Private equity firm Northstar Group, an early backer of Indonesian ride-hailing giant Gojek (now GoTo), is targeting to close its fifth fund by the end of this year. However, the fund will be smaller than its initial target of $800 million.
“What we are planning to do is have a slightly smaller fund. It took us many years to fully invest Fund IV. In Fund V, we will have a higher velocity of investing. Therefore, we will raise the subsequent fund faster than what we did before,” said Northstar co-founder and managing partner Patrick Walujo at DealStreetAsia’s Asia PE-VC Summit 2021 last week.
He was speaking at a fireside chat titled ‘Trendspotting and identifying the next big wave of digital economy winners‘ at the summit.
The fifth fund — Northstar Equity Partner V Limited (Northstar V) — will, like its predecessors, focus on investments in three areas: digital, financial services, and consumers, he said.
Singapore-incorporated Northstar had raised about a third of the initial target of the fifth fund by April 2020. The fifth fund would target growth-stage companies predominantly in Indonesia, while also keeping an eye on opportunities in other Southeast Asian markets such as Singapore and Vietnam, the firm’s co-chief investment officer Tan Choon Hong had told DealStreetAsia in May.
In December 2020, Northstar, investing from its fifth fund, acquired an 80% stake in the dairy firm PT Greenfields Indonesia from Singapore’s Japfa for $236 million along with American PE firm TPG.
Northstar’s fourth fund made bets in financial services and tech-enabled consumer companies such as ride-hailing platform Gojek, Vietnamese e-commerce platform Tiki, coworking space provider UPGen, and edtech startup Topica.
While Northstar typically cuts cheques with a minimum ticket size of $20 million, with the fifth fund, it is willing to sign smaller cheques for tech companies. This is to ensure it can capture opportunities at an earlier stage, Walujo had told DealStreetAsia earlier.
Founded by Walujo, a former Goldman Sachs banker, and former PricewaterhouseCoopers executive Glenn Sugita in 2003, Northstar started investing in the private markets in 2006. With TPG among its shareholders, the firm has LPs that include global sovereign wealth funds, pension funds, endowments, family offices, and other institutional investors.
Talking about GoTo, which is expected to go public next year, Walujo said at the Asia PE-VC Summit that the tech company’s initial public offering (IPO) will be a game-changer and if fairly valued, it could be the second or third largest company in Indonesia by market cap.
Northstar was an early investor in Gojek having first invested in the company from its 2014 vintage fourth fund, Northstar Equity Partners IV.
Edited excerpts from the fireside chat with Patrick Walujo:
What has changed at Northstar over the last 18 months due to the pandemic?
We have been focusing on three different sectors in the past few years: digital, financial services, and consumers. When the pandemic first hit the region, we paused and took stock of how things could end up. In hindsight, we did miss a number of interesting opportunities as we were assessing the risks. Some of the companies we decided not to invest in continue to do extremely well.
One thing that we decided very early during the crisis is not to stop our investing activities and to continue looking at these opportunities. However, we had to move fast and be agile as we had also learned that there were a lot of uncertainties as a result of how the pandemic unfolded.
At the same time, what has happened in Southeast Asia is that the ecosystem of investors, especially in the high-growth companies, has developed tremendously. I had a discussion with one of our oldest LPs [limited partners] based in North America. The observation was that the investor ecosystem in Southeast Asia is coming together. You see a lot of activities. This has also resulted in tough competition for us.
On the one hand, the ecosystem getting developed is good for the whole industry, but we also have to adapt. We have to move faster; we have to be totally on top of the market. So there are a lot of things that have changed in the past 18 months. However, it’s getting more exciting than ever.
Has there been any change in Northstar’s fifth fund that you’ve been raising since last year? If I’m not mistaken, you were targeting to raise about $800 million. How much have you raised so far, and when is the final close expected?
The strategy on Fund V will continue to mimic what we have done with Northstar IV, which has been a tremendous success for us. There are some spillovers to Fund V. So far, we have invested in three different situations from Fund V. Last year, together with TPG, we bought Greenfields, Indonesia’s largest milk producer. We continue our investment in Go-Ventures through Northstar V.
We’ve recently announced that we made an investment in Advance.AI, a company that we have been backing since they first started. A big part of their business is in Indonesia, and we have been an integral part of their expansion in the country.
We are planning to wrap up our fundraising by the end of this year. We’ve got a lot of support from our existing LPs. We have a few new LPs as well. We will continue investing in high-growth opportunities in Southeast Asia, with Indonesia being our primary focus in three different areas: digital, financial services, and consumers.
Does your target remain $800 million for the fifth fund?
What we are planning to do is have a slightly smaller fund. It took us many years to fully invest Fund IV. In Fund V, we will have a higher velocity of investing. Therefore, we will raise the subsequent fund faster than we did before.
Given the nature of our investment strategy focusing on high growth opportunities, [high] velocity of investing is a lot better and fits our investors’ appetite better than having a big fund with a long investing period.
Does that mean that your ticket sizes will come down in Fund V? Typically, your ticket sizes are about $20 million.
We are not doing smaller cheque sizes for the sake of putting in less capital. We are willing to put a smaller cheque with a view that over time, we will be able to deploy more capital as these companies grow.
We have been consistent with this strategy. The investment in Gojek started with $800,000 of capital, then $2 million, and over time, we deployed over $100 million. We believe that was the right strategy, given the risk-reward profile of the opportunity. That is what we are planning to do [with Fund V].
We have learnt that if we stick to a large cheque size, by the time these high-growth companies are ready to come to the market, it’s tough for us to be competitive because we don’t have much time to evaluate the opportunity. It’s hard to get to know the founder intimately over a short period.
We have done this strategy with eFishery and Advance.AI. That’s essentially a style of investing that has worked well for us.
GoTo will list in the coming year and give its investors a potential exit. Will it be a game-changer for the Indonesia startup ecosystem for both investors and the companies?
It’s going to be a big game-changer. On the business side, in the short time of the merger being completed, there have been a lot of synergies that the two companies have realized. We just had a business review, and everybody was pleasantly surprised about how fast the company had benefited from the combination.
If the market holds and we achieve the valuation that we believe is fair, this is going to be the number two or three largest company in Indonesia by market cap. It is also a big game changer because the regulators are working… the spirit with which the stock exchange regulators are working is that we need to make sure that the Indonesian stock exchange is competitive and able to host companies like us.
The regulator, I believe, is in the final process of revising the listing rules. It will be a game-changer because it will make Indonesia a lot more attractive for many more high-growth companies.
Is there a ballpark for what that “fair valuation” for GoTo should be?
I would leave it to the market to determine. I don’t like to mislead the market by quoting a number, but I think it reflects how well the company is doing, the underlying performance – and people will make their assessment of the valuation.
How big do you think the Bukalapak IPO was for investors and the ecosystem in Indonesia?
Bukalapak announced that they were raising $300 million, and they ended up raising $1.5 billion. By any measure raising $1.5 billion in an IPO is quite significant, especially for a company that is in the digital space. It is the first major digital company that got listed here.
At the same time, Bukalapak got listed based on the old listing rules, meaning that they did not request any [special] provision to the listing rules. Bukalapak IPO is significant as it shows there is depth in the local capital market to raise a serious amount of capital.
Does it mean that we now have a situation with increased participation in the capital markets, many local unicorns may not necessarily have to go to markets like the US in the future?
For GoTo, we plan to do a dual listing both in the Indonesian Stock Exchange and the US because we still feel that it’s good for us to be able to tap into the depth of the US market.
However, in Southeast Asia, Indonesia as a listing venue for Indonesian digital companies is getting very competitive. I believe that the necessity for these companies to go abroad is now diminished from where it was before.
Singapore has taken a series of steps to get the local tech companies to list on the SGX and rolled out SPAC listings on the exchange. What do you make of that?
The Singapore stock exchange is taking the right steps to make itself more attractive. I observe that none of the Singapore unicorns is listed in the country. It is a big capital market and what they are doing on SPACs makes a lot of sense. It provides an alternative to digital, high-growth companies in the region.
What is your view on SPACs?
We were offered many times to raise a SPAC at the height of the frenzy. We took a view that we wanted to remain focused on our investing strategy and style. Truth be told, even in a structure where we are not getting any ‘promote’ from the target companies, the market is extremely competitive. We understood the attractiveness, but we felt that given the size, whereby it only makes sense if you at least have a company with a billion-dollar valuation, our view was that it would not have been that easy to de-SPAC high-quality companies. So, we decided to stay as a bystander in the US SPAC market.
Singapore SPAC is attractive because it also allows smaller companies to participate. That may be a game-changer.
Do you think you will be interested in doing a SPAC in Singapore?
We are evaluating it at this moment. If we are confident that we can deliver to such SPAC investors, then we may do it.
Singapore got its state investment firm Temasek to help boost local tech listings on the SGX. Do you think Indonesia’s sovereign wealth fund, which is currently being set up, can play a similar role?
The Indonesian sovereign wealth fund is designed to leverage the government’s assets to attract more investments into Indonesia, primarily on the infrastructure side. It is early days for INA [the sovereign wealth fund] and I believe in the foreseeable future, it will remain focused on that mandate.
Let me come back to Northstar. You were very bullish at one point in time in Vietnam. Do you continue to do so? Has anything changed?
We will continue to be bullish on Vietnam, especially on the digital space in high-growth sectors. We recently invited an old partner to run our office there. Our recent investment was in Tiki, the largest local e-commerce player, and it’s doing extremely well. So far, we are pleased, and we are still actively looking for more opportunities there.
Do you also see Northstar getting into other areas that other private equity firms have such as secondaries, private credit, debt, or even special situations?
In the end, it depends on the bench strength that we have internally. The team that we have is trained for the areas that we have been focusing on. That includes early-stage investing, structured investing. Before we decide to go into a new strategy, we need to make sure that we have the right talent to support that.
How do you view the global funds that are now increasingly becoming active in the whole of Southeast Asia? The likes of A16Z, DST Global, Hedosophia and Tiger Global come and do due diligence very quickly, don’t debate on valuations and often don’t take a board seat. How do regional funds like you compete with some of these new entrants?
Generally, the more capital there is in the market, the better it is. It provides us with the path to exit some of our investments. It gives choices to our portfolio companies to access more capital. We are working with a number of them and we compare notes. People may make one or two mistakes but they learn from them and then they adjust their strategies. We are happy that there are bigger players coming into the market.
In terms of valuations, do you think markets like Indonesia and Vietnam should actually command a premium because of the pace of technology adoption and the number of users? These markets actually produce massive opportunities for funds to generate alpha.
As a supplier of deals, we never ask for a premium. We always ask for a fair valuation based on the underlying performance of the companies, and let the market decide on its own how much they want to value once the company gets listed or trades in the secondary market. We can’t really control that. We remain focused on how much we pay to enter and how we deliver value.
How do you and the management at Northstar shape the firm for the future?
We have a combination of experienced partners, who’ve been in the business for a long time, and younger members, whether they come from Google or other digital companies. We want to make sure that we have younger people coming.
We have a pretty systematic process of recruiting new people and we work very closely as a team. We work very closely with our portfolio companies, and make sure that we understand the trends, and what’s going on with their business because oftentimes, those create new investment opportunities as well. We stay very close to the market – what works today may not work tomorrow. We need to be agile and we need to be able to change.
What are your predictions for 2022?
If you look at where commodity prices are trading today, a lot of Indonesia’s commodities are trading at a high level, and I believe they will continue to hold up. That means on the macro side, Indonesia is going to benefit from the strength.
At the same time, the pandemic is now under control, the government has done an excellent job. Jakarta has fewer new cases than Singapore today. We think domestic consumption will come roaring back. In the last few days in Jakarta, we started to have traffic jams again, something that we have not experienced for a long time. So my view is that Indonesia will be firing on all cylinders next year. We are very optimistic.