Mon, 20 Dec 2010


By Hender Sender in Mumbai and Anthony Deutsch in Jakarta
TPG’s investment in coal mine service provider Delta Dunia confirms the large private equity firm’s reputation for doing the sort of edgy deals that competitors admire but rarely emulate.

So far, among the large investment firms, only CVC has been visible in Indonesia, having bought department store chain Matahari . Most of the investments made so far have either been done by local firms or by middle market investors like Olympus Capital.

But by partnering with Northstar, TPG has come up with a new template. Northstar so far has raised $400m for Indonesian deals in two funds (with TPG as an investor in both as well as in Northstar itself) and has put a total of $1bn to work in the country.

With 30 people on the ground, it can help TPG source deals, recruit management, help guide the companies they own and ultimately sell them.

This is the third time that Northstar and TPG have teamed up. In 2008, the two were part of a group with a majority stake in BTPN Bank, a small but profitable bank that makes small enterprise and consumer loans, often backed by the collateral of individual pensions.

Meanwhile, Northstar itself has invested in Alpha Mart, a mini market chain (from which it has already exited) and Tricom, a mobile phone retailer.

Still, Indonesia is not for the inexperienced or faint of heart. Ben Jenkins, a Hong Kong-based senior managing director at Blackstone says the firm has been “studying” Indonesia for four years.

Even executives at some smaller funds dedicated to south-east Asia say they avoid Indonesia because of the risks on the ground there.

Many western banks have been frustrated by the lack of a clear rule of law in Indonesia and others have avoided doing business with many of the most connected families in Indonesia for fear that those same connections can be used against them.

One major bank withdrew from a planned capital raising for one of the most powerful companies in the country over disputes involving disclosure on sensitive issues such as paying taxes.

Indonesia is the most competitive source of coal on a delivered basis for both India and Indonesia at a time when power is one of the key potential constraints for both the continent’s giants. As Indonesia draws ever closer to China, and grows increasingly wealthy as a result of its bountiful resources everything from coal to timber the attraction of the country will prove more powerful than the pitfalls.

For decades, south-east Asia’s largest economy has sold its abundant raw materials, but attracted virtually no private equity. With the TPG deal, more capital will have been raised in 2010 than over the past five years combined. Between 2005 and 2009, less than a billion dollars in private equity flowed into Indonesia, compared to nearly $9bn in Brazil.

“The private equity players are looking for legal security. If there is no legal enforceability, I think they will shy away from the contracts,” said Azam Khan, the principal investment officer at the International Finance Corporation.

The largest private equity deal in Indonesian history has sparked momentum. CVC Asia Pacific led the acquisition of the largest and most successful department store chain, Matahari, for $880m in January.

“If you get some global brand names in private equity and first movers to come in, I think you’re going to have a herd mentality,” said Edward Gustely a private equity specialist and senior advisor to the Indonesian government. “The opportunities are limitless, but then you have to manage expectations.”