Once-Hot Indonesia Loses Allure as Prices Chill Buyouts

Indonesia has lost much of its allure for private equity as steep valuations restrain buyouts in a country that two years ago was, in the words of one investor, “probably the sexiest destination in the emerging markets.”

International private-equity firms have acquired stakes in four Indonesian companies this year, down from 10 in 2011 and seven last year, according to data compiled by Bloomberg and the Asian Venture Capital Journal. Total transaction values fell from $649 million for the nine deals in 2011 where terms were disclosed to $324 million for the six deals last year for which prices were available, the data show.

Deals have fallen precipitously this year, to $87 million for three of the four announced deals. The biggest was a purchase by KKR & Co. making its first entry into Indonesia in July, buying a stake in publicly traded noodle maker PT Tiga Pilar Sejahtera Food valued at $35 million, according to data compiled by Bloomberg.

“Expectations have been high over the past two years for private-equity deal making in Indonesia,” said Nicholas Bloy, Kuala Lumpur-based managing partner at Navis Capital Partners Ltd., which oversees $3 billion in public and private equities in Asia. “But many players in the industry had a sobering reality check and now need to be more realistic in their return expectations, as they are facing inflated valuations by sellers.”

Still High

Even after its 22 percent decline from its all-time high on May 20, the Jakarta Composite Index has surged 75 percent over the past four years, compared with a 11 percent increase in the MSCI Emerging Markets Index. The Indonesian index closed at 4,073.46 today, down 2.2 percent from yesterday’s close.

The companies in the Jakarta index are trading at 17 times earnings, compared with 11 times earnings for companies in the MSCI Emerging Markets Index, according to data compiled by Bloomberg.

“Value expectations have been at record highs,” Bloy said. “Cautious investors are looking at valuations in a different way than bullish entrepreneurs.”

In addition to valuations, deal making is being chilled by shifting government regulations, which complicate market assumptions for acquirers, and competition from strategic buyers.

‘Sexiest Destination’

Growth in private equity in Indonesia has turned out to be “lumpy” rather than “a straight line,” said Juan Delgado-Moreira, a Hong Kong-based managing director at Hamilton Lane Advisors LLC, which invests in private equity.

“There is a bid-ask gap to bridge” because of high prices in the stock market, “which some would say is overheated” despite the recent drop, he said.

Delgado in January 2012 had said that “Indonesia is probably the sexiest destination in the emerging markets now,” calling it “one of the key long-term investment destinations in Asia.”

Large global private-equity firms this year have been selling more than buying.

TPG Capital, the Fort Worth, Texas-based private-equity firm started by David Bonderman and Jim Coulter, is the most active in Indonesia. In May, TPG was one of the sellers of part of a 72 percent stake in Indonesia’s PT Bank Tabungan Pensiunan Nasional, which it bought in 2008, remaining the biggest shareholder with 41 percent, according to data compiled by Bloomberg.

CVC Sale

In 2010, along with Singapore’s sovereign wealth fund GIC Pte, the private-equity firm invested in PT Delta Dunia Makmur, the owner of a coal-mining contractor. The following year, TPG joined a consortium in a 45 percent stake in consumer lender PT BFI Finance Indonesia.

CVC Capital Partners Ltd., one of Europe’s largest private-equity firms, in March was among the sellers of a 12.7 trillion rupiah ($1.2 billion) share of PT Matahari Department Store it had purchased three years ago and owned along with Indonesia’s Lippo Group. CVC in 2011 had made a $275 million investment in PT Link Net cable television and its parent company, PT First Media, according to the London-based firm’s website.

‘Growth Market’

Spokesmen for CVC, TPG and Carlyle Group LP declined to comment on Indonesia’s climate for private equity. Carlyle, the world’s second-biggest private-equity group, last year purchased a minority stake in telecommunications company, PT Solusi Tunas Pratama, without disclosing terms.

Indonesia is “a large and attractive growth market” with an “economic trajectory that is on pace to become a top 10 economy by 2030,” Ridha Wirakusumah, a Southeast Asia director for KKR, said in a July 22 announcement of the purchase of the 9.5 percent stake in Tiga Pilar Sejahtera Food. The statement said the deal wasn’t financed by KKR’s usual private-equity investment vehicle and instead was by its asset-management fund that also makes loans and buys companies’ bonds, in addition to taking equity stakes.

“KKR is pushing into other businesses like credit and alternative credit because an investment from a private-equity fund is not the form of capital that makes sense to everybody in every situation,” according to a further statement by Wirakusumah provided by KKR in August.

High Valuations

Deals in Indonesia have failed because of unrealistically high valuation expectations by sellers. One consumer company seeking a valuation at 12 to 14 times earnings before interest, taxes, depreciation and amortization for a private-equity stake should have been priced around eight times Ebitda based on comparable public companies, according to Navis Capital’s Bloy.

“When you have a slight divergence you can adjust, but here you can’t bridge the gap,” Bloy said. “Someone has to give.”

PT Lippo Karawaci, Indonesia’s largest publicly traded real estate developer by assets, last year attracted interest from private-equity investors when it offered a stake in its hospitals unit PT Siloam International Hospitals, according to a person with knowledge of the matter.

Lippo Karawaci instead chose an initial public offering, expected Sept. 12, and ended up cutting the size of it by almost 40 percent due to the recent market selloff.

Improving Opportunities

If the selloff in share prices as well as Indonesia’s rupiah continues, it may improve opportunities for private-equity investors, according to Sebastien Lamy, a Singapore-based partner at management consultancy Bain & Co.

The rupiah has plunged 13 percent this year to the weakest level in four years, making it the worst performer among Southeast Asia’s currencies, according to data compiled by Bloomberg. The currency traded at 11,125 against the dollar at 5 p.m. local time, down 0.5 percent from yesterday.

“If the stock-market adjustment lasts, it will also have an impact on private-equity valuations, and those lower valuations would mean that private equity deploys more capital in the country,” Lamy said. “A lasting devaluation of the rupiah will have the same effect.”

Price expectations so far have been driven by this year’s exits through public markets. Shares in Matahari surged 160 percent in Jakarta when trading resumed March 26 after CVC and its partner were said to have sold stakes at more than double the market price at the time. The stock has fallen 1.8 percent since.

Whetting Appetites

“The Matahari sale whetted a lot of sellers’ appetites,” said Edwin Soeryadjaya, the co-founder of PT Saratoga Investama Sedaya, an investment firm with $1.1 billion of assets under management, which went public in June. “If the potential seller sees a comparable company sell in the stock market at 14 times earnings, he doesn’t realize that in a private deal that’s not what you can expect.”

High asking prices have also been bolstered by the prospect of increasing economic expansion. Growth rates in Indonesia, Southeast Asia’s largest economy and home to 249 million people, are forecast to increase from 5.8 percent this year to 6.4 percent in 2015, according to the median forecast of 24 economists surveyed by Bloomberg.

That’s higher than projections for neighboring Malaysia and about double the growth expected for the global economy.

Surpassing Germany

Economic growth of about 6 percent a year would mean Indonesia’s economy will surpass Germany and the U.K. in size by 2030, according to a report last year by consulting firm McKinsey & Co. By 2020, the number of middle-class and affluent Indonesians may double to more than 141 million, Boston Consulting Group said in a March report. That’s greater than the population of Japan, and almost that of Russia.

Private-equity deal making is also complicated by the threat of changing government regulations, according to the Southeast Asia Private Equity-Venture Capital Report, published in May by Bain.

In a bid to protect domestic farmers, Indonesia last year tightened regulations requiring licenses for the import of horticultural products, according to the Office of the U.S. Trade Representative, which is disputing the rules at the World Trade Organization in Geneva.

“What if you buy Indonesia’s best-branded papaya sauce manufacturer?” asked Xavier Jean, director of corporate ratings at Standard & Poor’s in Singapore. “You are going to have a problem if they forbid the import of papaya. You probably have to buy domestically at much higher prices because everybody is going to rush to the domestic sector.”

‘What’s Next?’

The Indonesian government in 2009 passed a law requiring coal companies to sell a portion of their production domestically at a minimum price before exporting and in June proposed additional rules that could threaten mining companies’ profit margins. In May, the government limited the number of convenience stores and restaurants that a global company can run in conjunction with local partners.

“So what’s next?” Jean said. “Is it the capital goods sector? Is it the telecommunications sector? This kind of policy uncertainty could make investors think twice about investing.”

Private-equity investors in Indonesia are also facing increased rivalry from companies elsewhere in Asia seeking partnerships in their own industries, known as strategic investors, according to the Bain report. Such activity has been curbing private-equity deals, said Bain’s Lamy.

“You had a number of deals in Indonesia where financial investors have been competing with strategic buyers and where strategic buyers have won in the end,” Lamy said.

Failed Bidder

Carlyle Group, based in Washington, was among failed bidders for a 30 percent stake in GarudaFood Group, an Indonesian maker of chips, peanuts and other snacks, in 2011. GarudaFood then signed an agreement with Suntory Beverage & Food Ltd. of Japan for a drinks venture.

Danny Koh, a Singapore-based director at London buyout firm Actis LLP, which has $5 billion of assets under management, said he’s encountering more such deals.

“This invariably results in increased competition and higher valuation expectations,” Koh said, citing Japanese, Korean and Chinese companies “moving aggressively to establish their market position and presence by acquiring companies that could extend their distribution channels or product ranges.”

“A Japanese consumer player may pay over the top for an Indonesian firm because it is the one chance to enter the market,” he said.

Being Disappointed

Last year, Japanese beer maker Asahi Group Holdings Ltd. took a majority stake in a joint venture with PT Indofood Sukses Makmur, the world’s largest noodle-maker, to produce and market non-alcoholic drinks.

Many of the private-equity firms which set up offices in Indonesia may be disappointed now, said Agnes Safford, managing director at Jakarta-based advisory firm GreenWorksAsia, which focuses on renewable energy.

“In the financial world, it’s all about herd mentality,” she said. “But you can’t come here and think it’s fast and easy. It’s not that kind of country. You need a lot of patience. It’s also very much about establishing relationships, and that takes a lot of time.”