New economy sectors have displaced oil and coal in Indonesia’s new PE landscape

Photo: Mufid Majnun / Unsplash

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.

Expand Table

PE investments in Indonesian commodity firms

Private Equity FirmsCommodity Related Portfolios Date of InvestmentsStatus
Saratoga Investama SedayaAdaro Energy2002Current investment
Ancora CapitalBumi Resources 2008Exited
Ancora CapitalAncora Indonesia Resources2008Exited
Northstar GroupBumi Resources 2008Exited
Saratoga Investama SedayaProvident Agro2012Current investment
Saratoga Investama SedayaSihayo Gold2012Current investment
Saratoga Investama SedayaInterra Resources2012Current investment
Northstar GroupTriputra Agro Persada2012Partially exited
GICTriputra Agro Persada2012Partially exited
Northstar GroupDelta Dunia Makmur2013Current investment
Saratoga Investama SedayaSihayo Gold2014Current investment
EMR CapitalMartabe Gold Mine2016Exited
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.

New economy

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.

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PE investments in Indonesian consumers goods sector

Private Equity FirmsInvestment PortfoliosInvestment DateStatus        
CapSquare AsiaJamu Air Mancur2012Exited
Falcon House Partners Eatwell Culinary2012Current investment
CreadorSimba Indosnack Makmur2013Current investment
Temasek HoldingsMatahari Putra Prima2013Current investment
CapSquare AsiaChamp Group2014Current investment
EverstoneDomino's Pizza Indonesia2014Current investment
CVC Softex Indonesia2015Exited
CreadorCisarua Mountain Dairy2015Exited
Everstone CapitalBurger King Indonesia2015Current investment
Northstar GroupIndomarco Prismatama2015Current investment
GIC Carrefour Indonesia2016Current investment
Falcon House Partners Ismaya Group2017Current investment
CVC Garudafood Putra Putri Jaya2018Current investment
Falcon House Partners The Harvest2018Current investment
LDA CapitalJaya Bersama Indo2020Current investment
Affinity Equity PartnersSido Muncul2021Current 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.

Challenges

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.

Singapore Reporter/s

In Singapore, we are looking to double our reporting team by this year-end to comprehensively cover the fast-moving world of funded startups and VC, PE & M&A deals. We want reporters who can tell our readers what is really happening in these sectors and why it matters to markets, companies and consumers. The ability to write precisely and urgently is crucial for these roles. Ideal candidates must have to ability to work in a collaborative, dynamic, and fast-changing environment. We want our new hires to be digitally savvy and ready to experiment with new forms of storytelling. Most importantly, we are looking for hard-hitting reporters who work well in a team. Collaboration and collegiality are a must.

Following vacancies can be applied for (only in Singapore).

Following vacancies can be applied for (only in Singapore).   

  • A reporter to track companies/startups that have raised private capital, and have the potential to become unicorns. SEA currently has over 40 companies with a valuation of over $100 million and under $1 billion.
  • A reporter who can get behind the scenes and reveal how funding rounds are put together, or why they’ve failed to materialise. She/he in this role will largely focus on long-format stories. 
  • A journalist to track special situations funds, distressed debt and private credit (from the PE angle) across Asia.

Singapore Reporter/s

In Singapore, we are looking to double our reporting team by this year-end to comprehensively cover the fast-moving world of funded startups and VC, PE & M&A deals. We want reporters who can tell our readers what is really happening in these sectors and why it matters to markets, companies and consumers. The ability to write precisely and urgently is crucial for these roles. Ideal candidates must have to ability to work in a collaborative, dynamic, and fast-changing environment. We want our new hires to be digitally savvy and ready to experiment with new forms of storytelling. Most importantly, we are looking for hard-hitting reporters who work well in a team. Collaboration and collegiality are a must.

Following vacancies can be applied for (only in Singapore).

Following vacancies can be applied for (only in Singapore).   

  • A reporter to track companies/startups that have raised private capital, and have the potential to become unicorns. SEA currently has over 40 companies with a valuation of over $100 million and under $1 billion.
  • A reporter who can get behind the scenes and reveal how funding rounds are put together, or why they’ve failed to materialise. She/he in this role will largely focus on long-format stories. 
  • A journalist to track special situations funds, distressed debt and private credit (from the PE angle) across Asia.