KKR's TPS deal suggests future for GPs in Indonesia

Increasing levels of private-equity capital dedicated to Southeast Asia and a lack of buyouts or large-scale deals leave global GPs having to accept less attractive offers in Indonesia.
Mayooran Elalingam, Deutsche Bank: hard for PE to distinguish itself
Mayooran Elalingam, Deutsche Bank: hard for PE to distinguish itself

It is telling that in the same month that KKR raised a $6 billion Asia-dedicated private-equity fund, it made its first investment into Indonesia — as a minority investor in public shares.

The 9.5% stake in Jakarta-listed food company Tiga Pilar Sejahtera Food was taken not by KKR’s private equity team but by KKR Asset Management, a traditional asset manager. Terms of the July deal were not disclosed but bankers and local PE executives reckon it would have been around $50 million.

A global private-equity giant raises $6 billion to do private equity and ends up taking a minority stake with no control, no operational value-add, and — despite the bullish press statement made by KKR about Indonesia’s consumer growth story — very likely no 20%-plus internal rate of return on the deal, according to M&A bankers and competing private-equity execs in Jakarta.

“Many players were invited to take a look at TPS,” said a partner at a leading local GP. “We passed because of the governance. We want control or at least a larger say, not just a seat on the board.”

He says TPS sold a stake because its holding company, TPS Group, needs capital to pay down debts. “LPs want long-term investments so this [deal] may not be the right structure.”

For more analysis on private-equity deals in Indonesia, including the success stories, see FinanceAsia’s August magazine edition.

Deals offering general partners (GPs) control and the ability to drive management and business changes are rare in Indonesia. M&A bankers argue private capital will have to be more flexible and accept minority or PIPE (private investment into public equity) deals. This is particularly true for those eager to get in the market: Affinity Equity Partners and Carlyle Group executed inaugural deals in 2012, both taking minority stakes in companies controlled by local GPs.

“But by taking a small stake in a listed company, how do you differentiate yourself from a multinational investment manager or a portfolio investor?” asked Mayooran Elalingam, head of Asia M&A at Deutsche Bank.

The problem for global GPs in Indonesia is size, particularly in the most sought-out sectors: consumer retail, pharmaceutical, healthcare. “Anything big is not for sale,” said an M&A banker in Jakarta. “The company founders are not interested.”

This is forcing foreign GPs to change their tone. “Usually when foreign PE meets the local shareholders, they demand a high minimum IRR for their capital and expertise,” he said. “But too much capital is chasing too few opportunities in Indonesia, and you can’t demand a 20% minimum IRR ‘no matter what’.”

This banker says KKR’s initial discussion with TPS involved such a demand. But when it became clear the founders weren’t prepared to offer shares at a lower valuation, KKR switched tack and opted to make a pure investment.

Although global GPs and their backers are looking enviously at a handful of marquee scale deals — such as CVC’s $700 investment into Matahari Department Store in 2010, which has been partially exited via a $1.3 billion IPO in March, 2013 ­– the reality is that most of them will have to settle for TPS-type outcomes.

Or accept very small deals: the only buyout investment made in the first half of 2013 was a $30 million stake in food & beverage company Simba Indosnack Makmur by Creador, in March, according to the Emerging Market Private Equity Association.

Blackstone has set up regional operations in Singapore but has yet to make a deal in Indonesia; Bain Capital has so far not done so.

KKR’s Indonesia director, Ridha Wirakusumah, a former CEO of Bank Internasional Indonesia who joined the firm in 2011 to source deals, declined to comment for this story.

¬ Haymarket Media Limited. All rights reserved.
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