Warnings of Market Opportunities, Challenges in Indonesian Assets

Private equity fund managers identified on Tuesday the opportunities and challenges of investing in Indonesia’s equity market.

The price of assets in Southeast Asia’s largest economy has increased in recent years, making it expensive for investors.

For investors, when the price is high, they are left with a limited option: be selective on the acquisition target.

Private equity managers should not make any hasty entrances to Indonesia’s acquisition markets as prices have escalated steeply in the past years, according to a founding partner of Saratoga Capital.

“Fund managers need to be disciplined,” said Kay Mock, a founding partner of Saratoga, one of the biggest Indonesian-focused private funds in the country.

“Don’t get caught up in the heat of the moment and commit to a transaction with high valuation.”

Mock said this was a “natural phenomenon” when private equity funds were witnessing success achieved in the country and the economy in general was doing well, adding that the overall view in Indonesia was still strongly positive. But she urged caution in determining prices.

“It’s basically a matter of too much money chasing too little options,” Jean-Christophe Marti, a partner at Navis Capital Partners, told the Jakarta Globe. Navis manages $3 billion in assets in the United States, Europe, the Middle East and Asia.

Marti said he did not think that prices would normalize anytime soon, with demand still strong. Other than competition among private funds, big competition also comes from Indonesia’s conglomerate companies, he added.

According to a recent report from the Boston Consulting Group, measured by recent merger and acquisition transactions, acquisition prices in Indonesia have risen to 16.2 times earnings last year. In comparison, Indonesia’s benchmark stock index was traded at around 15 times the earnings last year.

However, Marti said, increases in earnings of local companies could somehow justify the increase in prices.

In July last year, Navis sold Efficient English Services, the operator of the English language training provider Wall Street Institute in Indonesia, to Pearson, a global publishing and education company.

Navis started the Wall Street Institute business in Indonesia in 2007 as a greenfield investment of about $1.5 million and sold the company for $16.3 million.

According to data from AVCJ Research, last year, there were 19 investments made by private equity funds amounting to $547 million. In the same year, there were only five exits made by private funds, but these sales amounted to $7.5 billion in value.

This year, one of the most anticipated exits will be done by CVC Asia Pacific, which is selling a stake in Matahari Department Stores for a reported $1.3 billion. It bought the stake for $616 million.

Marti said there were quite a number of good-quality companies still in Indonesia that would be good for investment.

Meanwhile, during the forum, private equity managers were also voicing their concern on exit strategies.

Private funds typical sell their investments after a few years to cash in their gains. BCG said that the selling of stakes through initial public offerings was a favorite exit route.

Tom Lembong, co-founder and partner at Quvat Management, said most of the time an IPO exit was only suitable for middle to large-sized companies. Over time, private equity may start using share swaps as a method of divestment, he said.

With market capitalization continuing to increase in Indonesia, many big companies will start to consider their shares as money. Private equity may see share swaps as a “viable” exit strategy, Lembong said.