15 March, 2016
The big picture
Indonesia has a rapidly expanding population which currently stands at approximately 255 million people, around 60% of whom are of working age. The country has a high literacy rate of around 94%, roughly the same as in Malaysia, China and Vietnam. Indonesia is Southeast Asia's largest economy with GDP in 2014 of US$888.54 billion and, according to G3, a rise in Foreign Direct Investment (FDI) year-on-year 2014 – 2015 of around 14%.
Since his election in 2014, and in the wake of the downturn in the global commodities market, President Widodo has made clear that developing Indonesia's infrastructure and encouraging private sector investment are clear priorities for his government.
According to a recent report by Bain & Company, Inc., there is an abundance of capital in the Asia-Pacific region. This over-supply of "dry powder" has resulted in inflated valuations and increased competition for targets.
As larger markets such as India and China have become over-allocated, investors have turned to the emerging markets of Southeast Asia. Like any emerging market economy, investors into Indonesia will need to factor in geopolitical and macroeconomic risks, but those factors have not deterred investors from seeking opportunities in this expanding economy.
As private equity investors become more commonplace in Indonesia, what may once have been seen as a threat to long-standing family-owned enterprises is now seen as an opportunity to deliver growth and value to promoters handing on to the next generation.
With Indonesia's growing middle class, the hot sectors are those that complement such a demographic, including financial services/insurance, consumer goods and healthcare. The global downturn in commodity prices, together with a feeling of resource-rationalism has led to decreased interest in pure natural resource plays. Indonesia has also seen an uptick in interest in technology start-ups and incubators, and it remains to be seen how this will develop in an evolving regulatory environment.
As announced in February 2016, Indonesia is looking to open more sectors to foreign investment, either unilaterally or with a local partner, as President Widodo seeks to increase foreign capital flows into the country.
In this edition of Around Asia Pacific, we will look at the significant deals of 2015, the current investment climate, our expectations for 2016, what investors need to know, and key legal developments.
The deals
Sumitomo increases its stake in Indonesian bank
In February 2015, Sumitomo Mitsui Banking Corporation ("SMBC") acquired a 17.5% stake in PT Bank Tabungan Pensiunan Nasional Tbk ("BTPN") from Texan private equity firm TPG Capital LP ("TPG") for US$461m. SMBC paid around a 40% premium for the shares in BTPN, which add to the SMBC group's existing control of around a third of BTPN's shares acquired from TPG in 2014. TPG continues to hold around an 8% interest in BTPN.
SMBC has stated that it is looking to expand its Asian offering including investing in Indonesia's financial sector.
BTPN is a listed national savings bank headquartered in Jakarta specialising in providing loans.
Sale of Martabe gold and silver mine
In November 2015, it was announced that a consortium led by EMR Capital, the Australian specialist resources PE manager, is to acquire a 95% stake in Agincourt Resources for US$775 million. Agincourt owns and operates the Martabe gold and silver mine in North Sumatra.
In line with the global drop in commodity prices, G- Resources Group Ltd. (a Hong Kong-based investment holding company) decided to sell its majority stake in Agincourt and instead expand into financial services and property investment.
The Martabe investment will be EMR's sixth investment, adding to the fund's existing portfolio of copper and potash assets. Martabe has historically performed well and the consortium plans to expand mining operations and develop the mine's potential.
PropertyGuru acquires property portal Rumah
PropertyGuru, the Singapore-based online real estate portal, has bought Indonesian property listings site RumahDijual for an undisclosed sum. The deal was driven by Indonesia's burgeoning property market; the Indonesian market is the second largest for PropertyGuru measured by web traffic. According to a press release, the acquisition will mean that 43% of all time spent on property portals in Indonesia will be spent on PropertyGuru-owned sites.
PropertyGuru is backed by TPG Capital, Square Peg Capital and the Emtek Group, who together contributed a total of US$129 million to the company in 2015, funding its acquisition of ePropertyTrack in July 2015 and the acquisition of Rumah.
"Indonesia is strategically important for PropertyGuru because it is the largest, and one of the fastest growing, property and digital markets in Southeast Asia," said PropertyGuru CEO and co-founder Steve Melhuish. "This latest acquisition is a further testament to our long-term commitment to the Indonesian property market."
Since PropertyGuru was founded in 2006, it has grown its online traffic 28% per year through its website and mobile apps – the media of choice for Indonesia's youthful demographic. PropertyGuru is active in Singapore, Malaysia, Indonesia and Thailand, and claims to be the market leader in all these countries with the exception of Malaysia. Investors in PropertyGuru are hoping to take the company public in 2016.
Convergence Ventures partners with Baidu
Chinese online services giant Baidu has invested an undisclosed sum in Indonesian VC firm Convergence Ventures as part of a financial and strategic partnership.
The partnership will facilitate the exchange of technical resources and expertise between the two, allowing Convergence to send founders of its portfolio companies to China to learn from Baidu, and enabling Baidu to leverage Convergence's Indonesian network to facilitate its expansion in the region. Baidu will also provide marketing resources and may directly invest in start-ups.
"We are proud to welcome Baidu Indonesia as a strategic partner and investor. Strong support from Baidu Indonesia will greatly benefit the growth of Indonesia’s digital ecosystems, especially for start-ups and local app developers who want an edge in growing both inside and outside of Indonesia" (Adrian Li, founder of Convergence Ventures).
Baidu's Indonesia branch and Convergence plan to set up a co-working space in Indonesia to support early- stage companies in their development of apps and other digital products.
"In the past year, Convergence Ventures has seen over 1,200 ventures so we are very well connected to entrepreneurs in the Internet and mobile start-up community" said Adrian Li, founder of Convergence.
Baidu recently launched the "Grow Local, Go Global" platform to develop Indonesia's digital industry. The platform showcases Indonesian apps locally and globally, building on the apps' home-grown success at the same time as giving them international exposure.
Having launched its debut $25 million fund at the end of 2014, Convergence participated in a number of deals in the tech space throughout 2015, including a US$1.5 million Series A round for e-commerce portal IndoTrading and an US$8 million Series B round for restaurant booking app Qraved.
Leapfrog invests in Reliance
LeapFrog Investment, specialist in emerging markets financial services, last year led a IDR562 million investment round for the Indonesian financial services provider Reliance Capital Management. Leapfrog was joined by two limited partner co-investors, Dutch development bank FMO and international reinsurer PartnerRe.
Michael Fernandes, Southeast Asian Head at LeapFrog, said of the investment: "We're targeting the emerging consumer class, who are coming out from poverty but are below the middle class. This group of people is just entering the financial market. For them, simple products like life insurance, hospital cash and key assets insurance are important."
Reliance is a diversified financial services group with interests in health insurance, life insurance, general insurance, and multi finance and asset management companies.
LeapFrog has demonstrated its confidence in projections that Indonesia's life insurance sector will grow by more than 20% year-on-year over the next five years, and that the general and health insurance sectors will grow by 15% and 12% per year respectively.
Yahoo Japan Capital backs Indonesia flash sale fashion website
Yahoo Japan Capital (YJ Capital), the corporate venture capital arm of Yahoo Japan, recently made its first investment in Indonesian fashion flash sale site VIP Plaza.
According to a release, the new fund will have a total value of JPY20 billion (US$169 million) with Yahoo Japan providing the bulk of the capital – JPY19 billion – and the GP providing the rest. VIP Plaza will use the funds to boost its e-commerce marketing activity with the aim of growing its customer base in Indonesia and globally, starting with the opening of a new Malaysia office.
YJ Capital managed to avoid Indonesia's "Negative List" of investments as VIP Plaza is established in neighbouring Singapore, not Jakarta, and in any event VIP Plaza is classified as a marketplace portal, which does not actually hold any stock. The latter reason was similarly taken advantage of in 2015 to facilitate SoftBank and Sequoia Capital's US$100 million investment into Tokopedia.
YJ Capital's fund is targeting institutional VC rounds with a focus on start-ups in the mobile, internet, and internet-of-things segments. VIP Plaza attracted 400 new international and domestic brands to join the site in 2015 alone, lured by its ability to shift large amounts of stock in a brief window of time.
According to Tesong Kim, CEO and co-founder, VIP Plaza gets around 3.5 million page views per month, with approximately 80% of purchases made via mobile devices.
Standard Chartered Private Equity invests in Indonesian retail electronics
Standard Chartered Private Equity has invested US$42 million for a 45% stake in a joint venture formed to hold retail electronics stores in Indonesia owned by Singapore-based TT International (TTI). Operating under the Electronic Solution brand, it already has a retail website. The joint venture has a total of 39 stores in Indonesia. According to a statement, TTI has ambitious plans to grow its presence in Indonesia and the Southeast Asia region.
TTI is a retail group that holds seven in-house retail brands spanning household appliances, consumer electronics and furniture (such as Akira and Teac). TTI launched its retail business in Indonesia in 2005. Electronic Solution retails audio and video products, home and office appliances, phones, IT products and furniture.
According to BMI Research, Indonesia's consumer electronics market was worth around US$16 billion in 2014 and is expected to grow to over US$20 billion by 2019.
Quadria takes minority stake in leading Indonesian pharmaceutical company
Quadria Capital, the Southeast Asia-focused healthcare investment firm, has taken a minority stake in Indonesian drug manufacturer SOHO Global Health.
This is thought to be the first private equity investment in the pharmaceuticals industry in Indonesia. The size of the transaction was not disclosed.
SOHO Global Health is one of the country's largest pharmaceutical players and is controlled by the Tan family. The company currently produces natural and synthetic medicines and hopes to leverage Quadria's global network to expand its portfolio and market presence. The company is strong in Indonesia and the wider Southeast Asia region, and also operates internationally in Nigeria, Lebanon, Mongolia, Mauritius, Sri Lanka and Pakistan.
"We are providing capital to grow the business and expertise to help them identify and bring in new products that will diversify their portfolio. It is a very broad business today but there are opportunities to move into higher value products," Hareesh Nair, vice president at Quadria, told Asian Venture Capital Journal. Quadria believes that its ability to guide and support the company as well as provide the necessary investment made it stand out from the crowd. "For an investor and a pharma operating company to come together there has to be a clear idea of how the investor is adding value, particularly in Indonesia where promoters are not just on the market looking for capital," Nair said.
Market commentary and analysis
Middle-class consumers on the rise
According to Boston Consulting Group, Indonesia's middle-class population is expected to rise from 70 million in 2012 to more than 140 million by 2020 – representing more than half of the country’s population. This growth is largely being driven by increased domestic consumption due to a growing population, lower unemployment rates and less dependency on exports and imports which have been declining year-on- year since 2013.
A 13% rise in the minimum wage in 29 Indonesian provinces and government price cuts in the supply of electricity and gas at the end of 2015 have also stimulated growth and increased the overall standard of living for many Indonesians. This, combined with the rise in household consumption (which accounts for more than half of Indonesia's GDP), is fostering the development of a strong emerging middle class in Indonesia.
Household consumption is expected to increase as the purchasing power of local consumers rises, matched by the rise of supermarkets, malls and online marketplaces over traditional small businesses such as street vendors and local markets.
The disbursement of wealth in Indonesia is also changing. Pockets of affluence are starting to develop in Sumatra and Papua and other areas outside of Java. This will change the distribution networks of companies hoping to capitalise on the growing middle class in these areas, as it will shift their focus to industries and investment opportunities that had previously been concentrated in Java alone. Boston Consulting Group predicts that the number of Indonesian cities with more than 500,000 middle-class citizens will increase from 25 to 54 by the end of 2020.
With the rise of the middle class, there will be increased demand for quality education, healthcare and financial services, which could mean lucrative opportunities for foreign investors.
Fire-starting and its consequences
The extensive fires and consequent noxious haze in 2015, started as a means of clearing land, were estimated by the World Bank to have cost Indonesia approximately US$16.1 billion, equivalent to 1.9% of the country's GDP, and more than double the reconstruction cost in the wake of the Aceh tsunami.
This figure does not take account of regional or global losses, and the potential impact on Indonesia's relationships with neighbouring countries affected by the haze.
Looking ahead
Infrastructure investment
Since his election in 2014, and in the wake of a downturn in the global commodities market, President Widodo has made clear that developing Indonesia's infrastructure and encouraging private sector investment are clear priorities for his government. All areas of Indonesia's infrastructure, including the electricity grid, roads, ports and TMT infrastructure will benefit from further investment. In 2015, the Indonesian government announced a US$400 billion infrastructure investment initiative covering the next 5 years. Attracting foreign investors will also help to make these infrastructure projects a success.
Potential investors will need to undertake robust due diligence pre-investment, including on the legitimacy of relevant licences and approvals, as well as the operating practices of the target group.
It may be difficult for PE firms to convince their investors to tie their money up for the length of time required to see a return on an infrastructure project that would be several years in the making. They may also need to consider structuring their investments more creatively, for example as convertible debt, allowing them to participate in any upside and seeking to minimise their losses in the event that the project goes badly.
President Widodo's enthusiasm for developing Indonesia's infrastructure faces the challenges posed by an uncertain political climate. An example is the Calimaya port project launched in 2010 by the previous government. The port was to cost US$2.6 billion, half of which was to come from foreign investors. However, when President Widodo took power, the project was reviewed and it was decided that it should be relocated because of concerns over its proximity to offshore oil and gas facilities.
Because of this, new feasibility studies and planning will recommence at a new location, which will take time, during which the foreign capital will be tied up and not earning any returns.
Despite these risks, and perhaps because of them, there are plenty of opportunities for investment in Indonesia's infrastructure sector, and the potential for returns to be made.
Cutting the red tape?
Out of 189 economies, the World Bank ranked Indonesia as 120th in 2015, rising 11 places to 109th in 2016, for overall ease of doing business. For ease of dealing with construction permits (an area likely to be encountered by infrastructure investors), Indonesia moved up 3 places in the rankings from 110th to 107th from 2015 to 2016. To put these rankings in context, neighbouring Malaysia ranked 18th for ease of doing business and 15th for ease of dealing with construction permits.
The Indonesian government seems to be very aware of these problems, and has promised to cut the red tape. President Widodo has, for example, proposed creating a "one stop shop" for issuing permits required for mining, forestry and transport, meaning developers will not need to go through the various ministries to get a license, thus streamlining the process.
Doing deals in Indonesia:
Key issues and considerations
Can we invest?
Foreign investment is encouraged in Indonesia, but in certain sectors is tightly regulated by Indonesia's investment coordinating board (Badan Koordinasi Penanaman Modal) (the "BKPM") or by various technical ministries.
A presidential decree known as the "Negative List" is issued approximately every three years and sets out which sectors are (a) closed to foreign investors; or (b) subject to a cap on foreign investment (or other restrictions), including different limits for ASEAN investors. Going forward, it is proposed that the Negative List will be reviewed annually.
While the Negative List is subject to review and amendment on a periodic basis, foreign investments entered into when a sector is open, or up to a relevant sector's limit, will generally be "grandfathered" and permitted under certain conditions to remain in place should the foreign investment limit for that sector be reduced.
In all instances, in order for a foreign investor to acquire shares in a private Indonesian company, the target company must first obtain a Principal Investment Licence from BKPM, and the target company must be converted (to the extent it is not already) into a foreign investment company (Penanaman Modal Asing) or "PMA" company. Conversion is relatively straightforward, although there are certain requirements to be satisfied and the whole process may take 2 – 3 months if there is a change in control and the procedure for an ‘acquisition’ under the applicable regulation needs to be followed. Alternatively, the foreign investor could, subject to the Negative List restrictions, establish a new PMA company and carry out an asset acquisition. Note that 'shelf' PMA companies cannot by their nature exist in Indonesia and asset acquisitions tend to be less common in Indonesia than in other jurisdictions.
It should be noted that a PMA company is itself regarded as a foreign investor, and will therefore too be subject to the Negative List to the extent it wishes to invest in other companies.
Common hurdles
While Indonesia is open to foreign investment, there are a number of recurring issues to be considered by potential investors. These include:
Economic and regulatory policy uncertainty
Economic and regulatory policies are subject to change and sometimes inconsistently applied in Indonesia. This combined with the legal uncertainties referred to below, make understanding the investment environment challenging.
Conflicting laws
There are several authorities and regulatory bodies in Indonesia whose remits frequently overlap.
From time to time, these bodies issue regulations, and policies/practices (written and unwritten) which, given a lack of centralized regulation, can make interpretation somewhat confusing and ascertaining legal certainty difficult. Since the introduction of greater regional autonomy, conflicts can also exist between national and regional legislation and policies
Access to information
There is less information publicly available than investors may be used to from working in other jurisdictions.
What information there is may not be relied upon as being current. Buyers are therefore heavily reliant on information produced by the seller, which makes non-disclosure and confidentiality agreements critical
Contract enforcement
Foreign court judgments are not enforceable in Indonesia, which means that a foreign court judgment against an Indonesian company would only be enforceable against the Indonesian company's assets located in the jurisdiction of the judgment.
Indonesia is a party to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, meaning that foreign arbitral awards are, in theory, enforceable. However, in order to enforce a foreign arbitral award:
- the awarding country must also be a party to the New York Convention;
- the award must be deemed not to contravene Indonesian national order; and
- an execution order must be granted by the relevant Indonesian Central Jakarta District Court.
On occasion, execution orders sought from the Central Jakarta District Court have been rejected on the basis that they contravene Indonesian national order/public policy. Relief is typically in the form of damages to the wronged party. Equitable relief such as an injunction or specific performance is rarely granted.
Corruption
Transparency International in 2014 scored Indonesia 34 out of 100 (where 0 is highly corrupt and 100 is very clean) in the Corruption Perceptions index, placing it 107th out of 175 countries. Potential investors should undertake robust due diligence exercises pre- investment and have adequate procedures in place to combat any issues post-investment.
Protectionist
As is common across many of the fast-developing world economies, Indonesia has various protectionist policies in place of which investors should be aware.
Time
Where regulatory approvals are required – and they almost always will be – indicative timelines can be misleading, meaning extra time should be factored in to allow for delays.
Competition
The Indonesian Business Competition Supervisory Commission has jurisdiction over foreign- to-foreign transactions where competition in Indonesia's domestic market may be affected, which means that structuring the transaction offshore will not get around competition issues.
Key legal developments
Competition / anti-trust – enhanced enforcement powers including heftier fines:
The Indonesian Business Competition Supervisory Commission (the "KPPU") oversees competition law in Indonesia. A draft amendment issued in 2014 now provides that:
- the mandatory post-merger notification scheme will change to a mandatory pre-merger notification scheme. Mergers, acquisitions (both asset and share) and joint venture establishments meeting certain standards must now be reported prior to becoming effective;
- Indonesian competition law will apply even more widely, including to foreign companies who do not have operations in Indonesia but whose conduct affects the Indonesian economy (for example, because they participate in Indonesian procurement tenders);
- an increase in the maximum fine from IDR 25 billion (approx. US$1.74 million) to IDR 500 billon (approx. US$34.8 million);
- an expanded selection of other penalties for competition law breaches, including blacklisting the offending company and revoking its business license;
- the introduction of a leniency policy by the KPPU, applicable for selective types of breaches; and
- tender collusion, which was a "rule of reason" (requiring evidence of negative impact to competition) may be established without such evidence of negative impact to competition.
Changes to the negative list:
As things stand, foreign investors may not directly invest into the B2C e-commerce sector in Indonesia. However, the government may soon lift this restriction in a bid to increase FDI. It was announced in January 2016 that a dedicated office will be set up by the government to run a number of initiatives to engineer a digital economy worth US$130 billion by 2020. Foreign investors should soon be allowed to invest freely (up to 100%) in large online marketplaces, provided they invest a minimum of IDR10 billion (approx. US$72 million) and work together with local warehousing companies.
Other imminent liberalisations of the Negative List announced in February 2016 include foreign investors being allowed to invest 100% in:
- cold storage businesses; and
- the crumb rubber industry on the condition that investors engage in partnerships with local farmers.
The amended Negative List reflecting these changes has not yet been issued.
Changes to the banking law on the horizon:
Changes to the Banking Law of 1998 are being considered. If these changes proceed, foreign investors stand to be affected by the following provisions:
- a proposed 40% cap on foreign investment in Indonesian banks, with any foreign investors holding shares in excess of the cap required to divest the excess to Indonesian citizens/entities within 10 years from the law coming into effect;
- where a bank is failing, a person/entity may only be a controlling shareholder in one commercial bank; and
- commercial banks including foreign banks with operations in Indonesia must be established as Indonesian limited liability companies.
Thinking of investing in a foreign currency? New restrictions to be aware of:
In March 2015, Bank Indonesia Regulation No. 17/3/PBI/2015 regarding the Mandatory Use of the Rupiah in Indonesia came into effect, significantly restricting the use of foreign currencies in transactions conducted in Indonesia. The aim of this regulation is to deepen the domestic rupiah market, stabilize the rupiah (which has been depreciating against the US dollar), and foster economic expansion.
The regulation provides for certain exemptions, including international transactions (such as export- import, cross-border supply of services and goods), international funding transactions and bank deposits in foreign currencies. Given that the Rupiah is not freely available outside Indonesia, current practice for deals between foreign companies (excluding PMA companies) and Indonesian companies is to state the consideration in a foreign currency (such as US dollars) in the transaction documents, and to convert this into Rupiah on the basis of an agreed exchange rate.
For further information, please contact:
Michael Chin, Partner, Hoganl Lovells
michael.chin@hoganlovells.com
