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10 Emerging Markets to Watch

INDONESIA

The country has undergone significant changes to its regulatory framework to encourage investment, and the efforts have paid off

Indonesia is an independent republic consisting of more than 17,500 islands spread over 3,400 miles along the equator. The main islands are Java, Sumatra, Bali, Kalimantan (Borneo), Sulawesi (Celebes), Papua, Halmahera and Seram. The capital city of Jakarta lies in the lowlands of West Java, the most populated island. The country has approximately 251 million people, and more than 300 ethnic groups. It is the world's fourth-most populous country and boasts the largest economy in Southeast Asia with GDP growing at about 6 percent annually to about $895 billion in 2012. Indonesian is the country's official language. In tourist areas, English is commonly understood and spoken.

Opportunity

Indonesia welcomes investment. Since the late 1980s, the country has undergone significant changes to its regulatory framework to encourage investment, and the efforts have paid off. The country's labor force is young, and investors are interested in doing business there. Indonesia is an "up-and-coming country," says Roberto Ferranti (pictured), vice president of portfolio operations at Baird Capital Partners, the Chicago-based buyout fund of Baird Private Equity. "There are lower wages and easy access to an ample workforce. It's still too early for us, but it's on our radar and we periodically look at opportunities there for our portfolio companies."

Challenges

The main challenge the country faces after completing transactions is finding suitable management-level employees. Foreign investors have the additional challenge of getting Indonesians comfortable with selling their family-owned businesses to "outsiders."

Notable Deals

TPG was an early investor in Indonesia. In May 2012, Japan's Sumitomo Mitsui Financial Group Inc. (NYSE: SMFG) acquired a 40 percent stake in Indonesian lender PT Bank Tabungan Pensiunan Nasional for $1.52 billion. TPG was the seller and had invested in the bank in 2008. According to reports, TPG was able to gain a 30 percent return on equity. TPG also has a non-controlling stake in PT BFI Finance Indonesian Tbk, the largest independent financing company in the country, which boasts more than 50 locations.

"Indonesia is a thriving democracy and, unlike China and other countries, you have always been able to get money in and out of the country," says TPG's Dattels. "It's among the top emerging-market investment destinations."

TPG and London-based CVC Capital Partners are the only two foreign private equity firms that have completed deals in the country in the last couple of years. However, local players are popping up. Saratoga Capital, based in the capital city of Jakarta, raised about $450 million for investment and partnered with World Bank Group's International Finance Corp. to acquire a $112 million majority interest in electric company PT Medco Power Indonesia, as well as air carrier PT Mandala Airlines, both headquartered in Jakarta.

Future

There are still plenty of investment opportunities left. In Indonesia, private equity firms manage less than $5 billion, according to the Indonesian government, contributing only about 1 percent of GDP. One positive sign of dealmaking to come: In May, the Carlyle Group (Nasdaq: CG) hired Rajiv Louis, who worked previously for UBS AG (NYSE: UBS) for nearly 10 years, most recently as head of the bank's Indonesia activities, to lead the Washington, D.C., private equity firm's investment activities in the country.