Risk and competition rife in Indonesia

Some believe the various investor groups currently piling into Indonesia may be underestimating the risks of Southeast Asia’s hottest market.

Other general partners were likely looking on enviously in May, as TPG and Northstar Pacific Partners collected seven times their money from a 40 percent sale of Indonesian Bank Tabungan Pensiunan Nasional (BTPN) to Sumitomo Mitsui Banking Corporation. The private equity firms had invested about $200 million in the bank back in 2007.

Similarly, in March, CVC Asia Pacific exited a 40 percent stake of Indonesian department store chain Matahari on the Jakarta stock exchange in a $1.3 billion deal, banking an estimated 3x return.

The exits appeared to confirm to the numerous eager GPs currently scrambling to enter Indonesia that stellar returns are a real possibility in the country.

Rich in natural resources such as natural gas, coal and petroleum, with a population of 234 million and a rapidly growing middle class, the country’s demographic and macroeconomic advantages are hard to ignore. Indonesia’s 2013 GDP growth has been forecast at 6.2 percent by the World Bank; its debt-to-GDP ratio falling from 61 percent in 2000 to 24 percent in 2012.

Heavyweight global GPs are moving in. In May, The Carlyle Group hired former UBS executive Rajiv Louis to head its Indonesian investments, closing its first deal in the country in October 2012. Warburg Pincus is also hiring an investment professional to target opportunities in Southeast Asia for the first time, sources say.

However, many GPs underestimate the risks of the Indonesian market, according to Chris Leahy, co-founder of risk consulting firm Blackpeak. “Private equity firms have all read about the problems, but some of them don’t think it is going to happen to them.”

Getting the returns that CVC and TPG have from recent sales… Those are a reflection of 2007-2008 investments, not of the kind of returns you can necessarily get if you invest in Indonesia today.

Chris Leahy, co-founder, The Blackpeak Group

So what are these risks? One issue, says Leahy, is that officials make unpredictable changes to regulations that affect private equity investments. For example, in mid-2012 Indonesian authorities restricted outright ownership of banks to 40 percent (except for listed banks with strong financial health and high levels of tier-one capital).

O’Melveny & Myers partner Joel Hogarth adds: “The mining ministry has been very prone to just pinging out a regulation that’s got dramatic effects in the market and seeing how many people squeal. [In comparison] Bank Indonesia tends to be measured in its approach.”

Another potential concern is the sort of sharp practices highlighted by British financier Nat Rothschild’s row with the Bakries, a powerful Indonesian family, over accounting irregularities and corporate governance issues at their jointly-owned coal company Bumi Resources.

But despite the risks, GPs continue to pile in, driving up valuations – even though most haven’t managed to do a deal yet. “There are a lot more firms rushing around Indonesia than deals that are out there. We get a lot of term sheets but we don’t get anything like as many completed deals,” Hogarth says.

Leahy argues that CVC and TPG are both taking money off the table as others rush in at higher valuations. “They’ve got out with huge returns and they’ve still got skin in the game. These are smart investors, and I think they can smell the top of the market.”

One thing’s for sure, he adds: recent exits are not necessarily a good indicator of future returns. “Getting the returns that CVC and TPG have from recent sales… Those are a reflection of 2007-2008 investments, not of the kind of returns you can necessarily get if you invest in Indonesia today.”