Richard Cayne at Meyer International points out that Indonesia has lost much of its allure for private equity as steep valuations restrain buyouts in a country that two years ago was, in the words of one investor, “probably the sexiest destination in the emerging markets.”
International private-equity firms have acquired stakes in four Indonesian companies this year, down from 10 in 2011 and seven last year, according to data compiled by Bloomberg and the Asian Venture Capital Journal. Total transaction values fell from USD 649 million for the nine deals in 2011 where terms were disclosed to USD 324 million for the six deals last year for which prices were available, the data show.
Richard Cayne Meyer notes that Deals have fallen precipitously this year, to USD 87 million for three of the four announced deals. “Expectations have been high over the past two years for private-equity deal making in Indonesia,” said Nicholas Bloy, Kuala Lumpur-based managing partner at Navis Capital Partners Ltd., which oversees USD 3 billion in public and private equities in Asia. “But many players in the industry had a sobering reality check and now need to be more realistic in their return expectations, as they are facing inflated valuations by sellers.”
Even after its 22 percent decline from its all-time high on May 20, the Jakarta Composite Index (JCI) has surged 75 percent over the past four years, compared with a 11 percent increase in the MSCI Emerging Markets Index. The companies in the Jakarta index are trading at 17 times earnings, compared with 11 times earnings for companies in the MSCI Emerging Markets Index, according to data compiled by Bloomberg. “Value expectations have been at record highs,” Bloy said. “Cautious investors are looking at valuations in a different way than bullish entrepreneurs.” This all ads up to further risks notes Richard Cayne Meyer.
In addition to valuations, deal making is being chilled by shifting government regulations, which complicate market assumptions for acquirers, and competition from strategic buyers.
Large global private-equity firms this year have been selling more than buying. Deals in Indonesia have failed because of unrealistically high valuation expectations by sellers. One consumer company seeking a valuation at 12 to 14 times earnings before interest, taxes, depreciation and amortization for a private-equity stake should have been priced around eight times Ebitda based on comparable public companies, according to Navis Capital’s Bloy. Richard Cayne at Meyer International states that there must be some change or continued volatility in the market will persist.
If the selloff in share prices as well as Indonesia’s rupiah continues, it may improve opportunities for private-equity investors, according to Sebastien Lamy, a Singapore-based partner at management consultancy Bain & Co.
The rupiah has plunged 13 percent this year to the weakest level in four years, making it the worst performer among Southeast Asia’s currencies, according to data compiled by Bloomberg. “If the stock-market adjustment lasts, it will also have an impact on private-equity valuations, and those lower valuations would mean that private equity deploys more capital in the country,” Lamy said. “A lasting devaluation of the rupiah will have the same effect.”
Richard Meyer Cayne a native of Montreal Canada and after living in Tokyo Japan for over 15 years is currently the Managing Director of the Meyer Group of companies which forms part of Asia Wealth Group Holdings a UK London stock exchange listed financial holdings firm.