page 12 capital confidence? - asian venture capital journal...after reaching $1.3 billion in 2010...
TRANSCRIPT
Asia’s Private Equity News Source avcj.com March 17 2015 Volume 28 Number 10
FOCUS ANALYSIS
Capital confidence?There is money to made in Indonesian private debt, but carry a big stick Page 7
Digital generationsInside Indonesia’s booming start-up scene Page 10
The holding patternInvestors are waiting for reforms to pay off Page 14
Tokopedia CEO William Tanuwijaya on building an online marketplace
Page 12
Indonesia has yet to live up to some unrealistic industry expectations
Page 3
Alibaba, Bain, CDH, CNEI, Hahn & Co, IFC, KKR, Matrix, Mizuho, PennSERS, Primavera, Rakuten, Rocket Internet, SummitView
Page 4
EDITOR’S VIEWPOINT
NEWS
FOCUS
PRE-CONFERENCE ISSUE AVCJ PRIVATE EQUITY AND VENTURE CAPITAL FORUM INDONESIA 2015
Indonesia’s middle market promises much, but is slow to deliver
Page 13
INDUSTRY Q&A
Unlocking liquidity for private equity investors
www.collercapital.com London, New York, Hong Kong
Anything is possible if you work with the right partner
Number 10 | Volume 28 | March 17 2015 | avcj.com 3
EDITOR’S [email protected]
THE STRONG FUNDAMENTALS THAT saw Indonesia propelled into the upper echelons of private equity – by words, if not deeds – as a counterpoint to China and India are largely unchanged. Sheer size and youthful demographics make the country a compelling destination for investors. Businesses can achieve growth and scale, propelled by urbanization and the emergence of a nascent middle class with the means to engage in discretionary consumption.
In recent years, leading global and regional private equity firms have established footholds in Singapore, dispatching investment professionals to Jakarta via the 7.40 a.m. Singapore Airlines flight out of Changi Airport. The plane arrives in the Indonesian capital one hour and 45 minutes later, but the one-hour time difference means dealmakers can jump in a cab and, traffic permitting, make their 10 a.m. meetings.
These meetings may be happening but is the deal flow as rich as anticipated? Given the hype surrounding Indonesia in 2011, the answer is surely no.
After reaching $1.3 billion in 2010 and $1 billion in 2011, investment has dropped off markedly. The 2014 total was just $354 million, according to AVCJ Research, about half the 2013 figure. Even the positives drawn from a steady increase in deal volume ring hollow: of the 30-plus investments completed in each of 2013 and 2014, at least half were early-stage (testament to the robust start-up space, but hardly encouraging for PE players). PIPE deals also feature prominently among the largest transactions.
Put another way, Indonesian GDP came to $868 billion in 2013 and private equity investment since 2009 stands at $4.8 billion. China’s economy is about 10 times larger and has seen 34 times more PE investment over the corresponding period.
There are various reasons for Indonesia’s weaker-than-expected deal flow. First increased investor interest sent valuations through the roof; then the economy faltered due to a downturn in the commodities cycle and volatility in emerging markets; and last year activity was muted as a
result of uncertainty tied to the general and presidential elections.
Another explanation is that dividing GDP by PE investment and holding up the result as evidence of under-penetration by the asset class is a flawed exercise. Other factors also come into play.
First, there is a scarcity of assets that are both investible and accessible, which can be tied to issues of transparency and corporate governance. Second, the availability of deals is linked to the nature of corporate ownership. Many assets in Indonesia are held by a relatively small number of family-owned conglomerates that are under no real pressure to sell. They run auction processes and seek sky-high valuations, or pick their partners carefully based on potential strategic input.
While Indonesia has failed to live up to the hype, it might be argued that deal flow is more or less in line with realistic expectations. The market is tough to crack, particularly for those pursuing transactions at the large end of the scale. People movements within the global and regional private equity firms are further evidence of this.
Nevertheless, there are grounds for optimism. The Indonesia private equity story is still in its early stages. Even if the established family conglomerates retain their stranglehold on sections of the economy – by no means a sure thing in the long term – the middle market will throw up new champions that need external investors to sustain growth, offer access to new markets and technologies, and facilitate succession planning.
For any GP looking for deals in this segment, investor education will be a priority in order to overcome entrepreneurs’ suspicions – including a reluctance to give up equity – and explain what PE can help them do. The hope is that if and when they achieve a critical mass of support, private equity becomes an easier sell.
Tim BurroughsManaging EditorAsian Venture Capital Journal
Great expectations
Managing Editor Tim Burroughs (852) 3411 4909
Staff Writers Andrew Woodman (852) 3411 4852
Winnie Liu (852) 3411 4907 Holden Mann (852) 3411 4964
Creative Director Dicky Tang Designers
Catherine Chau, Edith Leung, Mansfield Hor, Tony Chow
Senior Research Manager Helen Lee
Research Associates Herbert Yum, Jason Chong,
Kaho Mak
Senior Marketing Manager Sally Yip
Circulation Administrator Prudence Lau
Subscription Sales Executive Jade Chan
Manager, Delegate Sales Pauline Chen
Director, Business Development Darryl Mag
Manager, Business Development Anil Nathani, Samuel Lau
Sales Coordinator Debbie Koo
Conference Managers Jonathon Cohen, Sarah Doyle,
Conference Administrator Amelie Poon
Conference Coordinator Fiona Keung, Jovial Chung
Publishing Director Allen Lee
The Publisher reserves all rights herein. Reproduction in whole or in part is permitted only with the written consent of
AVCJ Group Limited. ISSN 1817-1648 Copyright © 2015
Incisive Media Unit 1401 Devon House, Taikoo Place
979 King’s Road, Quarry Bay,Hong Kong
T. (852) 3411-4900F. (852) 3411-4999E. [email protected]
URL. avcj.com
Beijing Representative OfficeNo.1-2-(2)-B-A554, 1st Building,
No.66 Nanshatan,Chaoyang District, Beijing,People’s Republic of China
T. (86) 10 5869 6203F. (86) 10 5869 6205 E. [email protected]
Unlocking liquidity for private equity investors
www.collercapital.com London, New York, Hong Kong
Anything is possible if you work with the right partner
avcj.com | March 17 2015 | Volume 28 | Number 104
ASIA PACIFIC
Bain targets $2.5b for third Asia fundBain Capital is preparing to launch its third Asian fund with a target of $2.5 billion and a hard cap of $3 billion. A source confirmed to AVCJ that the new fund will be in the market soon. Bain’s second Asia fund reached a final close of $2.3 billion in 2012.
Rocket leads $110m round for FoodpandaEmerging markets-focused food delivery app Foodpanda has raised another $110 million in a funding round led by its Germany-based parent Rocket Internet. A number of existing and new backers also took part. The company has raised more than $200 million since inception.
AUSTRALASIA
Australia’s IFM in $5.7b US toll road dealAustralian fund manager IFM Investors has agreed to pay $5.7 billion for a 66-year concession on a US toll road that crosses northern Indiana. It filed for bankruptcy last year due to heavy debts and low traffic volumes. The investment is being made from the IFM Global Infrastructure Fund.
GREATER CHINA
China launches $4.8b Silk Road ecology fundChina has launched its first PE fund that aims to improve the ecological environment in neighboring countries and regions. The vehicle, Green Ecological Silk Road Investment Fund, has received RMB30 billion ($4.8 billion) from eight local enterprises. It will back projects in China and other countries in the Silk Road Economic Belt.
PennSERS backs Primavera’s second fundPennsylvania State Employees’ Retirement System (PennSERS) has agreed to invest $50 million in Primavera Capital’s second China fund. The GP, which was founded by Fred Hu, former Greater China chairman at Goldman Sachs, is understood to be targeting $1.5 billion for the vehicle.
Alibaba, SAIC Motor launch internet car fund
Chinese e-commerce giant Alibaba Group and SAIC Motor, the country’s largest automaker, have launched a RMB1 billion ($160 million) fund to invest in the development of internet-enabled cars. It will be open to third-party investors.
Summitview consortium agrees take private of ISSA consortium led by Chinese GP SummitView Capital has agreed to buy NASDAQ-listed semiconductor manufacturer Integrated Silicon Solution (ISS). The deal values the company at approximately $639.5 million. The consortium also includes eTown MemTek and two investment firms, semiconductor-focused
Hua Capital and Huaqing Jiye Investment Management.
China interior design site To8to raises $200mTo8to, a Chinese interior decoration service platform, has raised a $200 million Series C round of funding from Sequoia Capital, Matrix Partners China and online classifieds marketplace 58.com. The company operates a platform that connects home owners with interior decorating firms, designers and construction material providers.
CDH commits $22m to Zhongding Dairy FarmingCDH Investments has led a RMB400 million ($64 million) Series A round of funding for Zhongding Dairy Farming. Its individual commitment is RMB140 million. Founded in 2013, Zhongding Dairy manages 32 farms in northern China and produces 260 tons of fresh milk each day.
VC-backed hospital chain files for Hong Kong IPOPengai Hospital Management Group, a Chinese cosmetic surgery chain backed by CMHJ Partners, IDG Capital and TDR Capital, has filed for a Hong Kong IPO. IDG holds a 10.60% stake in Pengai, with CMHJ and TDR each holding a 7.95% stake.
Alibaba to invest $200m in SnapchatAlibaba Group plans to commit $200 million to US-based social network Snapchat. According to reports, the investment will value the company at $15 billion. Snapchat has been looking for additional capital to improve its core services, and is said to be planning an additional $500 million round of financing.
CNEI commits $8.5m to waste treatment firmChina New Enterprise Investment (CNEI) has invested $8.5 million in Chenzhou Yangtao Chemical. The company is licensed to treat arsenic-bearing mine tailings - waste generated as a by-product of the mining process. The waste is processed and nonferrous metals, ferroalloys and related chemical products are extracted.
Car-washing app raises $20m from Ping An VCPing An Ventures, a venture capital arm under Ping An Insurance, has provided $20 million
Asia remains global leader for female representationWomen occupy 14.5% of senior roles at private equity firms in Asia, up from 11.8% in 2014, and a higher proportion than any other major market globally. There were also substantial increases in female representation at firms based in Europe and North America - the former went from 9.7% in 2014 to 12.4% in 2015, while the latter jumped from 11% to 13.7%.
The data, produced by Preqin, come at a time when the US venture capital industry is gripped by Ellen Pao’s gender discrimination case against Kleiner Perkins Caufield & Byers. Whether or not Pao’s claims reflect broader attitudes, women do not appear to be underrepresented compared to other asset classes. Females account for 14.8% of senior employees at VC firms globally, up from 11.2% in 2014 and 2013. Buyout firms remain in last place on 10.5%, trailing real estate on 13.6% and infrastructure on 14%.
Bigger players employ more women in senior roles. At firms with more than 20 employees, female representation in the senior ranks is 13.9%, up from 11.9% in 2014. This compares to 9.7% for firms with fewer than five staff.
NEWS
Innovative Directions in Alternative Investing
New York Boston Menlo Park London Hong Kong 212 754 0411 | 617 247 7010 | 650 561 9600 | 44 20 7399 3940 | 852 3987 1600
www.lexingtonpartners.com
Lexington Partners is a leader in the global secondary market. Since
1990, we have completed over 360 secondary transactions, acquiring
more than 2,300 interests managed by over 600 sponsors with a total
value in excess of $31 billion. For over 20 years, we have excelled at
providing customized alternative investment solutions to banks,
�nancial institutions, pension funds, endowments, family of�ces and
other �duciaries seeking to rebalance their private investment
allocations. Our unparalleled global sponsor relationships, capital
resources, and reputation as a reliable counterparty are widely
recognized, and we have skilled professionals to work with you in �ve
locations. To make an inquiry, please call us or send an email to
When Rebalancing is your First Priority, Make Lexington your Secondary Priority.
avcj.com | March 17 2015 | Volume 28 | Number 106
in Series A funding for Exc118.com, a Chinese car-washing service mobile app. It claims to have over one million users and 3,000 offline service providers, receiving 15,000 orders every day.
Matrix leads $15m round for CRM platformMatrix Partners has led a $15 million Series C round of funding for Xiaoshouyi, a Chinese customer relationship management (CRM) platform, alongside Sequoia Capital. Xiaoshouyi, which launched in 2011, provides software solutions that allow companies to automate sales force management.
NORTH ASIA
Hahn & Co’s Cowell e Holdings files for IPOCowell e Holdings, a portfolio company of South Korea-based Hahn & Co. portfolio and a major supplier of camera modules used in Apple devices, has filed for an IPO in Hong Kong. The PE firm owns a 50% stake in the business, having invested KRW86.2 billion ($76 million) in 2011.
Rakuten leads $530m Series E round for LyftJapanese e-commerce player Rakuten has led a $530 million Series E round of funding for US ride sharing app Lyft - valuing the business at $2.5 billion. Fortress Investment Group also participated. Rakuten contributed $300 million to the round, taking an 11.9% stake in the business.
Mizuho raises $170m for third mezzanine fundMizuho Capital Partners has launched its third fund focused on small- to medium-sized enterprises with initial commitments of JPY20.6 billion ($170 million). Government-backed Organization for Small & Medium Enterprises and Regional Innovation Japan (SMRJ) has committed JPY5 billion to the vehicle.
Japan consortium buys US PE-backed juice makerA Japanese consortium comprising brewing giant Sapporo International and Toyota Tsusho (TAI) America has acquired Country Pure Foods, a US-based food service juice manufacturer, from US private equity firm Mistral Equity Partners. Sapporo and TAI will own 51% and 49% of the company, respectively.
Kumho Asiana to buy back Korea bus unit
IBK Capital and Kstone Partners are set to exit South Korea-based Kumho Buslines after domestic conglomerate Kumho Asiana Group said it would buy back its former subsidiary. The KoFC IBK-Kstone Private Equity Fund bought the bus operator from Kumho Industrial in 2012 for KRW331 billion (then $291 million) as Kumho Asiana offloaded assets to pay down its debts.
Korea’s SMBA, IDG form $91m VC fundIDG Capital Partners and South Korea’s Small and Medium Business Administration have
agreed to form a KRW100 billion ($91 million) VC fund that will help Korean businesses enter the China market. IDG will commit more than 60% of the fund in Korean companies, chiefly in the healthcare, digital content, and technology fields.
Korea’s Memebox raises $17.5m from VCsBeauty-focused e-commerce start-up Memebox has raised a $17.5 million Series B round of funding from a group of VC backers. Participants in the round include Formation 8, Goodwater Capital, AME Cloud Ventures, Pejman Mar Ventures, Y Combinator, Winklevoss Capital, Cowboy Ventures and Altos Ventures.
SOUTH ASIA
IFC leads $10m round for eye hospital chainInternational Finance Corporation (IFC) has invested $5.5 million in Indian eye clinic chain Eye-Q Vision, leading a round of financing for the company worth $10 million. Nexus Venture Partners and Helion Venture Partners also participated.
PE investors exit India’s SFO TechnologiesIL&FS Investment Managers Limited (IIML), Franklin Templeton and Asia Mezzanine Capital Group (AMCG) have exited SFO Technologies, a leading Indian technology manufacturer. Financial terms of the transaction were not disclosed. The investors are said to have sold their stake to a promoter group.
Tiger Global, Accel commit $5m to ChargeBeeUS-based Tiger Global has led a $5 million Series B round for India-based subscription billing system developer ChargeBee. Existing backer Accel also participated. The new capital will be used to build up the company’s engineering and customer services teams.
Kalaari invests $2.5m in India-based CodigamiKalaari Capital has committed $2.5 million to Codigami, parent company of Indian social media manager app Crowdfire, in a Series A round of funding. The company will use the new capital to hire more staff and develop online marketing tools.
KKR consortium buys GE consumer finance unitA consortium comprising KKR, Värde Partners and Deutsche Bank has agreed to buy GE Capital’s Australia and New Zealand consumer lending unit for an enterprise valuation of A$8.2 billion ($6.3 billion). It is one of the largest PE deals ever seen in Australia.
The GE business has more than three million customers and works with many major retailers, offering a range of products and services such as personal loans, credit cards and interest-free retail finance. Other bidders for the asset reportedly included Apollo Global Management, Macquarie
Group and a consortium led by TPG Capital.“GE Capital is one the most respected
providers of consumer finance in Australasia. They are led by a strong management team with an outstanding track record of partnering with leading retailers,” said Ed Bostock, a director at KKR, in a statement.
General Electric has been divesting consumer finance assets as it looks to focus on industrial businesses, with a view to reducing the financial services share of revenues to 25% from 42% last year. It will continue to provide specialty commercial financial services to customers in oil and gas, energy, healthcare, aviation and mining.
NEWS
Number 10 | Volume 28 | March 17 2015 | avcj.com 7
COVER [email protected]
EVERYONE, IT SEEMS, HAS AN INDONESIA blacklist. “I’ve never done a Bakrie deal or a Widjaja deal,” says one GP. Another is more even-handed: “We have our list, other funds have theirs. They might be fine with some of the people on our list because they have a different level of relationship, and vice versa.”
Investors have long memories and mental scars remain from the Asian financial crisis when companies across Southeast Asia were brutally exposed by a mismatch between local currency-denominated assets and US dollar liabilities. As a result of their conduct circa 1997, a number of Indonesian families – the Bakries and Widjajas among them – are not welcome at certain financial institutions.
These were the origins of a reputation for poor corporate governance and shoddy treatment of foreign investors that, though partially rehabilitated, still stands. Plenty of groups recognize the opportunity in Indonesia’s growing demand for structured finance, but some are reluctant to participate.
“Broadly speaking, we have found it far more difficult in Indonesia to get the security, to get the first lien and be confident of our enforcement capability, compared to other emerging markets,” says Robert Petty, managing partner and co-founder of Clearwater Capital Partners, an Asia-focused credit investor. “We are comfortable that
we can get to the asset in India or China. We are not that way in Indonesia.”
As a result, Clearwater’s activities in the market have tilted more towards helping resolve distress situations than providing debt financing to growth companies. Others are more willing to fill what they see as a significant gap in the market, although a sensible structure and on-the-ground expertise are paramount.
This gap is occupied by companies that fall between the bases in terms of other funding options. They have particular needs that cannot be met by banks, yet they are too small to access the local equity or debt capital markets.
“Indonesia’s economy has been growing consistently over the last 10-15 years; the market has expanded and there is more room for companies to grow from mid-market $500-600 million into large-cap $1 billion players. Due to the valuation gap, these companies typically don’t want to sell equity too early. They would rather do slightly more expensive debt, which is still cheaper than equity,” says Jaka Prasetya, managing director and head of Indonesia at KKR.
Scope of involvement For KKR, the sweet spot for structured growth funding is $50-100 million, but there is a lot of activity in the sub-$50 million space. Prospective borrowers fall into three general categories.
Acquisition financing is a key area of demand. A company wants to acquire a rival that is one third of its size and the liability is beyond the local banks’ comfort zone. Equity financing is one option but the family owners are reluctant to dilute their interest by 30-40% ahead of an IPO so they opt for debt instead, allowing the lender to enjoy a little of the equity upside.
The scenario is similar in project financing, with the company unable to obtain a bank facility large enough to complete a capital investment. A private markets solution is used to top up the capital pool and it remains in place until the project is underway, at which point a senior financing might be available. The third category is for major shareholders that want to take up a rights issue or share placement but don’t have enough capital on hand. They use the shares as collateral to get the financing required.
There are various ways to play the market, and scope for a range of investors to participate. Su Ee Than, global head of OCBC’s mezzanine capital unit, observes that the space has become more competitive in the last couple of years. “The line is getting more blurred between traditional private equity and mezzanine,” he says. “Whether it is growth capital, special situations or mezzanine, in theory any mid-market PE firm would be able to look at a deal, depending on how they structure it and whether the return is justifiable.”
Local high net worth individuals have also been known to provide financing solutions. Operating within friends and family networks, they often see deals before offshore investors and they might be more comfortable taking on the risk due to a familiarity with the business or greater flexibility in financing arrangements.
The promise of profits – IRRs can be more than 20%, comprising a guaranteed return on a debt tranche plus some equity upside – is bringing people in, but they are exposing themselves to a challenging commercial environment.
Indonesia ranked equal last with the Philippines in the Asian Corporate Governance Association’s (AGCA) 2014 regional assessment. This represented a slight improvement on the previous edition in 2012 when the country occupied 11th and last place on its own. Citing Indonesia’s Good Corporate Governance
Belt and bracesThere is money to be made providing debt-based solutions to growing Indonesian companies that struggle to get financing from other sources. But enter uninformed or unprotected at your peril
Asia corporate governance rankings, 2014
JurisdictionRules &
practices EnforcementPolitics &
regulationAccounting &
auditing
Corporate governance
culture Total
Hong Kong 61 71 69 72 51 65
Singapore 63 56 64 85 54 64
Japan 48 62 61 72 55 60
Thailand 62 51 48 80 50 58
Malaysia 55 47 59 85 43 58
Taiwan 48 47 63 75 47 56
India 57 46 58 57 51 54
South Korea 46 46 45 72 34 49
China 42 40 44 67 34 45
Philippines 40 18 42 65 33 40
Indonesia 34 24 44 62 32 39
Source: Asian Corporate Governance Association
avcj.com | March 17 2015 | Volume 28 | Number 108
Roadmap for issuers and publicly listed companies, launched by the Financial Services Authority (OJK), the AGCA said there is potential for sustained reform.
“But can it succeed?” the association asked. “Much depends on political will, increasing regulatory resources and ensuring the right people are in place.”
Enforcement is the area in which Indonesia and the Philippines really trail their regional peers – the AGCA scored them 24% and 18%, respectively, with ninth-placed China achieved a mark of 40%. Plenty of private markets participants would agree with this assessment.
One debt and special situations investor has been engaged in legal action with an Indonesian corporate borrower in both Singapore and Jakarta. The transaction was structured using Singapore documentation in order to provide greater comfort to the foreign party. Although the Singapore courts have found in its favor, the action now rests on enforcement within Indonesia, where the collateral is based. Given anecdotal evidence of decisions being awarded to highest bidder, it is unclear whether the case will be judged on its merits.
Some industry participants say they can’t think of a case in Indonesia in which an onshore secured creditor has successfully enforced. Another take – without contesting the fact that the local enforcement and bankruptcy is uncertain – is that creditors don’t have to follow this route. Security arrangements such as mortgages are often preferable because they allow the lender to take temporary ownership over the collateralized assets and sell them upon default without having to resort to the courts.
The investor involved in the recent legal actions notes that the situation has not made him less interested in Indonesia as a market. Rather, it makes it more difficult to structure transactions sufficiently tightly that LPs are comfortable there is enough protection.
As Josh Stern, senior investment officer at the US-based Robert Wood Johnson Foundation, told the AVCJ Forum in Hong Kong last November: “The key components for LPs are downside protection and enforceability. In the US, it’s one jurisdiction and it’s a large market. But the difference in returns expectations in Asia is the
incentive that we want to go for outside of our geography.”
It is possible to take steps that address both concerns, making these returns achievable with an acceptable quantum of risk. Offshore collateral, personal guarantees from the borrower and full disclosure of their global assets are described as the three key ingredients to a copper-bottomed structure. Furthermore, the documentation would be reviewed by three different Indonesian legal counsels to ensure every aspect of local law is covered.
The availability of offshore collateral depends on the nature of the business. A small and
medium-sized enterprises (SMEs) in Indonesia with land assets that may be difficult to access is clearly a different proposition to shipping companies that own tankers offshore or export-oriented manufacturers that generate US dollar-denominated revenues from international customers. In these situations investors can set up cash traps to collect the money.
“For transactions that involve oil and gas tankers, for example, the chartering contracts may be signed offshore and we would then require them to open an account with the bank and channel the charter income through the bank so we have first lien on the cash account,” adds OCBC’s Than.
Collateral may well come as a combination of onshore and offshore assets. As a bank with a presence in Indonesia, OCBC is able to take land as collateral when financing real estate projects and also works with domestic securities firms to take shares as collateral in a listed enterprise.
Getting personalPersonal guarantees can also be cross-border as the owners of many Indonesian companies have some kind of exposure to Singapore. However, spousal consent can be an issue – it is required for personal guarantees made domestically – and there is always a question of how much the investor feels it can ask for and how much the borrower is willing to give.
A personal guarantee is a strong statement of a borrower’s seriousness in terms of building his business and honoring the financing agreement. If the investor insists on receiving guarantees from every family member and stakeholder
involved, plus details of all assets held globally, several problems can arise. First, a willingness to comply could be an indication of the borrower’s desperation to raise capital; the investor is legally protected but there is a lot of inherent risk in the transaction. Second, the demands could be more than a small family business, which lacks skilled back office staff, is set up to handle. Third, the borrower might just say no.
The same applies to situations of negative control. A creditor may not be able to enforce a position but it can make life very difficult for the company in question, tying up assets and blocking moves to develop the business. If the owner thinks the company is worth saving, and realizes the investor isn’t going away, it might be in his best interests to reach a settlement.
“There are many ways to cause pain and force the borrower to refinance you and get you out of there, but if a company is doing well and just wants growth capital, it isn’t going to like that kind of term sheet,” says one GP.
This comes back to why PE investors are in the market in the first place. If the thesis is to support strong companies that require capital to achieve a particular goal but can’t get access traditional bank channels, enforcement is not as much of a priority as when providing financing to groups that are seeking mezzanine solutions because they are already overleveraged.
For example, a company might have a $20-30 million from a bank and want $50-100 million for acquisitions as it bulks up ahead of an IPO. The deal is therefore structured around the public offering. The company is incentivized to achieve its goal quickly and repay the loan, but if this does not happen all is not lost provided the business remains in good health.
“If a company plans to go for an IPO two years down the road we could, for instance, structure a 4-5 year facility with warrants exercisable at the IPO,” says KKR’s Prasetya. “If the IPO doesn’t happen within five years, the warrants can be put back to the company for a required IRR. In situations where the IPO doesn’t happen for various reasons, if the company has delivered on its business plan, other options typically open up, such as a proper senior loan financing.”
An equity kicker arising from a liquidity event, which takes the return from mid-teens respectability past 20%, is a standard feature of such transactions. It rests on an alignment of interest between borrower and lender, and in this sense the structure of the deal and ensuring sufficient downside protection is just the starting point. The investor is doing more than providing financing based on an assessment of underlying assets; it is about making a call on a business model and a team’s ability to execute it.
“In other jurisdictions you may be able to
COVER [email protected]
“In Indonesia it is much trickier than that - it is more holistic. Do you feel comfortable with the owner? Does he see you as a partner or as a lender?” – Edwin Wong
COVER [email protected]
focus on the assets and care less about the management, and then if something goes wrong you foreclose. In Indonesia it is much trickier than that – it is more holistic. Do you feel comfortable with the owner? Does he see you as a partner or as a lender?” says Edwin Wong, managing partner and CIO of SSG Capital Partners. “And then you want to structure a deal where he has a lot to gain by paying you out.”
Opinion is divided as to how readily family groups are willing to treat foreign investors as true partners. Most industry participants say the companies they deal with are serious about their undertakings, recognizing that the capital required to sustain growth is unlikely to come from elsewhere. The economy has also moved on since the dark days of 1997. Laws are stronger, oversight stricter and company owners, whose wealth may have multiplied several times over, have more to lose by misbehaving.
The counterargument is that progress comes from a low base and Indonesia still has far to go. “It really depends on how badly they need the money,” says another investor. “Most of these families don’t wake up at night worrying about what J.P. Morgan thinks of them; they wake up thinking about Ferraris and how they are going to pay for their grandchildren’s education. CFO-type people still abscond with huge amounts
of money and it is viewed as a risk of doing business. This is a very tough contact sport.”
Boots on the groundMuch rests on the segment of the market investors target and their ability to assess a potential borrower’s creditworthiness. The historical blacklist comes into play here as well as more contemporary information networkst.
For the bank mezzanine units, once they have seen a company’s financial statements and business plan, the next step is to carry out name checks internally. If the borrower in question hails from Surabaya, calls will be made to the local branches – OCBC has around 400 outposts nationwide through its 85% stake in OCBC NISP, while UOB claims to have over 220 wholly-owned branches. If the company is not already a commercial bank customer they can talk to rivals, suppliers and customers who are.
“We can figure out how many other businesses a guy has and how they are performing, which family he is from and whether his grandfather would bail him out if he ran into trouble or he’s the black sheep of the family no one really cares about,” says Wee Yap Yeo, head of UOB’s mezzanine capital unit. “We can sift out partners who have bad reputations or could be problematic investees.”
In a country that remains largely opaque to outsiders and where the established family groups are quite closely intertwined, having a local presence is seen as imperative. Even for the very large deals that are run as processes by investment banks, due diligence may come up short without professionals who are familiar with the local language and legal systems. The SME space is less penetrated but building a scale business – along the lines of a merchant banking operation – requires manpower.
Clearwater’s Petty has more faith in the enforcement environment in China and India and he has invested heavily. The GP has three finance companies across the two markets, with 80 people employed in China and 30 in India. Citing the success of several motorcycle leasing players in Indonesia, he sees a future for the finance company model. However, there is no desire to seek first-mover advantage.
“Finance companies in any of these emerging markets are a phenomenal idea, but I don’t pretend to have the team, the capital base or the comfort to do it in Indonesia. I would rather be a fast follower and let someone else do it in front of me,” Petty says. “It is all about execution and that includes enforcement. Will someone get it right in Jakarta? Yes. Will someone blow up in Jakarta? Yes.”
The most authoritative and comprehensive guide to private equity investors in Asia
The Asian Private Equity Online Directory is the most comprehensive online directory on private equity and venture capital in Asia. It is easy to navigate, enabling access to a listing of around 3,900 Asian private equity firms and over 9,600 professionals.
For a free trial, please visit asianfn.com/VCDemo.
Asian Private Equity Online Directory
To subscribe, call Sally Yip at +(852) 3411 4921 or email [email protected]
avcj.com
avcj.com | March 17 2015 | Volume 28 | Number 1010
THE EMERGENCE OF INDONESIAN ONLINE marketplace Tokopedia is not only remarkable because of the relatively humble backgrounds of its founders – neither was educated overseas – but also because the landscape into which it launched. CEO William Tanuwijaya spent two years trying to raise capital before making a breakthrough in 2009. There were no incubators, few mentors, and even fewer local internet success stories to speak of.
At the same time the e-commerce space was filling up with a number of players bankrolled by large strategics; among them Plasa – a joint venture between eBay and domestic carrier Telkom Indonesia – and Multiply, a social e-commerce platform acquired by Naspers with a view to cornering Southeast Asia. More recently, Japan’s Rakuten has entered the space while Rocket Internet-incubated Lazada is looking to dominate fashion e-commerce in the region.
Despite this intense competition and a paucity of start-up infrastructure, Tokopedia raced through several small-scale venture rounds as its consumer-to-consumer (C2C) platform became the market leader, with 200% year-on-year growth rates and 2.6 million transactions taking place each month. The company struck gold – on paper, anyway – last October when SoftBank led a $100 million investment with participation from Sequoia Capital.
It is far and away the largest VC investment ever seen in the country’s IT space. According to AVCJ Research, the next largest disclosed round is worth a mere $8 million.
For many in Indonesia, the deal represents a watershed for Indonesian venture capital. It gives industry participants confidence that the country has the talent and potential to deliver top-quality technology companies, encouraging entrepreneurs to build the next generation of start-ups and investors to support them.
Comparisons are inevitably being drawn between Tokopedia and its market-leading counterparts in Chinese and Indian e-commerce, Alibaba Group and Flipkart, even though the business models are not an exact match and Indonesia is at a much earlier stage of development. The energy and ambition is trickling down to every level of the market, conveying a sense that the early-stage ecosystem is entering a new dynamic phase.
“Since the Tokopedia investment by SoftBank and Sequoia, the game is has changed entirely,” says Nicko Widjaja, an angel investor and program director at Indigo Incubator, a program set up by Telkom Indonesia. “A lot of VCs from outside the country have already set up bases in Indonesia, and they are looking at the country more seriously. What we are seeing now is quite different from when I started in this business back in 2011.”
Investors to set up shop include the likes of Singapore-headquartered Monk’s Hill Ventures, which launched early last year and opened a Jakarta office in December. Thailand-based Ardent Capital created an Indonesia presence two months earlier. A host of local players have also emerged. In addition to Widjaja’s
Indigo Incubator, there is the recently launched independent firm Convergence Ventures (which was Convergence Accel but changed its name to avoid confusion with Accel Partners).
Growth enginesThe increasing number of active players has inevitably led to a jump in disclosed early-stage deals. According to AVCJ Research, there have been eight transactions in Indonesia so far this year worth a total of $7 million, although the investment size was not disclosed in every case. In 2014 as a whole, $27 million was committed across 23 deals – the highest annual total on record. The previous two years each saw 14 transactions, though once again individual investment sizes tended not to be revealed.
“I think the ecosystem is already there – what is happening now is the fundamentals of Indonesia’s internet economy are rapidly expanding,” says Willson Cuaca, co-founder and managing partner at East Ventures. “If you look at it from the demand side, we have about 100 million internet users right now. Around 20% are engaged in e-commerce and this will increase to 40% in the next two years. That’s around 30-50 million users, which is huge.”
These estimates are broadly reflected in a recent report by Citi. In 2014 internet penetration in the Indonesia, which has a population of around 250 million, reached 33% – or approximately 83 million people – up from 29% in 2013. Come December the figure is expected to be 37%. By way of contrast, internet
penetration in India and China is projected to reach 20% and 49%, respectively, by the end of 2015. Meanwhile, smart phone penetration in Indonesia will rise from 34% to 40%, or 102 million users.
This translates into massive e-commerce growth. The business-to-consumer (B2C) segment alone was estimated to be worth $2.6 billion 2014 and will expand to $3.56 billion this year. It has been a startling ascent from just $560 million in 2011, with compound annual growth of 59% over the last four years. Online ad spending is also rising sharply, with a total of $209 million expected in 2015, a more than five-fold increase from four years ago.
However, given that more capital is flooding into Indonesia to chase this growing opportunity,
Growth inflection Indonesia has relatively incubators, angel investors and entrepreneurs with businesses of investible quality. Does the recent large investment in Tokopedia suggest the start-up ecosystem is now coming of age?
No. of deals
Indonesia early stage deals
Source: AVCJ Research
30
20
10
0
25
20
15
10
5
0
US$
mill
ion
Dea
ls
Amount (US$m)
20062005 20082007 2009 2010 2011 2012 2013 2014 2015ytd
Number 10 | Volume 28 | March 17 2015 | avcj.com 11
some early-stage investor are openly questioning whether there is enough supply to meet the demand.
“I think the market is ready but I am more concerned about the availability of start-ups worth backing,” says Indigo’s Widjaja. “When we did a search for entrepreneurs and founders on LinkedIn we found it was still small compared to Singapore or Malaysia. There were only 3,000-4,000 entrepreneurs, and of those only about 5% could actually be classified as investible.”
Widjaja argues this is where incubators can play a key role in nurturing the start-up ecosystem, but the pool is relatively shallow. It is though there are only around 10 incubators active in the country at present, among them: Merah Putih Incubator, Jakarta Founders Institute, Batavia Incubator, and Gurpara.
The problem is the industry has yet to see proof of concept. Indonesia’s technology space is still in its nascent stages, so there is no first generation of entrepreneurs to act as mentors and angel investors for up-and-coming start-ups. Furthermore, those independent incubators that do exist are resource-constrained so they are limited to small batches. This was one of issues facing Ideosource, which originally launched in 2009 with the intention of running an incubator.
“We looked at the incubation model but we didn’t see that model as being quite scalable, it was just too early.” says Andi Boediman, founder and managing partner of Ideosource. “So we decided we needed to do a seed model - and we since have deployed about $5 million to date in 19 companies.”
Arguably, Telkom Indonesia’s Indigo, as a corporate incubator, is able to draw from the deeper pool of capital and hence has scope to invest in more start-ups. According Widjaja, the incubator plans to back 40 entrepreneurs a year over two six-month programs. However, the program’s primary purpose is to support companies that can contribute to Telekom Indonesia’s own ecosystem, rather than helping companies scale up and become potential targets for later-stage investors.
Turtle powerDespite an apparent dearth of mentors available to Indonesia’s incubators, investors stress this does imply that the country lacks talent. Ideosource’s Boediman believes the first generation of start-ups will likely be driven returnees who have spent time aboard – particularly in more places with more developed technology ecosystems such as the US and Japan – working for the likes of Microsoft and Google.
Peng Ong, managing director with Monk’s Hill, likens Indonesia’s tech expats to China’s “haigui,” or “sea turtles,” who returned to the
country after protracted stays abroad and helped develop private enterprises, both in the technology space and outside of it. He estimates there are currently as many as 10,000 Southeast Asian citizens in Silicon Valley. Returnees aside, the numbers are still stacked heavily in Indonesia’s favor.
“For example, China has 1.3 billion people, and if you take the top 0.1% you have 1.3 million very driven and very smart people,” Ong explains. “It is the same with Indonesia. The overall population is smaller so that 0.1% amounts to fewer people, but it is still encouraging. I am not in Indonesia just because of the market opportunity; I am here because it has the largest pool of talent in Southeast Asia.”
One stumbling block is that much this raw talent is not trained for the tech sector. Monk’s
Hill is trying to address this by backing the CS Leader Scholarship program, which supports computer science students in the hope that they can form the backbone of the start-up ecosystem.
The private sector is not alone in pursuing this objective. Last month, Indonesia’s minister for communications and information technology unveiled plans to raise IDR12 trillion ($1 billion) from domestic conglomerates to develop the country’s digital start-ups. It is not just a case of sourcing additional funding but encouraging companies to engage with the local ecosystem. However, industry participants wonder whether such an initiative is necessary.
“What Indonesia has that countries like China lack are these large conglomerates that have made significant moves into the internet space, and have been doing a lot venture investing as of late,” says Adrian Li, founder and managing partner of Convergence.
Indeed, Convergence is backed by the Bakrie Group, while Lippo Group has set up Lippo Digital Ventures, Ciputra Group is behind the Ciputra GEPI Incubator, and Sinar Mas Group has launched Sinar Mas Digital Ventures.
“To be honest we don’t need that much capital support from the government when we lack enough quality start-ups, compared with the cash that is already available,” says Ideosource’s Boediman. “We don’t need money from the government as much we need them to address regulatory issues.”
It is a view shared by other industry participants. While markets like Singapore have sought to remove barriers to offshore capital, Indonesia is accused of being more protectionist. Of particular concern is the government’s inclusion of online retail on the negative investment list, which essentially blocks foreign investment in B2C e-commerce start-ups. To get around this, fashion site BerryBenka and online jeweler Orori - both backed by venture capital - are among those to base themselves in Singapore.
On top of this, Finance Minister Bambang Brodjonegoro announced on February 1 that the government would impose a 10% value-added tax on e-commerce transactions. Tokopedia’s Tanuwijaya has openly expressed concerns that this will discourage smaller merchants from
using formal online platforms. Instead, they will probably go back to informal ones like social media sites and messaging apps that offer little if any consumer protection.
“There are also a lot of restrictions that means it takes a bunch of time to set up a company,” adds Ong of Monk’s Hill. “These things are intended to protect people but they are slowing down wealth creation, so hopefully they will get dismantled.”
Bullish outlookThese regulatory hurdles may slow the development of Indonesia’s start-up ecosystem but they will not derail it – the momentum is already too strong.
Convergence’s Li – who hopes to reach a final close on his maiden fund of $30 million by the middle of this year – draws parallels between Indonesia today and China 10 years ago. To put that in context, in 2005, China had 103 million internet users, according to official statistics, and iResearch Consulting put total B2C e-commerce revenue at RMB5.6 billion ($896 million). Now the country has over 650 million internet users and B2C e-commerce is expected to be worth RMB15 trillion this year.
His optimism is share by East Venture’s Cuaca. “It is scaling up fast and we don’t look at the ecosystem alone,” he says. “If you look at the fundamentals of what is going on inside Indonesia, I think everything is just right at the moment.”
“I think the ecosystem is already there – what is happening now is the fundamentals of Indonesia’s internet economy are rapidly expanding” – Willson Cuaca
avcj.com | March 17 2015 | Volume 28 | Number 1012
Q: Getting Tokopedia to launch was a two-year process. What did you do during this period?
A: Raising money from friends and family was not an option at that time. My father was also sick, and as the only worker in the family, I couldn’t leave my job to bootstrap a start-up. In 2007, I went to the only person I knew who had money – the boss of the company where I was working. I pitched the idea of an online marketplace and he introduced me to people in his network but unfortunately no one bought into the idea. People were skeptical, asking me to name one person in Indonesia that had set up a successful internet business. They thought it was only a matter of time before eBay, Rakuten and Alibaba took over the market. Not coming from a well-known family and with no industry track record, I failed to raise money. I carried on with my job and then in February 2009 my boss finally decided to back the idea.
Q: How did you get traction?A: The first challenge was
convincing talent to join us. Working for a start-up wasn’t considered cool at the time; people wanted stable jobs with multinationals. We hired friends, starting with a team of four. It took six months to develop a viable product and we involved merchants in this process, asking them what functions they needed most. We got about 70 merchants on our beta platform. Then terrorists bombed the Ritz Carlton and JW Marriott hotels in Jakarta. An internet movement started called Indonesia Unite and people were asked to wear T-shirts saying, “kami tidak
takut,” which means, “we are not afraid.” Many of our merchants were selling these T-shirts and we wanted to support the movement, so we decided to launch the platform on August 17, Indonesia’s Independence Day. The first order came within 12 minutes. The following day a journalist came to our office and asked to do an interview. We hadn’t issued any press releases but I had written a blog post about our journey and an editor saw it. They wrote a two-page feature on us and that is how we got our initial traction.
Q: At what point did you perceive competitive threats?
A: Six months after our launch Telkom Indonesia announced a joint venture with eBay. Rakuten entered the market the following year through a joint venture with MNC and
then Naspers acquired Multiply, moving the headquarters from Florida to Jakarta with a view to becoming the marketplace leader in Southeast Asia. On paper we had no chance. But we are lucky to live in the internet era, where even the underdog can challenge the status quo and somehow eventually win.
Q: After the seed round, you were supported by several VCs. What has been their impact?
A: I didn’t speak English particularly well until 2010, but I was fortunate to meet with several Japanese investors who tolerated my broken English and helped me improve. Continuous learning is part of the Tokopedia culture. I raised money every single year, from 2009 to 2014, and each investor taught me something new. They plugged me into their networks and provided exposure to China, Japan and South Korea.
Q: And what do SoftBank and Sequoia offer?
A: I want to build something for the long term so I need shareholders with deep pockets that will support me. SoftBank and Sequoia are a perfect fit – they have amazing track records in helping entrepreneurs build companies. I want to learn about technological innovation in the US and business innovation in China and India. They can help me do this.
Q: What similarities do you see between China in 2003 – when Alibaba set up Taobao – and Indonesia in 2009 and today?
A: One similarity between the two markets is a lot of individuals were earning small amounts
from their main jobs and so taking on second or third jobs. Open marketplaces like Taobao and Tokopedia enable these people to start their own online businesses at basically no cost and with no risk. Through our platform, one stay-at-home mom turned a self-run enterprise into a small business with 40 employees. College students with no jobs and office workers who want to find second jobs are also among our top merchants.
Q: Do you want Tokopedia to expand vertically or geographically?
A: We will look at verticals first. Tokopedia is not an e-commerce company; it is an internet company that helps people to do e-commerce safely and easily. We want to expand our ecosystem within Indonesia before we consider entering new geographical markets.
Q: What message does the investment send out to local entrepreneurs?
A: Tokopedia is not a product of a joint venture between two giants, like most internet companies in Indonesia. The investment shows that it is possible to build a world-class company from scratch here.
Q: What are the biggest
challenges facing these entrepreneurs?
A: Talent and knowhow. Indonesia is no Silicon Valley, China, or India where they have the education and ecosystem to support innovation. Building a company is one thing; scaling it to global level is huge challenge given the lack of talent available.
INDUSTRY Q&A | WILLIAM TANUWIJAYA [email protected]
TrailblazerDespite initial local skepticism and competition from global rivals, Tokopedia has become Indonesia’s leading online marketplace, securing $100 million from SoftBank and Sequoia Capital last year. CEO William Tanuwijaya charts the journey
“Even the underdog can challenge the status quo and somehow eventually win”
Number 10 | Volume 28 | March 17 2015 | avcj.com 13
WITH A COMMITMENT OF $24 MILLION for a 20% stake in Bank Index Selindo, Creador this week announced its fourth investment in Indonesia. The GP’s move follows healthcare specialist Quadria Capital’s acquisition of a minority stake in drug manufacturer Soho Global Health, its debut transaction in the country.
This activity continues the middle market’s dominance of Southeast Asia. According to EY, the region saw 50 deals last year in the $20-500 million space with an average investment size of $133 million. Consumer products and retail was the most popular sector, while Indonesia remained the leading geographic market.
The country’s young and newly affluent consumers are credited with driving demand for services and products. Opportunities now extend beyond fast-moving consumer goods (FMCG) and into healthcare and financial services, as the Creador and Quadria deals suggest. But there is not enough to satisfy all appetites.
“Indonesia could be a very attractive market for global buyout firms, but it’s not a big enough market to justify a major presence on the ground,” says an Indonesia mid-market focused GP. “There are not many deals in the $50 million range or above $75 million.”
Limited supplyAVCJ Research records show PE investment in Indonesia has slowed in recent years. After reaching $1.4 billion in 2010 and $1 billion the following year, it dropped to $608 million in 2012 and $328 million in 2014. This reflects a paucity of large-cap deal flow following CVC Capital Partners’ investments in Matahari Department Store and Link Net in 2010 and 2011.
In the middle market, classified as PE transactions of $60 million or below, there were 16 deals worth $295 million in 2013. In 2014, the total fell to $148 million across 13 deals.
Kay Mock, co-founder of Saratoga Capital, attributes the fall in activity to PE investors holding off as they awaited the results of Indonesia’s 2014 parliamentary and presidential elections. This followed an outbreak of panic in emerging markets that sent the rupiah tumbling.
“In 2013 the currency was trading below IDR10,000 to the US dollar, today it’s at IDR13,200. GDP growth is slightly slower at 5% rather than 6%, inflation is under controlled and the current
account deficit has not deteriorated. Thus in US dollar terms, Indonesian assets are trading at much more attractive valuations than two years ago,” says Mock.
With assets theoretically 25-30% cheaper than in 2012 and the rupiah not expected to gain on the dollar in the near term, Saratoga is optimistic of doing more deals.
It and other GPs certainly have plenty of dry powder to burn. Over the last six years, fundraising by Indonesia-focused GPs amounted to $2.6 billion. Luke Pais, partner and ASEAN leader at EY, contends that deployment has been slow because entrepreneurs are wary of PE.
“Imagine that a founder started his business 30 years ago and he didn’t really think much
about proper financial reporting. He focused on the business and how best to grow it,” says Cyril Noerhadi, senior managing director at Creador. “It typically requires much explanation and continuous dialogue to get the founder agree to bring in a team of professional accountants.”
The market is evolving slowly and more private equity firms are spending time on the ground, building relationships with entrepreneurs. Meanwhile, a series of push and pull factors are expected to contribute a greater openness of private equity among businesses in Indonesia. On the pull side, in many family-owned businesses management control is transferring to a younger generation, comprising individuals who have been educated abroad or worked for multinational corporations.
“Younger entrepreneurs are more receptive to collaborating with financial investors, especially when PE can bring value-add,” says Saratoga’s Mock. “In the last decade Indonesian entrepreneurs made money riding on the upturn
in the commodities cycle, but that theme is no longer viable today. Banks have also become more selective in their lending, so PE financing has become an alternative source of capital.”
On the push side, Indonesia is an increasingly attractive market for strategic investors. This means more competition across almost all parts of the domestic economy, often from well-resourced multinationals. Local players need to make improvements in corporate governance to stay in touch and PE can help deliver this.
Valuation vortexEven if GPs can make a compelling case for how their involvement can help transform a business, they still need to get in at an acceptable price. Private markets valuations remain a concern. For example, valuations of listed financial services companies are now lower than what is expected in the private sector. “That’s actually a fact of speculation today,” says Creador’s Noerhadi.
However, Brian O’Connor, founding partner of domestic GP Falcon House Capital Partners, views the situation differently, arguing that there isn’t sufficient data on private deals in Indonesia to engender definitive valuation trends.
“There aren’t many deals as compared to markets like China and India, and these deals span across different sectors and growth profiles,” he says. “What we find is that the market is still inefficient in terms of valuation and it’s not unusual to find similar types of companies with markedly different perspectives on valuation.”
Even so, recent public listings on the Jakarta Stock Exchange suggest that high quality companies can command high valuations. Last week, Indonesian hospital owner Mitra Keluarga Karyasehat raised $343 million through its IPO. The offering was 10 times over-subscribed and the business was valued at close to 30x EBITDA.
In addition to the public markets, mid-market GPs see potential in secondary and trade sales. “Given the significant liquidity that has been raised by regional PE firms and for Asia by the major global buyout shops, secondaries will increase in importance, especially for well-institutionalized and scaled businesses. Secondly, the Indonesia growth story is becoming more attractive to international and domestic strategic investors and we have seen interest accelerate post the recent election,” O’Connor says.
Slow burn storyIndonesia’s middle market is a proxy for the robust services sector, but it is difficult for investors to penetrate and deal flow has been slow in recent years. Are we are about to see more?
“Younger entrepreneurs are more receptive to collaborating with financial investors, especially when PE can bring value-add” – Kay Mock
avcj.com | March 17 2015 | Volume 28 | Number 1014
TWO YEARS FROM NOW, AFTER MORE than two decades trapped in planning-stage limbo, the first trains on Jakarta’s mass rapid transit (MRT) system will roll into stations. The city’s proposed subway system has become a symbol of the chronic delays inherent to doing business in Indonesia. Now, thanks in part to the efforts of President Joko “Jokowi” Widodo – in his previous role as governor of Jakarta – the project is finally under construction.
Overseas investors hope that the MRT system will come to represent a new start for the country. Following his election last year amid much optimism from the investor community, Jokowi and his administration have taken steps
to improve the local business environment.However, this optimism is still tempered with
caution. Most of the country’s longstanding issues remain unresolved, and not all of the administration’s moves have found favor. The rupiah remains weak, with the government appearing unwilling to step in, and foreign investors are wary of moves that seem to suggest a protectionist mindset.
Observers are, for now, willing to tolerate
even the less popular actions as the products of a learning curve. “What’s important is that they demonstrate that they’re building up momentum in this area,” says Benedict Bingham, the IMF’s resident representative in Indonesia. “That’s what investors want to see. I think investors are aware that this is a medium-term challenge, but they want to see in the markers this year that progress is being made.”
Removing red tapeOne early move that boosted confidence was the government’s consolidation of its many regulatory agencies into a single permit board. The decentralized system is a frequent cause
of delays to projects, due to confusion about the process and miscommunication between the various agencies. Indonesia’s legislature plays a role as well, passing myriad vague or contradictory laws that must be reconciled by new regulations or even by presidential decree.
This dysfunction is one reason that the World Bank ranked Indonesia 114th out of 189 countries for ease of doing business in 2015. Indonesia ranks even worse in sub-categories such as
dealing with construction permits (153rd) and starting a business (155th), with the latter process taking an average of 53 days to complete.
By comparison, Malaysia ranks 18th overall, and 13th and 28th, respectively, in the two sub-categories. Only six days are required to start a new business.
The government’s proposed “one-stop-shop,” and the president’s promise to force regional governors to implement similar simplification measures, represent a significant step forward in cutting this red tape and getting projects off the ground. The active role taken by the president in starting construction on the MRT has been taken by some as an indication that his priorities are in the right place with regard to developing the country’s long-neglected infrastructure.
“If basic road and other primary infrastructure doesn’t get developed, this economic growth story will start to peter out,” says David East, head of transaction services for KPMG in Indonesia. “Indonesian companies are paying 3-4 times as much to get product to port and to get imported goods from port to factory compared to Vietnam, Thailand and Singapore, to varying degrees. The lack of infrastructure increases logistics costs, weakening the competitiveness of domestic companies.”
Indonesia’s logistical difficulties can in part be blamed on its unique challenges as an archipelago. However, World Bank data once again show that Malaysia, which has a broadly similar geography, outperforms Indonesia in transportation and logistics. Since 2007, Malaysia has consistently scored higher in assessments of quality of trade and transport-related infrastructure, ease of arranging competitively priced shipments, competence and quality of logistics services, and frequency of on-schedule delivery.
The Jokowi administration is aware of the country’s deficiency in this area. There are plans for infrastructure spending of $400 billion, to come from a mix of public and private sources. Furthermore, in the recently proposed budget the ministries with the largest increases in allocation were public works and transportation.
Funding will go towards improvements to 24 ports as well as the construction of roads and water treatment facilities, all of which is welcome news to investors. However, one industry source
The waiting gameIndonesia’s new president is still carrying goodwill from the investment community and has made some reassuring moves. Now investors are waiting to see if the new direction will pay off
Logistics capabilities: Indonesia vs. Malaysia
Source: World Bank
2007 2010 2012 2014
2007 2010 2012 2014
Quality of trade and transport-related infrastructure Ease of arranging competitively priced shipments
Competence and quality of logistics services
Ability to track and trace consignments Frequency with which shipments reach consignee within scheduled or expected time
US$
mill
ion
INDONESIA
US$
mill
ion
MALAYSIA
4
3
2
1
0
4
3
2
1
0
notes that the real test will be to see whether the government can follow through on its goals.
Another factor in the government’s infrastructure agenda is a desire to improve the manufacturing sector. The country is still smarting from the commodities crisis, and one way to prevent another such collapse is to diversify the economy so as not to rely too much on production of a limited range of natural resources.
Indonesia’s manufacturing sector as a whole grew by more than 5% in value-added terms between 2011 and 2013. That is a considerable improvement on the previous four years, when growth never reached higher than 4.74% and at one point dropped to 2.21%. In a bid to sustain and improve this growth rate, the government has in recent years announced its intention to attract greater overseas investment in manufacturing.
However, the administration might find its efforts hampered by its monetary policy. The value of the rupiah continues to fall, having reached 13,000 to the US dollar in February, and economists warn that if the depreciation continues, foreign investors will see no value in staying in Indonesia.
Although the government has downplayed the risk of a falling rupiah, it is not necessarily
being lazy or complacent, as a weak currency is beneficial to the country in some ways. Finance Minister Bambang Brodjonegoro has indicated that government revenues for natural resources increase considerably with every drop in the value of the rupiah, although this is of little comfort to most investors with exposure to manufacturing.
Independence agendaAnother area of frustration is Indonesia’s professed desire for self-sufficiency. The president has called for the country to be self-sufficient in food in three years, and tariffs and import duties continue in place for a wide variety of goods, including steel. The measures have worried some investors, who see in them a warning of protectionist and nationalist restrictions to come.
Others, however, contend that concern about the self-sufficiency program is misplaced. Edimon Ginting, deputy country director at the Asian Development Bank, says investors have misunderstood the reasoning behind the policy, which is to improve the productivity of domestic agriculture and aimed at a narrow range of products. He relates the program to the proposals for infrastructure improvement.
“Over 55% of the irrigation system is not working properly,” Ginting says. “Imagine if they
fixed that and improved productivity. They would be more self-reliant in terms of rice. They could process it, even export, for example.” He adds that if the self-sufficiency measures do negatively affect the economy, the damage will be more than offset by the positive impact of simplified regulations, improved infrastructure and increased investment in manufacturing.
Despite the mixed signals sent by the government, the investment community seems willing to wait for the government to find its feet and commit itself to the new approach.
Though a major bounce back this year seems unlikely, there is consensus that the environment will continue to improve. And even without the sought-after reforms, the current climate still offers the chance for considerable reward for those willing to take the risk of investing in Indonesia.
“This large domestic consumption base and the well-documented emerging middle class provide a huge potential upside if you get the right target, pay the right price and partner with the right local shareholder or businessmen,” KPMG’s East says. “A not-uncommon story we hear is a multinational’s Indonesia investment is their most favorite and profitable in Southeast Asia, provided they can get it all right – something that can be easier said than done.”
Wider reach to everyone in your organisation
avcj.com site licence allows everyone in your organisation to have instant access to in-depth analysis, real-time news and information on private equity in Asia and beyond. Sign up for an avcj.com site licence now and empower your team with critical information and data to soar above your competitors in Asian private equity.
How does it work?
We will arrange online access for your employees to avcj.com, either with individual passwords or by general access through IP address recognition.
How much does it cost
That depends on how much access you want, but we can customise cost-effective packages to all firms, regardless of size. For more information, contact Sally Yip at +(852) 3411 4921 or email [email protected].
avcj.com
avcjchina.com
Co-Sponsors
GLOBAL PERSPECTIVE, LOCAL OPPORTUNITY avcjchina.com
28-29 May • China World Summit Wing,Beijing
14th Annual Private Equity & Venture Forum
China 2015
50+ distinguished speakers who have unique insights in global and domestic investments
15+ thought-provoking sessions covering regional and domestic most debated topics
300+ attendees who are policy makers, fund managers, investment professionals, corporate executives from across the region
6 roundtable sessions with top expertise and intimate networking opportunities
What to expect at AVCJ China Forum 2015:
SAVE US$300 if you register before 10 AprilREGISTER NOW by emailing us: [email protected]
For sponsorship enquiries, please email: [email protected] or call: +852 3411 4919
LP-G
P R
ATIO
LPs GPs
1 : 2Attended by 110+ LP
from China and overseas
BY
CO
UN
TRYHong Kong
13%
China76%
Over 344 participants from15 countries and 230 companies.
BY
TITL
E
Principal/VP/Associates 33%Managing Director/ Partner/ CFO/COO 32%Director / GM / Chief Representative 20%Chairman / CEO / Managing Partner 15%
Join our WeChat for latest AVCJ Feeds
Asia Series Sponsor
VC Legal Sponsor