Private equity cash focuses on Indonesia

Rising investor interest in Indonesia in the short run is driving up valuations for private equity investors.

Private equity commitments to deals in Indonesia have risen above $3 billion, with perhaps another $8 billion on the way, leading to a short-term hike in valuations.

Consumer (including banking), infrastructure and resources remain the traditional areas for PE money in the country. Valuations in the consumer space have become heated, with local food and beverage companies trading at higher multiples than multinationals such as Coca-Cola.

The question for private equity general partners (GPs) is whether enough opportunities will arise during the next few years as this new cash gets deployed to meet investor expectations.

According to Preqin, a research and consultancy firm, there are currently 31 private equity funds — including real estate and infrastructure — currently in the market that include Indonesia in their geographic focus. These funds are targeting an aggregate $8.2 billion in commitments, said Mitul Patel, head of manager research for Asia in Singapore.

That is before KKR raised $6 billion for an Asia-dedicated fund this year; presumably KKR will want to put some of that to work in Southeast Asia, including Indonesia.

There is a lot of optimism about Southeast Asia becoming a core destination of private equity, along with China and India, but first managers must demonstrate investments can make money, he said.

The August edition of FinanceAsia magazine takes a closer look at private equity in Indonesia.

The biggest Indonesia-specific funds are managed by domestic players, with the top six funds having raised more than $2 billion since 2007, led by the $820 million Northstar Equity Partners III Fund, according to data from the Emerging Market Private Equity Association (Empea).

Foreign GPs CVC Capital, TPG, Affinity Equity Partners and Carlyle Group have done another $1 billion-plus worth of deals in Indonesia during that period of time. CVC’s $700 million investment into Matahari Department Store in 2010 (which it partially sold in March) accounts for the bulk of that.

KKR Asset Management, the traditional funds arm of KKR, has recently made its first deal; while Blackstone has opened a Singapore office but has yet to invest in Indonesia.

Although these GPs are raising capital to invest in Southeast Asia, as opposed to dedicated Indonesia strategies, Indonesia is the focus of their attention.

Malaysia’s PE market is tiny, Singapore Inc is too centred around government-linked companies, and Vietnam and the Philippines are still too immature to tick the boxes for a big GP’s investment committee, particularly when it comes to making that first deal happen.

Exits or partial exits by CVC and TPG show how Indonesia can be lucrative to foreign GPs, but few deals exist in size. That may change as founders become more familiar with how private equity works and the potential benefits it delivers; and also as a growing economy creates new opportunities.

For example, the slowdown of China and the softness in the commodities universe may be bad news for investors in public equities, but it could prompt tycoons in the natural resources sector to consider working with private equity, particularly if they need to recapitalise or spin off a business.

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