Private equity in Indonesia.
    Category: Smart Investing 2016 By : Rainer Michael Preis Read : 5162 Date : Monday, June 20, 2016 - 03:10:25

    Indonesia’s private equity market is experiencing newfound interest from global and local investors alike with a sharp recovery in activity in 2015 after a slump in 2014 caused by depressed commodity assets and political uncertainty.

    While investors in alternative assets have been heavily focusing on China and India for their Asian exposure, ASEAN’s largest economy is still underappreciated in the private equity context and under-invested. The potential of Indonesia’s private equity market can be expressed in one simple comparison.

    Whereas China’s economy is eight times larger than Indonesia in terms of GDP, private equity investments in the Middle Kingdom is 34 times larger than that of Indonesia, according to data provided by Asia Venture Capital Journal. While the energy and commodity space were a key focus in the past, private equity firms have recently been targeting industries that cater to Indonesia’s consumer sectors. Rising consumption coming from “Jokowinomics”—named after President Joko “Jokowi” Widodo—and a fast-growing middle class offers great investment appeal.

    One such growth area is the Indonesian healthcare sector. According to WHO, Indonesia has a healthcare spend per capita of $108, which is approximately 1% of GDP per capita. The Philippines, a country that has lower GDP per capita than Indonesia, has a healthcare spend of $140 (2% of GDP per capita). In comparison, Singapore spends an equivalent of 3% of GDP per capita or $2,500 on healthcare. Rising income levels and the implementation of Universal Health Care (UHC) are expected to provide coverage to the entire population, and this will provide further investment opportunities in general and in private equity in particular.

    Infrastructure, though for many years did not make firm progress due to the lack of government budget, was boosted by the government with the recent introduction of the largest state budget allocation to the sector. Infrastructure hence will be another vital part of Indonesia’s private equity investment opportunities. The government has announced 30 focused and tangible infrastructure projects available to private equity investment.

    The disadvantage of investing in private equity in Indonesia or any other emerging markets is that fee structures can be high due to the scarcity of fund managers focusing on the region. However, investors can choose to work with local General Partners (GP) who often have higher bargaining power, deeper relationships and better familiarity of Indonesian business culture than international players.

    Recent trends in family governance and succession planning in Indonesia will offer new avenues to find compelling private equity investments. The second generation of Indonesian family members, often educated in the West, are increasingly embracing private equity as an asset class and strategic investment. An appreciation of the value private equity can bring, and taking a longer-term view with private equity firms to build up enterprises into stand-alone businesses that are ultimately listed on the Indonesia Stock Exchange, are a strong motivation for established Indonesian families to engage in private equity. Indonesia’s large domestic consumption base, infrastructure spending and emerging middle class provide immense potential for private equity investors.