Indonesian infrastructure presents strong market for private equity investments

Indonesia that has been emerging as a strong market for private equity investment off late, has got a further boost with its government’s recent announcement of a $400 billion in infrastructure investments over the next five years.

President Joko “Jokowi” Widodo is intent on centralising authorisation procedures to encourage private sector investment, cutting red tape and accelerating administration of the projects. This is intended to generate growth and employment, following a reduction in job and consumption growth.

This also provides a compelling reason for PE firms to increase capital investments and seize opportunities in ASEAN’s largest economy, that has steadily maintained a 6% growth since 2010.

The strong fundamentals that position Indonesia as a counterpoint to China and India are unchanged, with immense geographic size, a large population with youthful demographics and an emerging middle class. This allows businesses based there to achieve growth and scale rapidly, propelled by a rapidly urbanising population.

 

Indonesian Telecoms Infrastructure

Telecommunications, Media & Technology (TMT) remain an especially promising field for investment, given the revelation of plans to implement significant upgrades to the telecommunications infrastructure of the nation.

Indonesia’s minister of communication and information, Rudiantara, is seeking to streamline the national telecommunication infrastructure and ensure its efficiency nationwide, rather than being limited to Greater Jakarta. With this in mind, he’s requested submissions from Telkomsel, Indosat and XL Axiata.

According to Indonesian media portal Detik, more than 2000 new customers are subscribing to Telkom Indonesia’s IndiHome service daily. A three-pronged package featuring fiber-optic connectivity for high-speed internet, cable television and home phone service, this allows for extremely fast data transmission.

This has implications for many of the satellite cities surrounding Indonesia, such as Bogor, Bekasi, South Tangerang and Tangerang. This investment in telecommunications infrastructure stands to benefit them, as would other major metropolitan areas like Yogyakarta, Surabaya and their surrounding municipalities.

With mobile data traffic predicted to surge 14-fold in the Asia-Pacific, driven by increasing smartphone proliferation and penetration, Indonesia has to upgrade its infrastructure. According to a report by IDC, Indonesia’s data traffic volume is projected to grow to 656 exabytes by 2020, from the 84 exabytes of 2014.

Telkomsel, Indosat and XL Axiata reported a fourfold increase in total mobile data traffic ‘payload’ on their networks from 2011 to 2013, surging from 47 exabytes to 177 exabytes in 2013. Jakarta, alongside Bangkok, has the highest density of Facebook users worldwide. According to ASEAN Briefing, the Nusantara Super Highway, whose construction is in progress, will expand broadband penetration to Indonesia’s rural provinces.

 

Private Equity Implications

While all these developments seem positively bullish, according to the Asian Venture Capital Journal (AVCJ), this enthusiasm for Indonesia may result in unrealistic expectations amongst investors. After investment reached US$1.3 billion in 2010 and $1 billion in 2011, investment dropped off. The 2014 total amounted to $354 million, according to AVCJ Research, approximately half the amount in 2013.

Despite deal volume increasing steadily, of more than 30 investments completed in 2013 and 2014, at least half were early-stage ventures, according to the AVCJ report. While testament to the wealth of opportunities in Indonesia’s robust entrepreneurial ecosystem and startup space, this is encouraging for only a single segment of the private equity market: venture capital firms. And Rocket Internet in particular.

This i discouraging news for private equity firms, which seek deals that involve middle-market firms and larger players than what VCs deal with. Indonesian GDP stood at $868 billion in 2013, with growth of 5.8 percent according to the World Bank. But private equity investment since 2009 stands at $4.8 billion.

By comparison, China’s economy is approximately 10 times larger but has seen 34 times more private equity investment over the corresponding period, based on data available to AVCJ.

Reasons for the weakened dealflow can be attributed to the downturn in the commodities market, particularly petroleum and its impact on the petrochemicals vertical as well as volatility that impacted emerging markets globally. 2014 also saw the general and presidential elections, which resulted in muted market activity, due to uncertainty over the leadership change and possible policy shifts.

Another factor impacting Indonesia’s PE market is a scarcity of assets that are both investible and accessible. This is tied to the nature of corporate governance and ownership in Indonesia, as well as the transparency of such deals, which impacts deal availability.

The corporate ownership environment of Indonesia is an environment with a strong ethnic Chinese element, with heavy influence from the bamboo network. Many Indonesian assets are held by family-owned conglomerate under no pressure to divest them.This enables them to run auction processes and seek high valuations. Alternatively, they seek out strategic partners to grow and build these business assets.

The bamboo network and economic aptitude of Indonesian Chinese means extensive cultural literacy and social currency are needed to breach this market. And this is particularly crucial for investors and M&A specialists pursuing large-scale transactions. If they are not culturally aware or engaged with this bamboo network and lack the social capital to access it, this makes generating and curating deals significantly harder.

Even if these established family conglomerates retain their oligopoly, middle-market players and ‘hidden champions‘ may emerge to disrupt this arrangement, and require external investors to sustain growth, offer access to new markets and technologies as well as facilitate succession planning.

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.