Reality check

12.03.13 / Author: Tim Burroughs, Asian Venture Capital Journal

Few Indonesia-focused GPs that sprung up in recent years have made headway. It points to a still immature local market and recognition amongst LPs that they can get exposure to the country in other ways.

If anyone encapsulates the Indonesian fundraising fervor it is C. Christopher Holm. In late 2011, it emerged that the former investment banker with Bank of America Merrill Lynch was seeking $1 billion in commitments from LPs for what would have been the largest-ever dedicated Indonesia vehicle.

“The idea evolved over the course of social dinners in Jakarta,” he told AVCJ last year. “We originally planned close to $500-600 million, but when we talked to people we know well, who would be potential LPs, the appetite was so strong.” Holm planned to focus fundraising efforts on local high net worth individuals, and he gave himself one year to accumulate the capital.

AVCJ hasn’t been able to reconnect with Holm. Emails have gone unanswered, mobile phone numbers are no longer valid, and the contact number for the merchant banking operation – Yawadwipa Companies – set up to run the fund leads to an entirely different firm. It would appear that Holm has either decided to operate off the radar (perhaps a wise move if the he has managed to secure local family money) or abandoned its capital-raising plans. If it’s the latter, then he is not alone.

Big Ambitions

A desire for Indonesian exposure, prompted in part by the success of a few early movers, saw a host of prospective GPs emerge in 2011. They included Falcon House Partners, Capsquare Asia Partners, Forte Capital, Fairways Capital, Mahanusa and Antara Capital. Only two have gathered any real momentum: Capsquare recently reached a final close of $75 million on its fund while Falcon House is said to be nearing completion of its $200 million vehicle.

Of the others, Mahanusa and Yawadwipa are status unknown; Antara began pitching LPs for a $150 million fund, generating some interest, but is nowhere near a close; and Forte and Fairways never got started, having recognized the tide was against first-time funds and returned to deal-by- deal advisory and investment work. They may return once conditions become easier and track records have been established.

“For all the talk about money coming in, a lot of it is coming in via regional players,” says Doug Coulter, partner and head of Asian PE at LGT Capital Partners. “Although people may be very bullish on Indonesia, it’s still hard to raise a first- time fund; not impossible, but it won’t be easy and it will take time. A lot of it is about the story and some of these stories were not compelling.”

While the raw potential for private equity in Indonesia is plain to see – the country has a nominal GDP of around $800 billion and a stock market capitalization of $400 billion, yet there is only about $5 billion in PE assets under management – weak fundraising numbers betray the lack of depth and experience in the market.

According to AVCJ Research, fundraising has reached $150 million or more five times in the last six years, chiefly helped by three of the better established domestic GPs, Northstar Pacific Partners, Quvat Management and Saratoga Capital. The 2011 numbers were swelled by Northstar raised $820 million on its third fund; last year it was Saratoga’s turn, as the GP closed Fund III at $600 million.

The speed and size of these fundraises speaks volumes for their status as big fish in a small pond. Northstar claims it has yet to make any formal decisions on a fourth fund but LPs expect the private equity firm to come to market no later than 2014. Apparently there is a commitment not to exceed $1 billion, the implication being that a larger target could be reached if so desired.

Going Regional

As for the regional players, most of the large pan-Asian funds are looking to do more in Indonesia and hiring aggressively to support these efforts. Then there are sub-regional operators focusing largely or exclusively on Southeast Asia.

Navis Capital Partners is the best known, but the likes of Creador and KV Asia – the former closed its fund at $132 million, the latter is about halfway towards its $200 million target – have emerged, with Indonesia expected to feature prominently. Singapore-based Southern Capital, meanwhile, is said to be progressing steadily towards a regional vehicle of up to $400 million.

“There is a lot of appeal in the country’s fundamentals although it’s a relatively new market and track records are thin,” says Jie Gong, executive director at Morgan Stanley Alternative Investment Partners. “A number of GPs are attracting capital so it’s no longer an underpenetrated market. With this conundrum, we think going through sub-regional [Southeast Asian] funds is a good way to do it. They have flexibility in their allocations to Indonesia and less pressure to stretch themselves in any given country. There’s also the ability to execute on cross-border expansion into Indonesia, for Singapore or Malaysia based companies.”

Indeed, Brahmal Vasudevan, CEO of Creador, recalls from the fundraising trail that the less opportunistic LPs – typically pension funds and endowments – were conscious of the merits of a regional blind pool as opposed to one devoted to Indonesia alone.

This doesn’t preclude country-focused managers, but it puts the challenges they face in context. Most of the larger LPs wouldn’t look twice at a first-time fund where the manager has no previous PE investment experience. Beyond that, the team must be able to display domain expertise and operational skills. If local GPs can’t meet these criteria then investors will seek Indonesia exposure via other channels.

While fundraising efforts will no doubt continue, the major change Coulter expects in the next year or so concerns regional players.

“My sense is that we will see a bunch of firms both big and small that have an interest in Indonesia opening up in Jakarta in addition to Singapore,” he says. “Players that have a regional strategy and talk about Indonesia as an important market must have a Jakarta office to appear credible.”