Indonesia's SWF strengthens private debt funding
From an initial government-funded capital base of $5 billion in 2021, the Indonesia Investment Authority (INA) has since grown to $9 billion of AUM and has deployed $3 billion of it. Several new allocations and joint venture projects are expected to be rolled out in the coming months by the sovereign fund, concentrated on INA’s four key sectors: infrastructure and logistics, digital infrastructure, healthcare, and green energy.
Last week, INA and the Development Bank of Japan (DBJ) announced a collaboration to deliver private debt facilities for mid- to large-cap Indonesian companies.
Sovereign funds globally typically allocate between one and nine percent of their portfolios to private debt solutions, according to consultancy firm Global SWF.
Private debt is gaining momentum in the Asia-Pacific region and in Indonesia’s credit market, which is valued at $400 billion, based on Bank Indonesia data. The nation’s debt investors have shown a strong inclination towards non-traditional funding structures.
The INA/DBJ deal will provide a variety of capital solutions, such as preferred equity, mezzanine, or a combination of equity and other forms of financing.
INA is also about to close a deal with GDS, the owner of China’s largest data centre. The strategic joint venture provides a platform for INA and GDS to develop a nationwide data centre platform in Indonesia.
INA
INA’s chief investment officer Stefanus Ade Hadiwidjaja told AsianInvestor the sovereign fund is also starting to develop a few greenfield investments with overseas companies, which have committed to building facilities and operations in Indonesia from the ground up.
“The data centre is a good example and we are also working with SK in Korea to create plasma vaccination manufacturing. This is very important for Indonesia – we need this healthcare security,” Stefanus said, referring to South Korea’s second largest business conglomerate.
Indonesia’s chronic infrastructure shortage is one reason why its SWF was modelled on India’s National Investment & Infrastructure Fund, which aims to use the country’s wealth but also to catalyse further FDI into the country. INA has now garnered more than $27 billion in co-investment commitments.
The challenge for the country going forward is to ensure that the economic momentum gained during the presidency of Joko Widodo does not dissipate once he steps aside in 2024.
“You can see in the current administration for the past eight years, how the development of infrastructure has been so successful,” said Stefanus. “We want to keep this rolling. So any existing assets that are already cashflow producing, we can acquire, like toll roads.”
“Obviously we want yield; we want the optimal IRR,” he added. “That can come a from a yield play or capital gain. For us, I believe there is a balance, with probably the larger portion being yield play, because of our infrastructure focus.”
INA doesn’t express its investment performance in terms of target returns. “We have a hurdle rate, but we can’t share that information.”
GOVERNANCE CONCERN
A key consideration for INA in its dealings with more established SWFs is the knowledge and technology transfer partners can provide. “What we call smart capital. So they bring the technology to Indonesia. But in many ways, working with SWFs and pension funds, the biggest value-add for us is governance,” INA’s Stefanus said.
Corporate transparency is still an issue for any investor in Indonesia, but INA sees itself as a catalyst, not only to bring capital but to help improve the overall asset quality.
“The way we do it is to treat any investment with the highest level of governance, in the level of transparency we expect, and in taking board and sometimes management seats, if necessary,” he added.
Knowledge transfer plays an important part in ensuring good governance. INA has partnered with Singapore’s GIC and China’s Silk Road Fund, and has co-invested with the Abu Dhabi sovereign fund ADIA, as well as Abu Dhabi’s state holding company, ADQ, and state investor Mubadala.
“ADIA and the big pension funds are the world’s largest infra investors. They have shared knowledge on how to handle all the nitty-gritty of toll road investments,” Stefanus said.
A common criticism of government funding in Indonesia is that the bulk of the money gets eaten up by Java, an island which features the nation’s capital and the economic heart of the country. While backing Indonesia’s largest companies and infrastructure assets, INA is conscious that it has to be even-handed.
“It’s hard if you have to allocate by island. Realistically, you can’t do that. But in fact, given that we are investing in the most important sectors and companies in Indonesia, the business outside Java is often the bigger portion.
“For example, on toll roads we invest in trans-Java and trans-Sumatra. Our biggest investment is in trans-Sumatra. Under this administration, we built the toll road from Lampung all the way to Aceh," Stefanus explained, referring to cities on Sumatra, Indonesia's largest island.
This story has been updated with new details in para 5.