Some like it hot

This time last year Indonesia was the hottest ticket in town. Investors flocked to the country, demanding exposure from their GPs, even those with little experience in the region.

Southeast Asia-focused funds, most of which cite Indonesia as their main investment destination, raised $2.5 billion in 2013, a 232 percent increase on the $755 million raised by equivalent funds in 2012, according to data from PEI’s Research & Analytics division.

However, as Indonesia’s macroeconomic headwinds strengthened in the second half of 2013, confidence plummeted – and deal volume dropped with it.

Just $30 million was invested by private equity during last year. That’s a 79 percent drop from the $145 million invested in 2012, and 91 percent less than was invested in 2011, Thomson Reuters data showed.

These figures show that it wasn’t just a case of the market being oversupplied with capital; dealflow dramatically dropped off too, as a result of the country’s macroeconomic difficulties.

“Last year was a bit of a quiet year for Indonesia,” one local fund manager explains. “Around the middle of the year the country started to have quite substantial macro headwinds. The currency depreciated about 20 percent, the current account deficit made people worry and inflation spiked.”

“It is still a challenging macro environment for the country. That is not going to end in 2014 and will probably continue into 2015.”

However, rumblings in the market suggest that the situation may be about to improve for the country’s private equity community.

In May, The Carlyle Group opened a Jakarta office. The firm’s interest in Indonesia has been long-standing, but it got off to a slow start in the market. Now, in establishing a concrete presence on the ground there, it is blazing a trail for other global private equity groups.

“Establishing an office in Jakarta is an important step in our expansion strategy to gain greater exposure in Indonesia as well as the Southeast Asia region,” Greg Zeluck, managing director and co-head of Carlyle Asia, said at the time. “This also reflects our commitment to investing in this exciting economy, and to supporting the development of Indonesia’s capital and investment markets.”

Moreover, the Northstar Group, one of Indonesia’s leading local managers, is currently in market raising its fourth vehicle, which is targeting over $1 billion. The fund launched in February, and is gearing up for a first close in June on $450 million – indicating real investor interest.

So why the renewed enthusiasm? One local manager ascribes it to a rebalancing of the over-exuberance of last year – coupled (counter-intuitively) with a downturn in the economy.

“In general, the environment for doing deals has improved considerably since last year,” he says. In light of the aforementioned macro-economic distress, not to mention the reduced competition as the market has become less fashionable,
entrepreneurs are increasingly reasonable about pricing, he explains. So valuations – a key sticking point for private equity, since at one point firms were having to pay up to 20x EBITDA for a consumer business – are coming down.

All of which means that local players are feeling much more optimistic. “We are now starting to see people accepting term sheets that are more attractive, both from a valuation perspective, as well as a governance perspective,” the GP says. In fact, he adds, one deal in its pipeline might not happen because it’s driving such a hard bargain on terms. There wasn’t much of that happening 18 months ago.