SE Asia’s largest market, Indonesia, has traditionally been driven by the commodities and consumer sectors. “With technology, you have a third engine, and consumers become the drivers of the Indonesian economy. This is the biggest value creation opportunity in Indonesia and probably Southeast Asia today,” said John Riady, CEO of IDX-listed Lippo Karawaci, during a fireside chat at the recently-concluded Asia PE-VC Summit 2021.
Riady envisions that Indonesian tech companies have the potential to touch a valuation of up to $400 billion in the next few years. “We’re going to see this space go from $60 billion today to $400 billion over the next few years.”
The Lippo Group is viewed as a proxy for the state of the Indonesian economy. Its performance across key business verticals – real estate, private healthcare, and its tech bets – place it at the centre of SE Asia’s largest economy.
In 2019, in a surprise move, John Riady, grandson of Lippo founder Mochtar Riady, became the CEO of IDX-listed Lippo Karawaci, and was tasked with restoring the property developer’s many challenges at that time. Lippo Karawaci is the majority shareholder of Indonesia’s largest private healthcare services provider Siloam International Hospitals. And, SGX-listed Lippo Malls Indonesia Retail Trust owns and operates one in every four malls in Indonesia.
Prior to taking over as CEO, Riady led the group’s digital efforts and investments in SE Asia’s technology sector. The group has made over 40 investments in Indonesia’s tech sector, which Riady believes is at an inflection point.
Edited excerpts from the fireside chat with Lippo CEO John Riady. The transcript, which has been edited for brevity and clarity, also includes the addition of context and announcements/updates following the summit:-
When you began investing in technology around 2014-2015, the Indonesian tech market was around $16 million. You estimate its value at around $60 billion today, and predict that it will hit $300-400 billion in the next couple of years. That will be a massive 7x growth. Can you explain the reasoning behind these numbers?
We are an Indonesian consumer services group, serving over 40 million unique Indonesians every year. Over the last 6-7 years, technology has become the most exciting thing in Indonesia. We made our first investment in early-stage investment in technology in 2014. At that time, if you added up the value of all the different technology companies in Indonesia, it would be about $16 million. Today, the same space is approximately $60 billion, which grew 1000 times in the last seven years. However, we’re just getting started. Over the next couple of years, we’re going to see this space go from $60 billion to $400 billion.
There are some reasons [for that]. First, If you see the technology ecosystem in China, it really exploded when the first generation of Chinese tech companies went public – Alibaba, Tencent, Baidu in the early 2000s. All the early-stage investors made money and reinvested [it] into the early-stage market.
The same thing will happen here, as companies go public, starting with Bukalapak and a few others in the pipeline. All the early-stage investors will exit and reinvest. Those companies will raise a lot of capital and invest in their own respective ecosystems. I think we’re just starting.
In China, the MSCI China has about 25-26% tech weighting. In Indonesia, MSCI Asia is practically zero tech-weighted today. However, I believe it will be 10-15% for tech in Indonesia over the next couple of years. You can see how technology Indonesia is the biggest value creation opportunity.
Until today Indonesia has always been driven by commodities and consumers. With technology, you have a third engine, and consumers become the drivers of the Indonesian economy. This is the biggest value creation opportunity in Indonesia and probably Southeast Asia today. This has been a big part of our strategy in Indonesia over the last couple of years.
How significant was the Bukalapak listing, as it was the first step and now it opens the floodgates for capital to come in, and then with this amount of capital coming into the system like you explained that’s going to be setting off the next couple of waves?
The entire Indonesian stock market has a combined market capitalisation of about $500 billion. I believe we are if not approaching become the largest in Southeast Asia. But if you compare that to the size of the economy to GDP, it’s still fairly small. So I think the Indonesian capital market is at a critical inflection and a big driver of this is the retail trading market.
The retail trading market makes up, 60-70% and someday up to 80% of trading volume on the IDX. The number of retail trading accounts has more than doubled over the last 12 months. The Bukalapak listing is a very important milestone.
If we take a look through China in the early 2000s, many people questioned whether the Chinese market could absorb the tech companies, and had enough risk capital for those companies? Today, there’re a handful of companies each worth a couple of 100 billion dollars, and are trading well in China.
The Indonesian market is going through the same developmental journey. The listing of Bukalapak was a good test case, which all things considered, I think is reasonably successful. And so this will open up the door for many others to follow suit.
How can the Lippo group take advantage of the biggest value creation that is said to emerge over the next couple of years? You’ve already been very active in the early-stage investments through your Venturra arm. What about the late-stage, pre-IPO rounds, and all these big companies that are coming up for a listing?
We are doing it through a four-pronged strategy. The first is investing early stage. We’ve been doing it since 2014. Some of our investments in companies are either approaching a billion dollars or over a billion dollars. At the beginning, those investments were [in the region of] $50,000, $100,000 or $20,000. It was because we invested very early on that we were able to follow the development work very closely with the founders and understand the business model and learn a lot along the way.
Investing early gives you a unique insight and a front-row seat into the development of the market so that will continue to be an important part of what we do through an entity called Multipolar, that’s early-stage investing.
The second entity or the second pillar is late-stage investing, including the IPO and pre-IPO round. We continue to also invest in Bukalapak, and you’ll see in the pipeline coming out soon. Investing in later-stage companies is because these are one of the 1000 companies that have made it this far.
The third pillar is becoming local partners to global technology giants who want to expand into Indonesia. We are local partners to a number of those companies.
The fourth, and final pillar is how do we unlock the value of our traditional businesses. For example, our supermarket chain called MPPA has about a 25% market share in the space in Indonesia. We have partnered with one of the leading tech giants in Indonesia to help the company digitise and pursue a real omnichannel strategy. [Note: As reported by us on October 7, Indonesian tech giant GoTo picked up shares in Lippo Group’s retail unit MPPA from its parent company. Following the transaction, GoTo now holds a 6.74% stake in MPPA].
Will you still go out and build companies in the white spaces? For example, you built out OVO, one of the largest e-payment companies in Indonesia. Also, how about your relationship with the local unicorns, like Gojek, which recently bought a minority stake in your retailer hub. By partnering with these companies, where does this opportunity fall?
The OVO experience was an example of us incubating companies. OVO is a payments company that we had started, and initially, we used our ecosystem to drive the adoption. I believe that in a digital world, use cases are so important. However large your own ecosystem is, it is never large enough. With OVO very early on, as soon as the payment system gained traction, we partnered with Grab, Tokopedia and through those partnerships, OVO became the leading digital payments company in Indonesia.
[Note: On October 4, 2021, days after our summit, we reported about Southeast Asian ride-hailing and financial services major Grab buying out early investors in Indonesia’s e-wallet OVO to increase its stake to 90%. Grab previously held a 39% stake in the Indonesian fintech company. It bought shares from conglomerate Lippo Group; Tokopedia, which announced its merger with Grab rival Gojek earlier this year to form GoTo; and Tokyo Century Corporation. The rest 10% of OVO is owned equally by PT Ide Teknologi Indonesia, a firm owned by founders of fintech startup Kudo, and PT Cakra Finansindo Investama. Kudo was acquired by Grab in 2019].
We like that [build-out] model and will continue to leverage our ecosystem to drive and support the growth of technology companies, but do so through partnerships. Whether it’s our department stores, supermarket, bank, securities company, we will continue to leverage the relationships that we built in the technology space to unlock value in these traditional companies.
You mentioned Multipolar earlier, and most of your tech investments are under this entity. When it comes to making late-stage investments, the capital commitments are pretty high. How do you look at a structure for Lippo? Do you see a structure something like Softbank has where Multipolar goes out and raises capital from external LPs to do big tech investments?
In Indonesia, we look at ourselves as a consumer services company. We think the biggest and most exciting opportunities are in the emerging middle class in Indonesia. And the way we’re structured is we’ve got a number of companies that are operating companies. We operate one of the largest real estate companies and one of the largest healthcare companies. When it comes to technology and investing for the future, Multipolar is our entity. Through Multipolar, we will be investing in those four buckets.
Multipolar NAV is around $1.5-2 billion. It’s advantageous to have an even bigger balance sheet when you’re investing in technology. So we are also investing third-party capital. You’ve mentioned SoftBank in a similar fashion and has a vision fund where they are the biggest LP as well as the manager of the fund. Obviously, on a much smaller scale, we’re pursuing the same strategy, where we will be managing funds, in which we are the biggest LP, but our plan is every dollar that we invest, you raise $2 or $3 and in doing so we’re able to leverage on the deal flow that we see. We’re able to deploy more capital to support our portfolio companies things like that.
Will Multipolar have a fund structure like the Vision Fund? Could you share more details?
Definitely. So obviously we’ll be investing from our balance sheet but also through the funds that we manage and you’ll see in the coming months, we’ll be sharing more information around what funds we raise, how large, who are the anchor, and partners LPs. We’re seeing a lot of interest, and people who want to invest in Indonesia, and I think they’ve seen that Multipolar has a track record and unique deal flow. So, we’re very pleased to be partnering with them.
How do you see the global VCs who have become very active in Southeast Asia and Indonesia? All of them are coming in, putting in money and sometimes they don’t negotiate on valuations, they often don’t take a board seat. They do diligence at a record pace. How do regional and domestic VCs compete here?
The reason why the tech space grew faster is there was much interest from these regional and global investors. I think all the different funds are very positive about the ecosystem. We’ve benefited immensely from it.
I hope they will continue to do more and more in Indonesia. As for local players like us, I think we’ve got a different angle, a different value proposition. We work with all those investors and have co-invested with them. I think collaboration is the name of the game.
Reflecting on the success of Indonesian unicorns – Gojek, Tokopedia, Grab, and Sea Limited – they all operate in Indonesia. All of them have demonstrated fintech as the core of their operation. Do you think that when it comes to B2C in Indonesia, financial services will be core to all of these companies?
Financial services are the largest market in any economy, second is real estate. So naturally, all these large ecosystems – Grab, Gojek, Shopee – have a huge consumer base. It would make sense for all of them to also serve their customers’ financial services needs.
All these companies get into that space because that’s a great way to serve the consumer, it’s a great way to also monetise on your customer base. I do think that all these companies will continue to go deeper into financial services, and I think there’s space for everyone.
Coming to your other core businesses, 50% of the group’s revenue comes from the healthcare space. You run Indonesia’s largest private chain of hospitals. You also have a telemedicine app. How do you see both of these operations in the next couple of years?
We manage 40 hospitals across Indonesia through Siloam hospitals. We built our first hospital in 1992. In the early 2000s, we started to roll out more and more hospitals and today we have 40 hospitals, probably adding two to three every year.
Healthcare is probably one of the most underpenetrated industries in Indonesia. Healthcare spending in Indonesia is only approximately 3% of GDP. The OECD average is closer to 6%-7%. In more developed markets like the US, it’s about 14-16%. Clearly, healthcare in Indonesia has a lot of room to grow. It is also coincidentally one of the industries that have obviously benefited from this unfortunate pandemic. And it’s benefited because of people’s growing awareness around health and wellness.
Through Siloam, we have exposure to the largest health care company in Indonesia. The technology part of healthcare is very exciting. We think it is complementary to what we do, so we work together with all the different telemedicine services in Indonesia to drive traffic to our hospitals. All of them are extremely valuable partners of ours and in some of those cases, we were also invested in them. We’re also active investors in the intersection of health and tech. Another company that we were invested in is about to do a SPAC in New York in the coming months [Note: In September, we reported that Lippo Group-backed Hong Kong COVID-19 testing laboratory Prenetics has agreed to merge with Artisan Acquisition, a SPAC founded by tycoon Adrian Cheng, to become the city’s first unicorn to go public].
In terms of health tech, do you see yourself building out your telemedicine app something like what you did with OVO? You also have clinics in Singapore and Myanmar. Do you see your healthcare being a Southeast Asia play going forward?
Healthcare is very different from market to market, from Singapore to Indonesia, to Myanmar to China. The healthcare needs are very different. Hence, we have built independent companies to run the independent healthcare units in each market.
Technology in healthcare is also very different. In Asia, our strategy in healthcare is to invest in the ecosystem. I don’t think you’ll see us roll out a set of Lippo telemedicine apps or an aggregator. Our strategy and health in Indonesia are to work with the ecosystem. We want to work with as many players as we can, and along the way, invest in some of them, and participate in growth stories as well.
On the real estate operations, how do you see the market playing out for you?
In the first half of this year, our real estate sales and marketing sales are up over 120% year on year. What we are seeing is that Indonesia is entering a golden era of homeownership.
In Indonesia, you’re seeing a combination of rising incomes, all-time low mortgage rates, and also better innovation on products on the part of developers resulting in an explosion in homeownership. I think over the last one or two years you’ve seen developers like ourselves lower price points to be able to deliver homes that are affordable for the middle-income consumer.