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TPG Partner Paves Way for Newcomers to Indonesian Private Equity

New investors are pushing into Indonesia’s fledgling private-equity market, where firms led by TPG Capital’s local partner raised a record $1.16 billion last year even as deal-making fell by more than half.

Glenn Yusuf, who ran Indonesia’s bank and corporate rescue agency following the Asian financial crisis in 1998, brought in former Lehman Brothers Holdings Inc. senior executive Brian O’Connor and private-equity manager Samir Soota to start Falcon House Partners. Mark Thornton moved to Jakarta in January after leaving 3i Group Plc, Britain’s largest publicly traded private-equity firm, and Chad Christopher Holm, a former Bank of America Corp. banker, set up Yawadwipa Cos.

The newcomers will compete for deals with global firms such as KKR & Co. and Carlyle Group in Southeast Asia’s biggest economy. There will likely be as many as eight new Indonesia-focused buyout funds in the next two years, said Juan Delgado Moreira, head of Asia at Hamilton Lane, which invests in private equity on behalf of clients.

“Fundraising isn’t really a problem,” said Delgado, who is based in Hong Kong. “Indonesia is probably the sexiest destination in the emerging markets now.”

Indonesia-focused private-equity firms, including Northstar Pacific Partners, backed by TPG, increased fundraising about fourfold from 2010, data from the Center for Asia Private Equity Research in Hong Kong show. Indonesia’s gross domestic product will increase 6.2 percent in 2012, the World Bank said this month, compared with a global average of 2.5 percent.

‘More Insulated’

“Indonesia is a little more insulated from the global woes,” said Thornton, 3i’s former head of Southeast Asia. “I get the sense that they’re not feeling the pain and anxiety the same way that many other countries are.”

The private-equity industry manages assets of less than $5 billion, compared with a stock market value of $407 billion, according to Gita Wirjawan, the country’s trade minister.

“Private equity in Indonesia is still in its infancy,” said Charles Gunawan, co-head of investment banking for Indonesia at Credit Suisse Group AG in Jakarta. “It’s going to become explosive. Give it five years, it’s going to go in a very major way.”

Private-equity deals in Indonesia fell 53 percent to about $545 million last year, according to the Center for Asia Private Equity Research. The 2010 figure was boosted by the 7.2 trillion rupiah ($797 million) acquisition by London-based CVC Capital Partners Ltd. of PT Matahari Putra Prima’s department store business, the biggest buyout in Indonesia.

In China, the value of transactions rose 26 percent to $14.2 billion, while in India they gained 41 percent to $7.8 billion, according to the firm.

Cheaper Options

Deals of $100 million or more have been rare in Indonesia as companies large enough to require such amounts have cheaper funding options or are unwilling to cede or share control with outside investors, Gunawan said.

Indonesia’s central bank cut its benchmark interest rate to a record-low 6 percent last year to shield the economy from slowing global growth. Yields on U.S. dollar bonds sold by Indonesian companies average 6.73 percent, the lowest since September, according to a JPMorgan Chase & Co. index.

Investments are set to pick up in the second half of the year as the economy starts to feel the impact of Europe’s debt crisis and companies turn to private equity funds that have the “dry powder” to shore up corporate balance sheets, said Sandiaga Uno, who co-founded Jakarta-based Saratoga Capital.

“The interest will take some time to translate into capital being deployed to work,” he said.

Ratings Upgrade

Saratoga, which is seeking to raise $400 million for its third fund, bought a stake in budget carrier PT Mandala Airlines last year. It has invested almost $600 million since starting in 1998 and returned about five times the money, Uno said.

The firm is shifting focus to companies that will benefit from growing consumption in the world’s fourth-most populous nation, away from natural resources investments, said Uno, who started the firm with Indonesian billionaire Edwin Soeryadjaya.

Indonesia’s growth has so far weathered the faltering global economy, helping it regain an investment grade rating for its sovereign debt at Fitch Ratings and Moody’s Investors Service for the first time since the Asian financial crisis. Standard & Poor’s rates Indonesia at BB+, the highest non-investment grade rating, with a positive outlook.

Indonesia is the world’s biggest palm oil producer and holds some of the largest deposits of natural gas and minerals such as coal and copper. Consumer confidence has been buoyed by political stability under President Susilo Bambang Yudhoyono not seen since the ouster of former dictator Suharto in 1998.

Stocks Rally

The benchmark Jakarta Composite index climbed 16 percent in the past year, the second best-performer in Asia behind the Philippines. The MSCI Asia Pacific Index fell 12 percent.

Northstar raised $820 million last year, the biggest private-equity fund to invest in the country, after attracting “a lot of” first-time investors, including pension funds, sovereign wealth funds and fund of funds worldwide, said co-founder Patrick Walujo in Jakarta. The manager has already invested about 20 percent of the fund, Northstar’s third, in three transactions.

Before raising its latest fund, Northstar had invested about $1.2 billion with its partners, of which about $400 million was its own capital, Walujo said. “We should be able to at least generate that kind of investment within the next five years,” said the former investment banker at Goldman Sachs Group Inc.

New Entrants

Fort Worth, Texas-based TPG, run by billionaire David Bonderman, took a minority stake in Northstar through a share swap last year. Northstar and TPG joined a group led by Indonesian billionaire Boy Garibaldi Thohir that bought a stake in consumer lender PT BFI Finance Indonesia in May.

Among the new entrants, Holm, formerly a Hong Kong-based Bank of America managing director who worked on mergers and acquisitions, set up Yawadwipa, which has offices in Jakarta and Singapore, in January. He aims to raise $1 billion for an Indonesian private-equity fund mainly from the nation’s wealthiest individuals.

Former 3i executive Thornton, who attended an intensive Bahasa Indonesia language course in Jogjakarta in central Java late last year, said he is considering setting up a “special opportunities” fund that would make private-equity investments, buy shares of listed companies and high interest-paying debt. A “pure private-equity approach” may not be the most effective way of investing in Indonesia given how young the industry is, he said.

Local Partners

“Unless you have a local partner who really knows the local dynamics very well, it is hard to clinch a deal,” said Kathleen Ng, managing director at the Center for Asia Private Equity Research. The market “has not presented itself as an attractive liquidity platform for foreign private-equity investors to exit,” she said.

KKR, the U.S. buyout firm co-founded by Henry Kravis, last year hired Ridha Wirakusumah, the former president director of PT Bank Internasional Indonesia, as it continues to seek its first investment in Indonesia.

“Our strategy is to find Indonesian companies where there is not only an investment of capital needed, but there is also the desire to partner with us to bring global best practices to the business,” said Wirakusumah, director at KKR Asia and a member of the firm’s Southeast Asia private-equity team. “This type of value-add investing, while always important, is even more critical in times of economic uncertainty.”

Falcon House

Yusuf, who was also president director of plantation firm PT Perusahaan Perkebunan London Sumatra Indonesia, set up Falcon House with O’Connor and Soota, who previously oversaw EMP-Daiwa Capital Asia Ltd.’s Southeast Asia private-equity fund and has been based in Indonesia for almost two decades.

Falcon House aims to raise $200 million in 2012, said O’Connor, who was the head of Lehman’s business in Indonesia and first lived in Jakarta from 1995 till 2001. Over the past decade, investors profited from investments in distressed or cheap assets, a boom in commodity prices and the scarcity of capital, O’Connor said.

“Moving forward, returns will be less linear and more challenging with these factors no longer driving returns,” said the former banker, who was a member of Lehman Brothers’ Asia executive committee. “The two things that will likely characterize successful private-equity investing in Indonesia over the next 10 years will be relationships and the ability to create change and transformation in Indonesian companies.”

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