Why this South-East Asian country is under-penetrated for PE investment

Private capital penetration in this island national stood at 0.07% over a five-year period, according to data from EMPEA.

Despite growing investor interest in South-East Asia, private capital investment – which includes private equity, real assets, infrastructure and credit – in Indonesia remains under-penetrated, data from the Emerging Markets Private Equity Association show.

Private capital penetration in Indonesia (0.07%) lags behind the Philippines (0.11%), Malaysia (0.23%) and Vietnam (0.14%), EMPEA found.

According to the industry association, one of the key reasons for the under-penetration of private capital in Indonesia is the dominance of local corporate investors, who have deep local knowledge and extended relationships that give them an advantage over foreign investors.

“Family-owned businesses and conglomerates are also often hesitant to sell to private equity firms and agreeing on terms can be a lengthy and difficult process. These factors greatly limit the number of large investable assets available to GPs,” EMPEA said.

Private capital is also relatively new in the country, with only a few established players in the market. What this means, according to EMPEA, is a shallow track record of successful exits and thus little willingness from investors to commit to a country-specific fund. As a result, many investors have opted for a pan-Asia approach that favours opportunistic deals in Indonesia.

Indonesia-focused fundraising has slipped since 2014, with only three GPs raising $210 million among them last year, compared with $525 million in 2014. Falcon House Partners, which raised $400 million for its second vehicle in November 2016, and Northstar Group, which is deploying its 2014-vintage $810 million Fund IV, are among Indonesia-focused funds, according to PEI data.

Meanwhile, global private equity giants KKR and CVC Capital Partners have been active investors in the country. KKR’s recent investments in Indonesia include agri-company Japfa Comfeed, on-demand mobile platform GO-JEK and bread company Nippon Indosari Corpindo. CVC, meanwhile, has backed broadband and cable TV service provider Link Net and private hospital operator Siloam Hospital Group.

Despite the many hurdles, EMPEA believes that investors continue to remain upbeat about Indonesia’s growth story.

Michael Fernandes, partner and global co-lead for Asia at LeapFrog Investments, said in an EMPEA statement: “With the fourth largest emerging middle class in the world, projected to rise to 23.9 million households by 2030, investment in Indonesia presents a strong commercial opportunity to increase the supply of essential services to this massive consuming class.”

Jaka Prasetya, member of KKR in charge of Indonesia, also added: “The country is on track to be one of the top ten global economies over the next decade, and KKR as a firm is committed to supporting strong local partners, family-owned business groups, management teams and entrepreneurs through the provision of tailored, long-term capital solutions.”