Rapid growth in the Indonesian private equity sector is already happening. Over $3bn was invested in Indonesia’s start-up sectors in just the first six months of last year, doubling the year before and a huge increase on the modest $50m of just five years before. Even Google’s Accelerator has now launched in Indonesia, which now claims a fifth of private equity/ venture capital investment in SE Asia. But a surge, whether of boots on the ground or investment in a country, is not the same as a sustained change. In fact, it’s quite the opposite – a temporary boost designed to achieve a specific objective. So, which is it in this case?
What makes for the rapid and sustained growth of private equity investment in a country?
Established wisdom says that it is a combination of factors: demography, stable economic and political prospects, improvements in regulation, and a series of freshly evaluated comparative advantages, such as lower costs of production, new concentrations of human capital, or captive markets. Participants in private equity courses have always learned the legends of how Silicon Valley benefitted from the growth of Google, or how Management Buy-Outs were spurred on in Europe by generational change in Mittelstand companies over many years.
How does Indonesia compare?
Yes, Indonesia is enjoying a rapid growth in its mobile enabled middle class, which is doubling every five years, quite possibly generating an online shopping potential a fifth of China’s in South-East Asia by the end of next decade. Young Indonesians no longer talk of emigrating, as they did even a decade ago. Yes, the country has now enjoyed relative economic stability for over a decade, with growth reasonably expected to be maintained at around 5% this year and next, whilst deregulation and disinvestment by the public sector are now on the agenda. And yes, the country has risen in World Bank governance standings, during a period when the general standard is itself rising. The Indonesian government has reason for confidence.
Yet there are also plenty of reasons to be cautious. Threats to political stability have not disappeared, family-run conglomerates still control most of the biggest companies, whilst regulation has not kept pace with economic growth: the legal backdrop for private equity, for example, is still antiquated: Indonesian law does not recognise specific corporate governance rules for private equity business activities. There is a high bar to clear to take a company private, and neither are exits easy. Growth itself may be curbed by problems such as balance of payments concerns, which any trade war waged by the USA would accentuate, a slip in commodity prices, and the weakening of State-owned enterprises’ balance sheets that are crucial to infrastructure development, recently highlighted by S&P. Private equity investors are notoriously cagey about admitting losses from their deals, but Indonesia is widely rumoured to have provided examples: the FT reported that KKR lost money on an energy investment (at least on a mark to market basis), Temasek on a hypermarket and CVC on a hospital chain. Once the economic cycle turns there will be even more reason for private equity investors to develop a sudden and no-doubt belated caution.
Second, and equally important, Indonesia is just catching up with critical technological infrastructure. Every country now needs its rideshare services, so Indonesia now has a proper national champion in internationally funded Go-Jek. Likewise, an online marketplace, hence Tokpedia, and a travel aggregator, hence Traveloka. But there is no unlimited market or opportunities for such huge investments, whereas first mover advantage counts for a lot for both. A further one-off boost can be expected as and when State-controlled construction firm Waskita Karya and toll-road operator Jasa Marga complete selling shares in toll roads. But take out the mega-deals and the one-offs, and the statistics look much less impressive – still $300m, but a modest surge at best. Fintech and healthcare are flatter Gini curve sectors which can be expected to soak up several billion dollars more of investment, but even they have economies of scale and are more dependent on the economic cycle. It is regular private equity deals such as BFI Finance, PT Bank Danamon Indonesia and Trinugraha Capital that must eventually drive the sector.
Third, and of real concern to Indonesian policymakers, the surge is almost completely dependent on Chinese investors such as Tencent and Alibaba, who provided over 90% of the capital last year. Whilst they are rebalancing their portfolios in the Indonesian direction, expect the surge to continue, but once the job has been done – probably around 2020 – the rate of growth of Chinese investment is highly likely to slow. US investors meanwhile are being lured back to domestic markets by creeping regulation, although dry powder in the Asia-Pacific region is around $225 billion, more than two years of future investment, and is steadily rising, the region as a whole maintaining its golden status for limited partners.
That money, however, need not find its way to the Indonesian market, which has always had a reputation for being the most cyclical market in SE Asia, a place where fortunes are often made but easily lost. After investment reached $1.3 billion USD in 2010 and $1 billion USD in 2011, private equity investment dropped off: the 2014 total amounted to $354 million USD, according to AVCJ. So far, the current private equity surge is running twice as big but true to form, although everyone wishes and hopes that, this time, it may be different.