009 was a relatively strong 4.6 percent4. The economy is expected to grow 6.3–6.5 percent in the years to 2013.5 With domestic consumption accounting for 60 percent of GDP6, Indonesia’s economy is less dependent on exports than some of its neighbors and thus less exposed to the problems in the US and Europe.
In early 2011 Fitch, Moody’s and Standard & Poor’s upgraded Indonesia’s credit rating and held out the prospect of it attaining investment grade for the first time in a decade in 2012,7 a move that would increase the country’s ability to finance infrastructure projects. The government’s ability to achieve progress in infrastructure development is also being closely monitored. Investors are increasingly comfortable with risks that used to plague the archipelago, including regional autonomy, sectarian violence, terrorism and currency fluctuations. Even legal and judicial uncertainties have become tolerable.
FDI hit a record US$12.61 billion in 2010, an impressive performance considering foreign investors had been withdrawing funds from the country as recently as 20038. While Indonesia has not been a busy PE market historically, there have been nine deals of more than US$100 million in the past five years9. High-profile transactions, including CVC Capital Partners completing a US$770 million buy-out of Matahari Department Stores from conglomerate Lippo Group in 200910, and PE and trade investors eyeing a stake in GarudaFoods during 2011, have raised the profile of PE in Indonesia.11
1The Economist, 2 April 2009
2Financial Times, 7 September 2011
3Asian Development Bank: Indonesia – Critical Development Constraints, 2010
4Asian Development Bank, Indonesia Factsheet 2011
5World Bank, June 2011
6Reuters, 6 October 2011
7Jakarta Globe, 9 April 2011
8Economist Intelligence Unit, July 2011
9Asian Venture Capital Journal, July 2011
10Reuters, 26 March
11Financial Times, 31 May 2011