Indonesia, Southeast Asia's biggest and fastest-growing economy, is becoming a new focus for a growing number of global buyout funds, drawn by improving stability and strong commodity prices.
As deal valuations no longer look so attractive in Asia's most popular destinations for foreign investment, China and India, dealmakers are trying to find alternatives in Asia, the fastest-growing continent, private equity executives say.
"Southeast Asia has been the Cinderella to China and India. If people continued to find great deals in China and India, Indonesia would have continued to be Cinderella," said Roman Scott, managing director of private equity firm Calamander Capital in Singapore.
Chinese stocks in Shanghai are trading at a trailing PE ratio of 22 times, versus 20 for Bombay's index and about 16 for Indonesia.
"You're looking at a country that's stuffed with fabulous commodities, and where there's a huge emerging middle class. It's still China and India ten years ago -- there's plenty of opportunity," said Scott, adding, though, that his firm is focused more on the frontier Sri Lankan market than on Indonesia.
There are still plenty of risks for firms directly investing in Indonesia. High on the list are bureaucratic red tape and corruption, especially in the legal system and energy sector.
But two recent foreign investments in the resource-rich country, the world's top exporter of thermal coal and tin and the largest producer of palm oil, reflect investors' rising confidence in Indonesia's dealmaking environment.
Last month, European buyout fund CVC Capital Partners spent over $770 million to form a joint venture with retailer Matahari Putra Prima to own 80 percent of its department store unit, making it the biggest recent foreign private equity investment in the country.
That deal pushed Indonesia into third place globally in terms of the size of private equity deals so far in 2010, with a 10.7 percent share. By contrast, in 2009 Indonesia only had a 0.1 percent share and its $98.6 million worth of deals trailed deals worth over $1 bln in both China and India.
MORE FUNDS, MORE DEALS
CVC's deal may well herald an investment wave in Indonesia as many other big names are catching up, in particular in three sectors -- resources, infrastructure and retail, bankers and analysts say.
"A rising population and growing purchasing power will support the retail sector, and also most Indonesian households have no leverage," said Ari Pitoyo, head of equity research at Mandiri Securities in Jakarta.
Affinity Equity Partners, an Asia-focused private equity firm set up by some former top UBS bankers in Asia, plans to raise a new multi-billion-dollar buyout fund to focus on new markets like Indonesia.
Affinity hired Inghie Kwik, Morgan Stanley's former Indonesia investment banking head, to help it set up office in Jakarta in late 2009.
Kwik, a well-connected local dealmaker, is looking at several possible investments in Indonesian telecoms, mining and infrastructure, though no formal proposal has been made yet, according to a source close to Kwik. The source declined to be identified because the matter is not public.
Securities firm CLSA said in a January report that department store operator Ramayana, pharmaceutical firm Kalbe Farma, Bank Panin and tobacco firm Gudang Garam are on the wish list of strategic investors.
Blackstone's senior managing director Benjamin Jenkins said on the sidelines of a conference in Singapore late last year he hopes the firm could do more deals in the Southeast Asian nation.
"Potentially really interested in Indonesia. So I hope we can do more there," he said. "We have looked at coal deals in Indonesia, we haven't done one yet."
Private equity firms will still be keeping a close eye on whether planned government reforms, such as stamping out graft and removing energy subsidies, continue or stall.
There's also the risk the central bank will fail to control inflation, a historical problem. The rupiah gained 17 percent in 2009, but any loss of stability could lead to depreciating earnings for foreign investors.
However over the next three to five years, the typical timeframe for a private equity investment, the country is expected to reach investment grade, says the world's top bond fund manager PIMCO, a status that would draw further investment.