Compared to a few years ago, private equity investment in Indonesia is a vastly different landscape today.
PE firms targeting Southeast Asia’s largest economy have drifted away from traditional sectors such as commodities to embrace technology, and consumer goods, among other emerging sectors — a sign of the changing face of the Indonesian economy.
Until around six years ago, commodities constituted the bulk of Indonesia’s exports. Coal topped the list with an 11.82% share of the exports, followed by palm oil (9.91%), gas (9.75%), and crude oil (5.4%), according to World Bank data.
Consequently, Indonesia’s non-tax revenues were dominated by natural resources (around 50%) throughout 2005-2015.
The tables turned in the new decade. In 2020, non-tax revenue from natural resources was only Rp160.4 trillion — a 43% share of the total Rp367 trillion. In tandem, PE funds, too, have been realigning their portfolio.
Take the case of Northstar Group. The Singapore-incorporated firm, with a focus on Indonesia, had made many commodities-related investments in the past, but has now put a pause on such investments.
In 2008, it teamed up with the local PE firm Ancora Capital, to rescue the debt-laden coal miner Bumi Resources by picking up a significant stake. In end-2009, Northstar acquired the coal mining contractor Delta Dunia Makmur. In 2012, along with Singapore’s sovereign wealth fund GIC, it invested in the palm oil plantation Triputra Agro Persada, which listed on the Indonesia Stock Exchange (IDX) last month.
Other PE firms, too, invested proactively in natural resources-based firms in the period.
PE investments in Indonesian commodity firms
|Private Equity Firms||Commodity Related Portfolios||Date of Investments||Status|
|Saratoga Investama Sedaya||Adaro Energy||2002||Current investment|
|Ancora Capital||Bumi Resources||2008||Exited|
|Ancora Capital||Ancora Indonesia Resources||2008||Exited|
|Northstar Group||Bumi Resources||2008||Exited|
|Saratoga Investama Sedaya||Provident Agro||2012||Current investment|
|Saratoga Investama Sedaya||Sihayo Gold||2012||Current investment|
|Saratoga Investama Sedaya||Interra Resources||2012||Current investment|
|Northstar Group||Triputra Agro Persada||2012||Partially exited|
|GIC||Triputra Agro Persada||2012||Partially exited|
|Northstar Group||Delta Dunia Makmur||2013||Current investment|
|Saratoga Investama Sedaya||Sihayo Gold||2014||Current investment|
|EMR Capital||Martabe Gold Mine||2016||Exited|
|Source: Data compiled by DealStreetAsia|
“The commodity boom greatly propelled Indonesia’s economy in the previous decade,” said Freddy Karyadi, a partner at the law firm Ali Budiardjo Nugroho Reksodiputro (ABNR). Coal, in particular, was attractive as an alternative energy source when oil prices reached a peak.
Cut to 2021 — oil prices are well below the peaks witnessed in the 200os, and Northstar, starting from its fourth PE fund in 2014, has made a strategic decision to stop investing in natural resources companies.
“We find the sector to be very cyclical (with long cycles) and not suited for private equity investment. The resources sectors are also subject to global risk factors which we are not well equipped to underwrite,” Tan Choon Hong, co-CIO of the PE firm told DealStreetAsia.
Northstar still owns 38% in Delta Dunia Makmur, through Northstar Tambang Persada (NTP), according to the mining contractor’s website. NTP is a consortium comprising Northstar, TPG Capital, GIC, and China Investment Corporation (CIC). While there have been rumours since 2018, Northstar has not managed an exit from Delta Dunia Makmur.
In general, PE focus has now turned to new economy sectors like consumer goods.
PE investments in Indonesian consumers goods sector
|Private Equity Firms||Investment Portfolios||Investment Date||Status|
|CapSquare Asia||Jamu Air Mancur||2012||Exited|
|Falcon House Partners||Eatwell Culinary||2012||Current investment|
|Creador||Simba Indosnack Makmur||2013||Current investment|
|Temasek Holdings||Matahari Putra Prima||2013||Current investment|
|CapSquare Asia||Champ Group||2014||Current investment|
|Everstone||Domino's Pizza Indonesia||2014||Current investment|
|Creador||Cisarua Mountain Dairy||2015||Exited|
|Everstone Capital||Burger King Indonesia||2015||Current investment|
|Northstar Group||Indomarco Prismatama||2015||Current investment|
|GIC||Carrefour Indonesia||2016||Current investment|
|Falcon House Partners||Ismaya Group||2017||Current investment|
|CVC||Garudafood Putra Putri Jaya||2018||Current investment|
|Falcon House Partners||The Harvest||2018||Current investment|
|LDA Capital||Jaya Bersama Indo||2020||Current investment|
|Affinity Equity Partners||Sido Muncul||2021||Current investment|
|Data compiled by DealStreetAsia|
“Based on the strong performance of our fourth fund, Northstar is convinced that focusing on the consumer sector, along with financial services and the digital economy is the right strategy,” Tan said.
Along these lines, in 2015, Northstar invested in the Indonesian ride-hailing decacorn Gojek and the hospitality tech company MG Group in 2016. In 2020, it invested in the education technology company Zenius, the agritech startup eFishery, and the digital banking company Bank Jago.
“Today’s market is dominated by the digital sector, as it brings more efficiency. There is also a change in consumer behaviour,” said Karyadi. For the tech startups, venture capital (VC) fundraising beyond Series B or Series C is difficult, thus a combination of PE, VC, and strategic investment is the best option, Karyadi added.
Indonesia, which has a population of 268 million, is home to the world’s fourth-largest number of internet users (185 million). Millennials and Gen Z consumers, who account for a significant portion of the population, are the main drivers of the digital economy, according to a Deloitte report.
In 2019, Indonesia’s digital economy contributed to about 2.9% of its GDP — higher than anywhere in Southeast Asia except Singapore (3.2%) and Vietnam (4%), as stated by the same Deloitte report.
“The PE firms may see the size and prospect of the addressable markets and segments. They may also be lured by the potential of digital platforms in overcoming existing logistical, connectivity, and infrastructure challenges, and the increased reach of last-mile logistics, and successes in rapid scaling of marketplace and peer-to-peer models,” said David Rimbo, managing partner of EY Indonesia.
Another factor fanning the shift is the fluctuation in the value of the Indonesian Rupiah against the dollar. A fluctuating currency makes export-oriented sectors like commodities unattractive, said Rimbo.
However, the currency risk is an issue faced by investors in almost all emerging markets, said Tan of Northstar. This has encouraged PEs to primarily invest in companies in the consumer, financial services, and rising digital economy sectors, as they tend to be domestic-focused and have lower exposure to currency risk.
Investing in new economy sectors, though, is not foolproof.
The consumer goods sector, for example, has been under pressure in the last three years, even before COVID-19 struck. Indonesia’s FMCG industry contracted 5.9% in 2020, the lowest in the last 20 years. Earlier this year, the government also announced a plan to eliminate the luxury sales tax for new cars. “These announcements show the pressure prevailing in the consumer sector,” Karyadi added.
Investments in tech startups, too, have associated risks. “The PE firms that foray into Indonesia’s local tech startup sector can be viewed as principally opportunistic, given the cash-burns of the startups and their untested route to profitability,” said Rimbo of EY Indonesia.
On the other hand, the strong equity returns in developed markets, and the emergence of alternative destinations in the region such as Vietnam and the Philippines, have led PEs to adopt a more cautious approach in evaluating Indonesian deals.
Despite the challenges, Indonesia is still attracting foreign investors including PEs. One of the main reasons is the demographic bonus, Karyadi said.
“The omnibus law is expected to enhance Indonesia’s manufacturing and other industries amidst the global supply chain issues brought on by the pandemic and rising geopolitical tension,” said Tan.
There are non-tech sector businesses that may be attractive for PEs such as logistics — mainly last-mile and fulfilment logistics — healthcare, education, financial services, and data centres. Other sectors being encouraged by the government include electric vehicles (EV) and tourism, Rimbo said. The notable sweet spot for PE plays in Indonesia is the middle-market business owners, he added.