Is it Indonesia’s time to shine?

The archipelago is the obvious choice for private equity firms wanting to capture opportunities the young and urban middle class provide.

Indonesia, the world’s fourth-most populous country at 266 million, has become one of the most attractive investment destinations in Asia for private equity.

President Joko Widodo’s four-year rule has brought anti-corruption efforts, infrastructure development, fewer restrictions on foreign direct investment in agriculture, banking and healthcare sectors and a push for value-added manufacturing and services.

Technology is one sector that has benefited from these initiatives. Ride hailing and logistics company GO-JEK, e-commerce platform Tokopedia and travel booking start-up Traveloka – each valued in the billions of dollars – have all capitalised on the country’s rising middle class and internet penetration.

KKR, Warburg Pincus, insurance giant Allianz and Singapore state investor Temasek are investors in GO-JEK. Sequoia Capital and Alibaba have backed Tokopedia and Hillhouse Capital Group invested in Traveloka.

Private equity and venture capital deals in Indonesian technology companies have driven deal volumes in the region and continue to be a priority for investors, according to EY’s Private Equity Briefing: South-East Asia. The ratio of tech deals in the region increased from 19 percent in the first quarter of the year to 25 percent in the second quarter. “Technology and disruptive sectors like fintech or health tech are seeing more investment activity,” says Damian Adams, a Singapore-based partner at law firm Simmons & Simmons.

In terms of traditional private equity, renewable energy has been of interest to investors, although regulations capping renewable energy power purchase agreements to average energy grid prices has affected projects in that sector, he adds.

Aside from the tech sector, private equity firms are also deepening their exposure to Indonesia’s family-owned and consumer-focused conglomerates. In June this year London-based CVC Capital Partners invested $150 million in GarudaFood, established in central Java and one of Indonesia’s most prominent food and beverage manufacturers. It has often teamed up with the Lippo Group, a corporation controlled by the Riady family, in transactions such as private hospital operator Siloam International, internet provider LinkNet and retailer Matahari.

KKR, meanwhile, acquired an $81 million stake in agri-company Japfa Comfeed in June 2016 and invested a reported $74 million in bread company Sari Roti in October 2017. “Three years ago there was more of a challenge for family-run businesses to embrace private equity investment because of the relative lack of awareness of what that meant in terms of ceding control and firms getting a portion of the equity,” Adams says.

He notes the rhetoric now is that the education curve has largely been addressed and there is more acceptance of the role private equity can play in the improving and expanding local businesses.

Brian O’Connor, founding partner of Indonesia-focused mid-market firm Falcon House Partners, agrees this younger generation of business owners, chief executives and chief financial officers, who are more financially sophisticated, is driving change.
Indonesia’s underleveraged market and the headline deals made by global and regional firms are other key factors, he notes.

Liquidity from local banks is mixed, particularly for cashflow, non-asset-based businesses, O’Connor says. “Loan growth pretty much has been below 10 percent for the past few years and local interest rates are high, so companies are looking for alternatives. Private equity fits that very nicely.”