beyondbrics

A troublesome state-owned bailed-out bank in Indonesia that has been the subject of two investigations. An acquisitive overseas private equity fund manager looking for a finance vehicle. Sounds like a perfect fit.

Chad Holm, a former M&A banker with Citigroup and Bank of America Merrill Lynch who now runs Yawadwipa (a merchant banking and investment advisory group paired with a private equity arm), wants to buy PT Bank Mutiara. It’s not a deal for the faint-hearted.

Bailing out then-named Bank Century in 2008 for around $700m may have averted a minor banking crisis, but it has cost the Indonesian government a finance minister, seen the suspension of a central bank governor, and prompted investigations by the Corruption Eradication Commission and the Supreme Audit Agency. There were even riots outside the parliament building when a motion debating whether criminal charges should be brought descended into chaos.

So why is a relatively new private equity fund in Indonesia prepared to brave the messy politics to buy the bank in a deal potentially valued at $750m?

“We look at this business not necessarily as a pure private equity play but as a platform on which to grow the broader base of our financial services businesses,” said Holm. “We look at it as a stabilised retail platform with some [small and medium enterprise] businesses, some very good foreign exchange businesses in there, and it’s not tied to a family.”

Bank Mutiara might not be linked to a family (with all the management issues that entails), but the baggage it comes with is enough to trigger some hefty excess luggage fees.

When Indonesia’s government bailed out Bank Century in 2008, the plan was to turn it around and sell it within three years. And indeed, the bank has improved: its assets have nearly doubled between 2008 and 2010 to Rp 10.8tr, and it turned a net profit in 2010 of Rp 218bn after losing Rp 7.3tr in 2008.

But a sale has not yet happened, as the agency managing the bank has rejected a number of bidders as unqualified (without specifying why they were ineligible). And the political wrangling has persisted, with the two investigations being disputed by politicians.

In March 2010 parliament voted by a clear majority that the bail-out was illegal which prompted the investigations that examined whether the government overpaid deliberately, and where the money from the bail-out went. A lengthy parliamentary inquiry dismissed the claim that some of the bail-out funding was used in the re-election campaign of President Yudhoyono.

So why would a neutral third party try to get exposure to Indonesia’s growing financial services sector by jumping into such a politically messy situation where other bids have been rebuffed? The problem is that if you want to buy an Indonesian bank valuations for listed entities are extremely high because of expectations that banks will benefit from the country’s growing middle class. Hence the interest in Bank Mutiara.

Holm is not blind to the challenges, nor is he looking to get embroiled in any political mess: “We have absolutely no interest in getting involved in a process that ends up with a bunch of political grandstanding and the like. To the extent that politics get involved in the process we will likely have no interest in continuing to invest our time and money.”

And yet, he says, he’s confident that the government, which is “seeking to be as open minded and transparent as possible” will give credence to their bid. Plus, he says, “I think people are somewhat rational in terms of making sure that the time and the money that’s been invested in this doesn’t go for naught.”

Private equity is taking off in Indonesia. Although private equity groups are estimated to manage assets of only $5bn, investors, such as a TPG-affiliated local fund, have recently raised major new funds. And Yawadwipa itself has just launched a $1bn fund in the country.

But whether Yawadwipa can do a deal for the bank “in a timely manner, on the most advantageous terms, and absent political rhetoric,” as a statement from the group says, remains to be seen. The private equity investors focusing on Indonesia will be watching closely how receptive the market is to their attempt.

Related reading:
Jakarta stages rescue of troubled Bank Century, FT
Tensions rise over Indonesia bank rescue probe, FT