How do you view the hype surrounding Indonesia from foreign investors – is it justified?
I think it is only natural for there to be an increased interest in Indonesia given the relatively good track records that have been achieved by the few funds operating in Indonesia. As the appetite for Indian and Chinese products have waned, in part because of the difficulty of delivering superior performance in these markets, it is not surprising that many pan-Asian and global funds have set their sights on Indonesia, a market that they have neglected for at least the last decade.
It is not easy for them to restart or reestablish their efforts in Indonesia because it is not an easy market. However, we do not view them as our main competitors, mainly because typically they want to write larger cheques of $75 million or above. Unfortunately, Indonesia is not a market where one can find many large transactions, mostly because the business landscape is dominated by a few large families who are all doing very well and don’t really need to sell anything. And if they do, they will approach an investment banker who will print 20-30 books and get the highest valuations. We tend to avoid those auction situations because we find it is difficult to achieve our return.
Many GPs are expecting that to change. Do you believe family groups will start divesting their assets, creating from more opportunities for private equity? If not, will you face increased competition?
I don’t think it will change. There have been some exceptions, of course. For example, when CVC Asia Pacific bought the stake in Matahari [Department Stores] from the Lippo Group, they also did a cable television transaction buying from the same group. But aside from that, we really do not see many other instances where these family groups have sold off significant assets.
[For us], our equity cheque sizes are really between $25 to $50 million, so we focus more on the small- and medium-enterprise space and help [businesses] make the leap to the next stage of growth, where they have encountered difficulties because of their inability to secure financing from banks. Or maybe because they are bumping up against other family groups and have difficulty overcoming some of the challenges on the ground.
If investors rely on the so-called rule of the land and seek to redress their grievances by the courts, they will find that judicial decisions are not always consistent.
Kay Mock, founding partner, Saratoga Asia Funds
Our key competitors we do not believe are the financial investors. We have lost most of our deals in the past to strategic acquirers. I think they are also looking for growth and since Indonesia is an economy that can provide that element, many strategics are looking to expand or gain a foothold in Indonesia.
What challenges do you believe foreign firms will face when they enter Indonesia?
There is a question over whether foreign private equity firms are going to find it easy to penetrate a market like Indonesia. I think the answer is no, it is not going to be easy. Indonesia is an emerging market, there are many challenges. While the country has many rules and regulations, they are not always consistently enforced. If investors rely on the so-called rule of the land and seek to redress their grievances by the courts, they will find that judicial decisions are not always consistent. I believe, and of course I am biased here, that Indonesian groups will always have an advantage because of their experience of having operated in the market for such a long time. They are in a position to determine who are the better local sponsors or vendors.
I’m not suggesting that domestic groups have a better ability to secure a favourable judicial decision, but by avoiding the pitfalls of entering a business relationship with a counterparty who is of more questionable standing, the local groups have an enhanced probability of success. There is always the possibility of leakages – front-running, self-dealing – and we try to minimise our vulnerability in that respect by having the right to appoint the chief financial officer. So we basically want to control the purse strings.