omm-raising private equity financing in indonesia (june27, 2012)

8/12/2019 OMM-Raising Private Equity Financing in Indonesia (June27, 2012)

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Raising Private Equity

Financing in Indonesia

Joel Hogarth and Siew Kam Boon

Jakarta In-House CongressJune 27, 2012

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Introduction


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Total Private Equity Investments in Indonesia(2008 to 2011) by Deal Value

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Source: Asian Venture Capital Journal; McKinsey & Company Private Equity Asia-Pacific Report 2011

Introduction What is Private Equity?

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TIME

SEED EARLY MID/EXPANSION

LATE/PRE-IPO

EXIT

Angel Investments

Venture Capital & Growth Capital

Debt Investments

Mezzanine Capital

Pre-IPOInvestments

PrivateInvestment inPublic Equity

(PIPE)

Private Equity


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Angel Investors

WHEN? Early stage pre-revenue companies, typically where itsoperations and products are not yet ready for market testing andbeta

WHAT? Seed money in the form of minority equity investments

May also be in the form of convertible instruments for downsideprotection

Used for funding of initial operations, building a product prototype, andproduct testing.

WHOM? Seed capital is primarily by friends and family, Angel

Investors, or very early stage Venture Capital firms.

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Venture Capital and Growth Capital

WHEN? Early to mid-stage of a private companys growth cycle.Growth Capital typically focuses on rapidly growing companies withproven business models whereas Venture Capital may invest incompanies with unproven ideas.

WHAT? Minority equity investments, sometimes in several stages offunding (Series A, Series B) to accelerate growth of a young business from commercializing its products to

expansion into new markets and launching new products

more active operational control and strategic guidance than Private Equityfunding

WHOM?Angel investors, Venture Capital funds, Private Equityfunds


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Private Equity / Leveraged Buyouts

WHEN? Mid to late-stage of a companys growth cycle and generally coversinvestment in more established businesses

WHAT? In a traditional sense in matured markets, also known as Leveraged Buyouts and

typically involves the purchase of a controlling stake of a company. Many Private Equity players in Indonesia are open to minority stakes (coupled

with other forms of control). May include Debt and Mezz.

WHOM? Venture Capital Funds, Growth Capital Funds, Distressed Funds,Special Situations Groups, High Net Worth Individuals, Sovereign WealthFunds

Recent Case Examples:

o Bank Central Asia

o Berau Coalo BUMAo Matahari Putra Prima

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Pre-IPO Investments

WHEN? Typically when a company is very close to an IPO

WHAT?

Equity injection and/or financing to prepare company for IPO. Fundsoften used to:

Refinance pre-existing facilities with terms restricting the IPO

Corporate reorganisations

Acquisitions

Usually intended to be repaid through proceeds from IPO

Usually contains some form of equity kicker

Since many of these investments are now in default, this type ofinvestment is hard to raise


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Private Investment in Public Equity (PIPE)

WHEN? Companies with shares listed on a stock exchange

WHAT?

Similar to a Private Equity investment into private companies except ona larger scale and subject to capital market rules.

Does not involve acquisition of a controlling stake that triggers amandatory takeover and typically involves strategic partnership betweenthe controlling shareholder of a company and the Private Equity fund.

Attractive to Indonesian public companies, especially if there isinsufficient demand through capital markets

Recent Case Example:

Saban Capital PIPE into Media Nusantara Citra

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Why Private Equity?


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Why Private Equity?

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Private Equity funding remains an attractive source of funding fora company: that is not yet publicly listed

that needs funding to achieve its growth plans

that is not able to find a suitable strategic investor (or does not want thebusiness implications that come with this)

is prepared to give a significant minority stake upside if the company issuccessful

Private Equity fund could enhance the business of the investeecompany in:

raising debt finance

improving operational and management systems

enhancing financial controls

synergies with other investee companies

marketing and profile raising

preparing for an IPO or merger

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Private Equity Funding in Indonesia

Until recently, only a handful of recognised domestic PrivateEquity funds in Indonesia.

Flood of new GPs in the market raising between US$200 to350m, many funds have already secured their capitalcommitment.

Private Equity funds are interested but generally find it difficult toclose a deal in Indonesia due to the competition from strategicinvestors, complex transaction structures and pricingexpectations


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Raising Private Equity Financing

The Process

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Selecting a Private Equity Fund

Is this an investment the Private Equity fund understands

Do they have experience in the business?

Do they have relevant country experience?

How much money can the fund commit

Can it fund the entire investment itself?

Is it reliant on consortium or bank funding?

Do they want a controlling stake?

What business advantages can the fund bring Business synergies?

Operational support?

Reputation / credibility?

Assistance in procuring third party financing?


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The Process

A time-line and process for a typical Indonesian Private Equity deal: Initial Discussions and Preliminary Research (1-4 weeks)

Letter of Intent

Termsheet (often signed during due diligence).

Due Diligence Exercise (4-8 weeks)

Documentation (2-4 weeks)

Signing

Conditions Precedent (2-4 weeks)

Closing

Best Case Scenario: 8-10 weeks

3-4 months is more common due to issues arising in due diligenceand changes in structure.

Longer if deal is conditional upon governmental authorisations

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The Process Initial Discussions and Letter of Intent

Initial discussions will take place at a high-level between the PrivateEquity fund and the Company and its Shareholders

Once both parties agree that a deal makes sense, they will oftensign a Letter of Intent covering the basic deal-parameters (non-binding) and certain other binding terms:

Exclusivity

Confidentiality

Costs and Expenses


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The Process Term Sheet and Due Diligence

Before or during the due diligence process, the parties will usuallyenter into a Term Sheet:

Key commercial terms and conditions of the deal after detaileddiscussions

Usually subject to pricing assumptions, due diligence, tax structuringand final documentation governing the transaction.

Due Diligence:

Financial, tax, operational, technical and legal due diligence

If material issues arise in due diligence, this may cause the PrivateEquity fund to renegotiate the terms set out in the term sheet or evenabandon the transaction

Key features of the company revealed during due diligence often arereflected in the final legal documents governing the investment

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The Process Overview of Transaction Documentation

Investment: Share Purchase Agreement or Share SubscriptionAgreement; Escrow Agreements

Governance: Shareholders Agreement or Investor RightsAgreement

Financing: Facility Agreements; Mezzanine Facility Agreements;Security Documents; Intercreditor Agreements

Anci llary: Warrants; Put/Call Options


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The Process Share Purchase Agreement

Sale and purchase (or subscription)

Consideration

pricing adjustments

earn-outs and/or claw-backs

consider escrows

Conditions precedent

Pre-completion covenants

Comprehensive Representations and Warranties and Indemnities

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The Process Shareholders Agreement

Director and Commissioner appointment rights

Reserved matters that cannot be carried out without the Private Equityfunds consent

Cash controls eg signatory rights over bank accounts

Transfer provisions moratorium, Good/Bad Leaver, drag, tag, ROFRs, pre-emption

Non-competition, Non-Solicitation

Ensuring minority protection is also possible in PIPE transactions but becareful to avoid obtaining control and therefore triggering a MandatoryTakeover Offer requirement.


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The Process Conditions Precedent

Usually a Private Equity deal will be subject to conditions precedentwhich need to be fulfilled prior to Closing:

Corporate Approvals

Regulatory Approvals

Third Party Consents

Tax clearances (or opinions)

Disclosure letter

Legal opinions

(Possibly) commitments on senior bank financing

Investment Committee Approval

If certain conditions cannot be fulfilled, this can be a reason for alate-stage failure of the deal this is very frustrating for both sides

as a considerable amount of time and energy will have beenexpended

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The Process - Closing

Once all documentation has been signed and the conditions precedentfulfilled, the deal can proceed for Closing

Fund will generally need to call capital

On the Closing Date, the Company (and/or its Shareholders) will deliver theshares to the Private Equity fund, and the Private Equity fund will pay incash

The Shareholders Agreement will immediately become effective, and theCompany will appoint the Private Equity funds representatives to the Boardof Directors and Board of Commissioners

Any agreed cash controls will also take effect


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Auctions An alternative process for attractive assets

If the assets being sold are very attractive, the Company / Shareholdersmay consider an Auction process.

Auctions are rapidly gaining popularity, particularly with respect to strategiccash generating assets in the commodity and agribusiness sectors.

Advantages of an auction include: The Company / Shareholders maintain control of the process

Multiple bidders will hopefully drive a better price (or at least better terms)

May create direct competition between strategic purchasers (e.g. other corporategroups) and financial investors (e.g. private equity funds).

Disadvantages of an auction include: If the asset is insufficiently attractive, the prospect of a competitive process may

dissuade bids.

May take significantly longer and may be more intrusive, due to due diligenceand negotiations with multiple parties simultaneously.

Considerably more work, which can make this an expensive process.

Depending on the direction of the market, may not ultimately get a better price orterms.

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Ownership and Control


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Ownership (and foreign ownership restrictions)

Private equity funds will typically want ownership of theirequity stake

This can cause deal structuring issues, particularlyforeign ownership restrictions (either under the ForeignInvestment Law or other regulations, such as theBroadcasting or Mining regulations)

Deal structures for Indonesian Private Equitytransactions therefore entail the use of a variety ofinstruments to achieve an equivalent economic and

governance level.

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Control

This is one of the key issues encountered in negotiating privateequity investments in many jurisdictions, including Indonesia

Private Equity funds typically require a high degree of financial andcorporate governance controls (although they do not generally getheavily involved on an operational level)

A typical private equity investment may include the control terms inprevious slides


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Reserved Matters

A typical private equity reserved matters list wouldinclude controls over the following: Amendments to Constitutional Documents

Changes to the Share Capital (including options)

Payment of Dividends

Mergers & Acquisitions

Material new capital expenditures or business lines

Raising material financing

New contracts exceeding a certain threshold (possibly even inthe ordinary course of business and related party contracts)

Many Indonesian companies are unaccustomed to thislevel of control from an entity outside of the group

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FCPA / Anti-Bribery Legislation

International Private Equity funds (particularly those established inthe US and UK) are increasingly concerned about the implications ofthe US Foreign Corrupt Practices Act (FCPA), UK Bribery Act orequivalent Anti-Bribery legislation.

The restrictions under the FCPA and the UK Bribery Act may be farmore stringent than equivalent Indonesian legal requirements andpractice

Depending on the circumstances, investment by an internationalPrivate Equity fund may require a significant review of business

practices and the imposition of controls on the company becausethe Private Equity fund can be held liable in the US or UK foractivities of the company that are not in conformity with US or UKlaw


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Exit Strategy and Transfer Restrictions

The best Private Equity investments will have a significant elementof strategic cooperation and synergy.

However, Companies should be aware that the Private Equity fundis primarily making a financial investment. Private Equity funds typically have a limited life for their funding

(generally 5-10 years) and will need to be able to sell their investmentswithin this time frame to return funds to their investors.

Conversely, the Private Equity fund will usually need the existingshareholders to remain committed to the business for the life of theinvestment.

Ideally, the business will be successful, and the Company willsuccessfully IPO within this timeframe.

However, if this does not occur, the Private Equity fund will need tobe able to negotiate a private sale, and may require exit rights suchas drag-along or tag along rights and put options.

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Rights of First Offer / Rights of First Refusal

Right of First Offer (ROFO)

Right of First Refusal (ROFR)

Private Equity funds do not generally like these rights, particularlyROFRs, as third parties are very reluctant to put in the time andeffort of bidding for a deal, only to be defeated by the existingshareholders at the last minute. However, a company in a goodbargaining position may be able to negotiate a ROFO.


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Why Private Equity Investments

Succeed and Fail

in Indonesia?

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Reasons Private Equity investments fail to close inIndonesia: Failure to agree on pricing

The Company often considers the private equity funds desired return to beexcessive, while the fund may believe that it is making a high risk investment andneeds to be able to justify the risk to its investors through increased returns

Failure to agree on controls: Indonesian Companies are often unprepared for the intrusion of the controls

that private equity funding often brings as well as the additional regulatorycompliance burdens

Failure of condition: In the current environment, many private equity investments fail because a key

condition (e.g. consents from existing lenders) is not met

Due Diligence: Private Equity funds will want to do extensive due diligence on the business - this

typically is an intrusive and time-intensive process Disagreements concerning full disclosure often arise, which can injure the

relationship between the investor and the Company and imperil the transaction

Failure to obtain investment committee approval In the current environment, failure of a private equity fund to obtain investment

committee approval is a risk


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Reasons Private Equity investments break-down inIndonesia

The deal is too successful When a private equity investment is successful, it can make a huge return for the

Private Equity fund.

Shareholders can resent what they see as excessive returns of the PrivateEquity fund for not much work. (The Private Equity fund will see the returns ascompensation for the risks they have taken, however, these are not alwaysappreciated once the deal is successful).

Management disagreements

The other main reason for break-down of a Private Equity investment is failure toagree on the management direction of the company.

For example, the Company may wish to make significant expansion oracquisitions, whereas the Private Equity fund is more interested in a return.

A pre-agreed business plan and good Deadlock provisions can mitigate thenegative effects of a break-down.

One possible solution is a buy-out right at a pre-agreed rate of return, tocreate a clean-break.

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Reasons Private Equity investments succeed inIndonesia

Good synergy and working relationship between the Private Equity fund andthe Company

The Private Equity fund is able to facilitate relationships with lenders and keybusiness partners

The Private Equity funding is used for capital expenditure or acquisitionprojects that are successful and result in good returns.

The Private Equity funds sponsorship facilitates an IPO of the Company.

The Private Equity fund is able to create efficiencies in management,logistics, supply chain, inventory and financial functions.

Returns and incentives are properly aligned between the Private Equity fundand the other shareholders.

Fundamentally, the Company has a good business, which is enhanced by theinvolvement of the Private Equity fund, and all parties make money a truewin-win situation!!!


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Panel Session:

Questions gratefully received by the Panel: Joel Hogarth, Partner, OMelveny & Myers LLP

Siew Kam Boon, Counsel, OMelveny & Myers LLP

Joel Hogarth

Joel Hogarth is the coordinator of the OMelveny & Myers'Indonesia practice and acts as consultant to O'Melveny'sassociate firm in Jakarta, Tumbuan & Partners, as well asmaintaining an office in Singapore. Joel focuses primarily onMergers, Acquisitions, Private Equity and Corporate Finance andalso provides practice support for our other practice areas oncross-border transactions involving Indonesia.

Joel is an English and New York qualified lawyer specializing inacquisitions and structured investments into emerging markets.He has represented investment funds, financial institutions andcorporate groups on high profile Asian transactions since 2001.

Joel focuses on mergers and acquisitions and private equity, witha strong grounding in special situations and distressed situations.

He employs an extensive knowledge of equity and debtinvestment techniques, including preference shares, hybridinstruments, convertible debt, mezzanine and high-yield financingto efficiently structure offshore investments into emerging markets.

* Operating in Indonesia solely as a consultant to our associatefirm in Jakarta, Tumbuan & Partners, and not in his capacity as apartner of OMelveny & Myers LLP.

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Jakarta*:Tumbuan& PartnersGandariaTengah III/8KebayoranBaruJakarta Selatan 12130Indonesia

The Plaza Office Tower 41st FloorJl. M. H. ThamrinKavling 28-30Jakarta 10350Indonesia

Phone+6221 2992 1987Fax+6221 2992 8198

Singapore:9 Raffles Place#22-01/02Republic Plaza 1Singapore 048619

[email protected]


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Siew Kam Boon

Resident Office

Singapore:

9 Raffles Place#22-01/02 Republic Plaza 1

Singapore 048619

Tel: +65-6593-1826

Email: [email protected]

Siew Kam Boon is a counsel in OMelvenys Singapore office and a member

of the Mergers & Acquisitions Practice.

Siew Kam represents private equity funds, special situations groups,sovereign wealth funds and corporate clients in structured debt, equity andhybrid investments into public and private companies as well as on a varietyof cross-border transactional and related corporate matters.

Siew Kam has been a lead counsel on some of the largest and most highprofile recent deals in the region, including the acquisition of KingsSafetywear by Honeywell, the acquisition of MRI Trading by CWTInternational, the acquisition by an Indonesia fund of gold mines in Indonesiaand Malaysia from UK-listed Avocet, the sale of PT Jawamanis Rafinasi toWilmar Interntional, and the PT BUMA leveraged buy-out.

Siew Kam is fluent in Bahasa Indonesia, Bahasa Malaysia, and Chinese andis both Singapore and English qualified.

Siew Kam has been recognised by Chambers & Partners as a leading

individual for her Indonesian M&A work and is noted for her diligence andcommercial savvy. The International Financial Law Review identifies SiewKam as diligent, skillful and compassionate towards client service.

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approximately800 lawyers 15 offices 3 continents 23 languages

International Reach


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Beijing

Yin Tai Centre, Office Tower

37th FloorNo. 2 Jianguomenwai Ave.Chao Yang DistrictBeijing 100022Peoples Republic of China+86-10-6563-4200

Brussels

Blue Tower

Avenue Louise 3261050 BrusselsBelgium+32-2-642-4100

Century City

1999 Avenue of the Stars

Los Angeles, CA 90067United States+1-310-553-6700

Hong Kong

31st Floor, AIA Central

1 Connaught Road CentralHong KongS.A.R.+852-3512-2300

Jakarta*

Tumbuan & Partners

GandariaTengah III/8KebayoranBaruJakarta Selatan 12130Indonesia

The Plaza Office Tower41st FloorJl. M. H. Thamrin Kavling28-30Jakarta 10350 Indonesia+6221-2992-1988

London

Warwick Court5 Paternoster SquareLondon EC4M 7DXEngland+44-20-7088-0000

Los Angeles

400 South Hope StreetLos Angeles, CA 90071United States+1-213-430-6000

Newport Beach

610 Newport Center DriveNewport Beach, CA 92660United States+1-949-760-9600

New York

Times Square Tower7 Times SquareNew York, NY 10036United States+1-212-326-2000

San Francisco

Two Embarcadero CenterSuite 2800San Francisco, CA 94111United States+1-415-984-8700

Shanghai

Plaza 66 Tower 137th Floor1266 Nanjing Road WestShanghai 200040People's Republic of China+86-21-2307-7000

Singapore

9 Raffles Place, #22-01/02Republic Plaza 1Singapore 048619Singapore+65-6593-1800

Silicon Valley

2765 Sand Hill RoadMenlo Park, CA 94025United States+1-650-473-2600

Tokyo

Meiji Yasuda Seimei Building11th Floor2-1-1, MarunouchiChiyoda-kuTokyo 100-0005, Japan+81-3-5293-2700

Washington, D.C.

1625 Eye Street, NWWashington, DC 20006United States+1-202-383-5300

* OMelveny & Myers LLP in Association with Tumbuan & Partners

Offices