Emerging markets: Indonesia comes out of the shadows

With a population of more than 250 million, rising wealth and growing access to technology, Indonesia is witnessing a flurry of private equity investment.

Two key trends make Indonesia an attractive market for buyout firms: strong gross domestic product growth (5.2 percent year-on-year) and a middle class which is forecast to swell to 90 million by 2030. This means consumer spending is set to rise by 7.7 percent a year to $1.1 trillion in about 15 years, according to data from consultancy McKinsey.

Online retail spending has benefited from rising incomes, with the e-commerce sector projected to reach $130 billion by 2020, making Indonesia the third largest online market in Asia behind China and India. That tremendous opportunity has not gone unnoticed: private equity firms are financing start-ups and spawning a new breed of businesses ranging from on-demand grocery delivery to better payment platforms and modernised logistics. Favoured targets are healthcare, life insurance, infrastructure and the upgrading of consumption services.

KKR recently invested in a $550 million funding round for motorbike taxi app GO-JEK alongside Warburg Pincus and Farallon Capital and has an $81 million stake in listed agriculture supply chain company Japfa Comfeed. The firm’s managing director Jaka Prasetya says it is exploring better connections between sellers and end users, focusing mainly on the secondary side of e-commerce such as delivery, warehousing and disruptive technologies. KKR also sees opportunities in high-quality produce and packaged food and snacks.

Investor-friendly policy moves announced in the past two years have been a boon to private equity. The government has removed limits on foreign direct investment in distribution, health services and e-commerce, previously capped at around 49 percent. Recent initiatives in upgrading infrastructure, improvement of public transport and the implementation of universal healthcare have also lured private capital into the country.

While the opportunities for investment are immense, the Indonesian market is not without its challenges.

Persistent issues such as business uncertainty arising from unclear regulations, unpredictable change and numerous government approvals still weigh on Indonesia’s promise of becoming a huge private equity market, according to Sahala Situmorang, a partner in transaction advisory services at EY Indonesia, writing in its latestPrivate Equity Briefing: South-East Asia report.

Family-controlled businesses, which account for approximately 40 percent of market capitalisation in the country, also continue to have the majority of market share across a range of key industries including property, agriculture and energy, data from Boston Consulting Group show.

Prasetya adds that buyout opportunities are still “very limited”, resulting in increased competition for targets. “There are still very limited buyout opportunities in Indonesia because generational handover and succession planning seems less of a challenge given the typical large family size. As a result, deals tend to be more in the minority growth space, with deals that are $100-$300 million. We believe this is where the majority of the pan-Asian private equity firms are focusing on.”

Photograph by Niwat Tantayanusorn.