Indonesia’s private equity trend amid the COVID-19 situation

September 2020  |  SPECIAL REPORT: PRIVATE EQUITY

Financier Worldwide Magazine

September 2020 Issue

Indonesia, home to 260 million people, is known for its large domestic demand, vast natural resources and affordable labour. The Indonesian government has also been working on removing complicated bureaucracy and simplifying regulations to create a more investor-friendly environment. These factors make the country an attractive investment destination.

This article will focus on the trend, structure and governance of private equity (PE) investment in Indonesia, as well as the main risks facing it due to the COVID-19 pandemic.

PE investment hotspots

In the past, PE investors have preferred to invest in conventional sectors such as mining, healthcare, financial services and retail as these sectors were considered stable and profitable. Nevertheless, developments in data and technology in recent years have changed the targeted investment sector. For the last couple of years, the technology sector (and other new sectors) have been booming and attracting a lot of PE interest. Many renowned PE investors have been investing in Indonesia’s top tech companies, such as GO-JEK (ride hailing and logistics), Tokopedia (marketplace) and Traveloka (online travel booking).

In 2018, investing in peer-to-peer (P2P) lending companies greatly increased. The key factor driving PE investment into the P2P sector was Indonesia’s large under-banked population, combined with growing needs and the welfare gap. But interest in the sector seemed to have decreased since the government strengthened the requirements to operate as a P2P operator.

In 2018-2019, investments also increased in logistics and insurance technology companies. Companies which were able to attract investment included logistics startup Sicepat Ekspres, which raised $50m in its Series A funding round, and Waresix, which raised $25.5m in its Series A funding. While the insurance technology sector is relatively new, it looks promising as there are many new players in this market. One of the most innovative is WE+, which engages Indonesian convenience stores (Alfamart) to provide ease of access for insurance claims to its policyholders.

PE deal structures and governance in Indonesia

As investing in a PE fund provides different liquidity compared to investing in publicly listed companies, the exit mechanism is one of the most important factors facing PE investors, in addition to choosing a good target company. In this regard, establishing a tax-efficient structure is also key to successful investment. This section will elaborate on the common structure for PE investments in Indonesia and the key governance terms important for PE investors.

Structure. The following are key factors for investors in determining the most appropriate structure for their investment: (i) exit possibility; (ii) the negative list issued by the authorities in which certain business sectors are closed or restricted for foreign ownership; and (iii) dividend repatriation and tax considerations.

Factors (i) and (iii) drive a new trend of establishing a foreign entity in a country that is considered investment-friendly for tax treatment and potential exit by investors. Investors will then make their investment in this foreign entity which, in turn, will acquire 100 percent of the shares in the Indonesian target company.

Another investment structure that is common when investing in businesses that are in distress or restricted for foreign investment is to use convertible loans which will grant the same rights as if the shareholders are investors in the target. Others use sophisticated structures such as a back door listing or utilise venture capital (VC) or mutual funds as a holding company.

Governance. There are several terms that are frequently included in agreements governing relationships with other investors or founders of the investee companies. Indonesian company law permits the issuance of common or ordinary shares, and other classes of shares which have different rights, such as voting rights, dividend preference, liquidation preference or right to nominate directors or commissioners. Investors usually would like a different class of shares which give them dividend preference to accelerate the return on their investment, liquidation preference to limit losses, and the ability for representatives to hold a position on the board of directors and board of commissioners.

Certain protective rights for the investor require that certain actions cannot be taken without obtaining approval from the investor. This arrangement is normally used when the investor takes a position as a minority shareholder, to ensure that no key decisions are entered without the approval of the investor. Such reserved matters usually include the following: (i) issuing new shares or convertible instruments coupled with anti-dilution rights; (ii) transferring shares of the other shareholders combined with tag-along; (iii) amending the articles of association and management team; (iv) entering into transactions with affiliated parties; (v) distributing dividends and buying block shares; (vi) any merger, acquisition, liquidation or litigation involving the target company; (vii) approving a business plan; and (viii) agreeing a put option.

Other key issues include the right of first refusal and tag-along right, certain information and audit rights, exclusivity to key personnel, non-compete and non-solicitation provisions and deadlock mechanisms.

Main risk facing an investment

The COVID-19 pandemic has caused a global recession and will surely impact the behaviour of PE investors. Based on data from the Indonesian Investment Coordinating Board (BKPM), for the first quarter of 2020, foreign investment in Indonesia experienced a 9.2 percent decrease compared to Q1 2019. The BKPM expects more significant deterioration in the coming quarters.

Sectors that contributed significantly to the foreign investment total value in the first quarter of 2020 were metals, electricity, gas and water supply, transportation, warehousing, telecommunications, housing and pharmaceuticals. In contrast, the travel and tourism sector has been the most heavily affected by the COVID-19 pandemic, after the Indonesian government imposed restrictions on domestic and international flights.

During the pandemic, it is expected that technology companies which provide marketplace, entertainment and conference services and logistics and delivery companies will continue to grow and attract investment. On the other hand, the travel and tourism sector will continue to struggle.

The Indonesian government has issued some regulations to provide incentives to many businesses. For example, it introduced Regulation of Minister of Finance Number 23/PMK.03/2020, as lastly amended by Regulation of Minister of Finance Number 86/PMK.03/2020 on Tax Incentive for Taxpayers who are Affected by Corona Virus (PMK).

Pursuant to PMK 86, the government has eased the burden for some companies. Among others, the government will bear the PPh 21 (income tax) of employees who work in 1189 industries as regulated by the PMK. The government will bear the income tax of taxpayers with certain gross income. It has introduced an exemption on PPh 22 import tax for 721 industries as regulated in the PMK. The government has reduced the instalment for PPh 25 for 1013 industries as regulated in the PMK and accelerated VAT restitution for 716 industries as regulated in the PMK.

Government Regulation in lieu of Law Number 1 of 2020 on the State Finance Policy and Stability of Economic System for Handling the 2019 Corona Virus Disease and/or for Handling Threat to National Economic and/or Economic System Stability (Perpu) has also been introduced. This Perpu needs to be approved by the house of representative to be implemented as law; nevertheless, it has already had a binding effect.

Pursuant to this Perpu, the government has decreased the corporate income tax rate to 22 percent for the 2020-21 financial year and to 20 percent for the 2022 financial year. An eligible publicly-listed company may obtain a rate 3 percent lower than the previous rate.

Freddy Karyadi is a partner and Anastasia Irawati is a senior associate at Ali Budiardjo Nugroho Reksodiputro (ABNR). Mr Karyadi can be contacted on +62 818103949 or by email: fkaryadi@abnrlaw.com. Ms Irawati can be contacted on +62 21 250 5125 or by email: airawati@abnrlaw.com. The authors would like to thank Carla Nathania, a junior associate at ABNR, for her assistance in preparing this article.

© Financier Worldwide

BY

Freddy Karyadi and Anastasia Irawati

Ali Budiardjo Nugroho Reksodiputro (ABNR)

©2001-2024 Financier Worldwide Ltd. All rights reserved. Any statements expressed on this website are understood to be general opinions and should not be relied upon as legal, financial or any other form of professional advice. Opinions expressed do not necessarily represent the views of the authors’ current or previous employers, or clients. The publisher, authors and authors' firms are not responsible for any loss third parties may suffer in connection with information or materials presented on this website, or use of any such information or materials by any third parties.