Seeing Through the Haze in Indonesia

The investment outlook for the country remains unclear. But some PE firms see a sizable opportunity in Southeast Asia’s largest economy.

For years, a fog of red tape, corruption, and economic nationalism has dimmed investment in Indonesia. And recent weakness in emerging markets globally, paired with a downturn in the commodities market, has further hit investor interest in this nation of 250 million.

Research by the Asian Venture Capital Journal shows Indonesian private equity investment in steep decline, with the 2014 total of $354M amounting to just half the amount in 2013.

Recently, on a visit to Washington, Indonesia’s president, Joko Widodo, sought to reassure investors, announcing a number of economic reforms; and although many fear his promised actions will take years, if ever, to pass, others have faith in Widodo and are backing their belief with dollars.

They’re picking out bright spots in the Indonesian economy and making deals now. LeapFrog Investments, which invests in financial-services businesses in emerging markets, recently led a $45M investment in Reliance Capital Management, its first Indonesian deal.

“Everyone was looking forward to Indonesia’s new government under President Widodo and economic reforms being taken, and that was definitely a factor in our investment,” says Sugandhi Matta, a director at LeapFrog Investments, based in Mauritius. “We’re seeing a number of really good businesses and local entrepreneurs who are looking for partners. And the fundamentals here are strong.”

Indonesia has maintained 6 percent economic growth since 2010. It is geographically immense and boasts an emerging consumer class among its large, young population.

“These are consumers who are not necessarily poor but not yet middle-class,” says LeapFrog partner Michael Fernandes. “They are just beginning to require access to financial services to manage their cash flows—as well as access to insurance products to protect their assets. This is one of the fastest-growing markets, in this respect.”

Matta says that Indonesia has a strong entrepreneurial history compared to other Southeast Asian nations.

“In terms of the sophistication of its companies, Indonesia is more mature than some other countries in the region,” she says. “There is also a fair number of innovative local companies that are trying to do things differently.”

Red tape—from the government or elsewhere—is the hallmark of every emerging economy. But Fernandes believes that regulators have been fairly supportive of local companies and their interactions with foreign investors. “We are seeing a constant balance between nationalistic tendencies and liberalization in Indonesia,” he says. “There is always a bit of back-and-forth between how much multinational organizations that are operating in the region can own. But the country is definitely making progress.”

Indonesia poses many of the same challenges to investors as other emerging markets. The country has currency risks and regulatory roadblocks. Many company owners are not familiar with—and do not trust—private equity players, because exits are unproven.

LeapFrog’s exit plan for Reliance Capital Management is to go public. “Our value-add is helping Reliance hire better people and expand their financial product line,” Fernandes says. “Our capital and expertise can help them become a complete financial-services business that will champion local consumers.”

Beyond financial services, LeapFrog is scouting for other “gaps” in the Indonesian market—sectors where it can jump in and fill a need. “Potential areas for us include healthcare, renewable energy, and education,” Fernandes says. “They all seem to be big gaps in this market, and we’ll look at these opportunities in our future funds.”