Two of Indonesia’s mostly highly valued unicorns have begun actively preparing to float their shares. But neither will hit a stock exchange until at least late 2019 thanks to a combination of rapid geographical expansion, the current emerging markets malaise, and a thicket of regulations to work through and overcome.
The complexity of floating the first large tech start-ups from an emerging markets jurisdiction like Indonesia was always likely to necessitate long lead times. As a result, capital markets experts say that ride hailing and courier company Go-Jek and online booking agent Traveloka began the groundwork for their IPOs in the first quarter of the year. This was some time before they actually need or want to raise public equity.
Traveloka is said to require the most work of the two since it is not currently incorporated in Indonesia and its tax situation is consequently more complicated. But it is believed to be the furthest advanced in its plans, having hired Latham & Watkins as its IPO counsel.
Investment banks have not yet been hired, but have submitted a multitude of pitches incorporating a variety of IPO structures and listing venues.
WHERE TO LIST
In terms of where to list, some banks have suggested a sole listing in Jakarta while others have pushed for dual listings in either Singapore and New York or Jakarta and New York.
Most believe the unicorns should and do want to list in Jakarta, not least to keep the government onside in their home market.
The general consensus favours an international listing as well. But the unicorns will not be able to complete a simultaneous listing and they will also have to offer shares domestically first because of capital gains tax rules.
If they debut offshore, they will be liable for up to 25% in capital gains tax. If they debut in Indonesia, however, the unicorns will eligible to pay a founders’ tax of just 0.6% plus a 0.1% tax on subsequent share sales.
HOW TO LIST
Indonesia’s IPO approval process adds another layer of complexity on top of this. It is not straightforward even for a traditional company, let alone one controlled by a special purpose vehicle (SPV) registered in the Cayman Islands.
Indonesia’s lack of a fixed IPO approval timetable makes it difficult for prospective candidates to optimize when they come to market. In recent years, larger issuers have got round this by completing a small technical listing first, followed by a larger secondary offering, which they can time more effectively.
Start-up companies have a number of other regulatory issues to contend with, although bankers say the regulator, Otoritas Jasa Keuangan (OJK), is working hard to resolve them.
The first and foremost concerns profitability requirements.
“If a company lists on the main board, it currently needs to have been in operation for a minimum of three years and have recorded a profit for at least one,” said Kristo Molina, a partner at Witara Cakra Advocates, which has an exclusive association with White & Case.
“If it opts for the development board, it does not need to be profitable up-front, but it does need to demonstrate how it will book one within five years of listing.”
WHAT TO LIST
Then there is the question of which assets the unicorns should list domestically and which ones they should list offshore. Do they list their consolidated operations at home and the SPV abroad, or just the Indonesian subsidiary at home and the consolidated operations covering the whole of Asia abroad?
Specialists say there are advantages and disadvantages to either route.
If they list the consolidated operations in Jakarta, the founders would not be able to take full advantage of offshore jurisdictions’ rules on dual-class shares. Future divestments would also have to be executed through Jakarta.
If they list the Indonesian subsidiary locally, however, then there are concerns that this would set a lower valuation benchmark, which might cap the price they then get offshore.
“There’s no real precedent so the jury is still out,” said one specialist. “They’ll also need to be careful and disclose future listing plans in their domestic prospectus.
“If they don’t, they could end up having to make a mandatory general offer when they launch an ADR.”
What no one doubts is the Indonesia Stock Exchange's (IDX) capacity to absorb the unicorns.
Go-Jek and Traveloka’s latest funding rounds have respectively valued them at $9 billion and $4 billion. Given the exchange’s 10% minimum freefloat rules, this implies IPOs of at least $900 million and $400 million based on current valuations.
A transaction of this size would make Go-Jek’s Indonesia’s IPO the largest this decade, beating PT Borneo Lumbung Energi, which raised Rp5.7 trillion ($577 million) in 2010.
But it would not be the largest IPO ever. That accolade currently belongs to PT Adaro Energy, which raised Rp12.25 trillion ($1.32 billion) back in 2008.
And while Go-Jek would rank among the exchange’s top 10 stocks by market capitalization, it would lag its largest, Bank Central Asia (BCA), by some margin. Based on its November 23 close, the bank had a $42. 56 billion market cap and a 41.5% freefloat.
BCA also trades around $24 million shares per day. So even a $1 billion IPO by one of the unicorns would only represent about 42 days trading volume.
NEW YORK NEW YORK
But just how small is small for an exchange with an overall market capitalization of $464 billion? For size is one of the main calling cards that the IDX's rival across the Straits of Singapore has been trying to pitch.
Singapore has long been the place where rich Indonesians park their cash and unpaid taxes. Analysts also calculate that about 5% to 10% of the Singapore Stock Exchange’s (SGX) market capitalization comes from Indonesian companies.
Bankers say that the SGX has, understandably, been lobbying hard to win Indonesia’s unicorns as part of its perennial efforts to drum up business in a small City State, which does not generate much of its own. Earlier this year, it approved dual-class share offerings in a bid to diversify and woo tech companies.
Leong Chuo Ming, a partner at Withers KhattarWong in Singapore, applauds the effort.
“It’s a good first step, but it will be a challenge to compete with the likes of the Nasdaq, which has a longer track record in the tech space and valuations are higher,” he said.
Nevertheless, Leong highlights Singapore’s legal framework as one of the main reasons why the SGX might have an advantage over the IDX.
“Investors, in particular, prefer a legal system that accords familiarity and a higher degree of certainty and predictability,” he added. “In that aspect, Singapore delivers.”
Indonesia, on the other hand, has a legal system which investors have often found opaque and difficult to understand. Many dislike the fact that it is not bound by precedent. This gives judges huge discretion and makes outcomes difficult to predict
The competition between Singapore and Jakarta means that the unicorns will likely choose one or other.
The IDX itself has been a keen promoter of US stock exchanges as a partner. In September 2016, it led a roadshow to New York in a bid to encourage more local companies to execute dual listings. It believes that this will help to promote Indonesia on the global stage and make shares available to retail investors who do not have direct access to the IDX.
Its efforts have yet to bear fruit and there is still only one company with a dual listing in Jakarta and New York: PT Telkom. The telecoms group listed there in 1995, one year after its former sister company PT Indosat listed in Jakarta.
History has accorded each company a diverging fate. Today, PT Indosat Ooredoo has an $823 million market capitalization compared to Telkom’s $26.43 billion.
In 2013, Indosat unsurprisingly decided to de-list from the NYSE on cost grounds.
Another Indonesian group, PT Aneka Tambang, is also dual listed in Jakarta and Australia. But even though Australia has plenty of mining companies, Aneka Tambang’s average daily trading volumes are often zero.
Some bankers argue that fund managers prefer to trade companies in their home markets particularly given how many global investors are now based in Asia. But others wonder whether the tech companies can achieve the valuations they want domestically.
On the plus side, they offer novelty value and diversification. But domestic investors are not used to paying high multiples for Indonesian companies and certainly not unprofitable ones.
Private equity investors, on the other hand, are very used to rapid valuation inflation. Consequently, none of Indonesia’s unicorns have found it hard to raise cash to fund their ambitious expansion plans.
As a result, some bankers believe that an IPO might be at least three to four years away.
“It’s all about gaining market share right now,” said one banker. “I wonder whether an IPO would distract valuable energy from that, but it might provide good publicity.”
Another adds, “Indonesia has elections in April next year and if current market conditions continue the way they are, I think the unicorns are going to just kick the can down the road.”
Go-Jek has been ramping up its regional expansion; it has launched operations in Thailand, Vietnam and Singapore over the past few months.
Its ongoing Series F funding round will help to pay for it. So far, it is believed to have secured $1.2 billion from existing investors including Google and JD.com.
The final close could top $1.5 billion.
Its valuation has also doubled since its last funding round, which closed in August 2017. According to S&P Global Market Intelligence figures, it sourced $1.5 billion from investors including Tencent and Temasek.
Since it was founded in 2010, it has built up a shareholder roster including KKR, Sequoia and Allianz.
A recent leaked memo suggests that KKR has a 7.14% stake and Sequoia 6.88%. The largest single shareholder is said to be Singapore’s Gamvest with 8.82%.
Traveloka, meanwhile, is also raising at least $400 million in a fundraising round led by GIC. Its valuation has also doubled since it last raised $350 million from Expedia in the summer of 2017.
Indonesia’s third big unicorn, Tokopedia, has gone down a slightly different route after bringing Alibaba on board. The latter invested Rp14 trillion ($1.29 billion) in August 2017 for an unknown stake in the e-commerce company.
Company executives have said that Alibaba does not have a majority stake, but analysts believe it is likely to be close.