November 27, 2023
JAKARTA – Many businesses in Indonesia remain under family control, but investment bankers say the segment offers ripe pickings for corporate action including initial public offerings (IPOs) once a new mindset – or a new generation – takes hold.
Indonesia has a low stock market capitalization-to-GDP ratio when compared to other countries, even in ASEAN, meaning less of the country’s economic productivity is reflected in the stock market.
The increased participation of family businesses in IPOs would contribute to a larger stock market value, says Andry Satrio Nugroho, an economist at the Institute for Development of Economics and Finance (INDEF).
“The lack of family business going public and the limited number of multinational corporations [MNCs] operating in Indonesia are significant contributors to the country’s low stock market-to-GDP ratio,” Andry told The Jakarta Post on Friday.
More domestic IPOs would also increase the number of reputable companies for investors, notes Muhammad Harits Zaenal, an investment banker with Sucor Sekuritas: “Therefore, IPOs are theoretically recommended for Indonesian companies.”
However, he added, many firms were principally reluctant to the idea of an IPO, sometimes because of their understanding of the IPO concept.
“It is noteworthy that, in family businesses, the relationships are intricate, and not everyone is inclined to trade shares of their company publicly,” stated Muhammad.
Family companies may prefer to retain ownership inside the family and not involve external parties, Muhammad said, adding that there was concern that IPOs could result in negative public sentiment if they do not proceed smoothly.
Aside from being generally inclined to shy away from going public, many business owners see no need to do so from a financing perspective. Prominent companies maintain the belief that they can effectively handle their finances without resorting to an IPO.
Muhammad, who advises many companies on the pros and cons of IPOs, cited the example of “an oil and gas company with a valuation in the trillions of dollars that has yet to conduct an IPO.”
For smaller firms, the cost to initiate an IPO, starting at Rp 4 billion, was simply too high, he added.
He also alluded to the increased public scrutiny that typically accompanies public listings: “For instance, if a company is perceived as being insufficiently concerned about a particular issue [of public concern], it may face a widescale boycott threatening to impact its revenue and related aspects,” Muhammad said.
However, he sees “a considerable amount of potential” for corporate action because of the presence of numerous sizable companies that remain in family hands. One impediment to some IPOs, he added, was that companies had yet to register with the government’s Online Single Submission (OSS) system, which would simplify the public dissemination of information in preparation for an IPO.
Mira Arifin, Indonesia country executive at Bank of America, noted that in the past two years, numerous respectable family-owned businesses had gone public.
“Along with dilution of stake, a lot of the time, there is a mismatch of expectations on valuations. This keeps a lot of family-owned businesses away from IPOs,” while some medium-sized companies still rely on bank loans for financial support, Mira said.
Lokky Win Wijaya, a native of Bandung, has been actively engaged in his family’s textile enterprise for a quarter of a century. Illustrative of many family business owners’ avoidance of publicity, Lokky declines to reveal the name of the company established by his parents in 1967 for the purpose of this article.
A supplier to prominent sportswear brand Nike and others, the company also exports its products to many countries including Cambodia, China and Morocco.
He had considered an IPO himself, but multiple factors had convinced him to refrain from going public for now, said Lokky, explaining that many business families failed to properly comprehend IPOs and sometimes their accounting did not meet required standards.
“Regarding the readiness for an IPO, my family business is currently unprepared, and others may be facing similar circumstances, ” Lokky told the Post on Nov. 15.
“When a company is preparing to go public, it needs to be ready to release annual reports,” he explained, noting that, if the company did not have a well-developed accounting system in place, this could present a considerable obstacle.
Another consideration, of course, was how appealing a company’s business field was to the investing public at the time of an IPO, Lokky highlighted.
Mira cited rare earth minerals, metals and mining and renewable energy as critical sectors in Indonesia, where Bank of America anticipated IPO activity, while sectors focused on the domestic market, such as insurance and digital infrastructure, were also seeing deals.
Barito Pacific raised Rp 3.13 trillion (US$ 201 million) in the IPO of its subsidiary PT Barito Renewable Energy (BREN) on Oct. 9, according to the company’s website.
Unlike many business families that shy away from public listings, Hermanto Tanoko from Surabaya has accomplished IPOs for seven of his companies, spanning various industries from beauty products to drinking water and paint.
Rendy Maulana Akbar, the CEO of a tech company he founded, said many families worried about the effect on their reputation in the event of an IPO failure, and that reputation was important for businesses looking to expand.
He also raised the issue of a lack of interest from family members to continue the business, which might in some cases make an IPO an attractive exit option.
“Given the complexities of family businesses, it is essential to maintain the perspective that it should be managed with a focus on the family’s interests. Meanwhile, those who advocate for an IPO believe that businesses can thrive when managed with professionalism and oversight from the public,” Rendy said.
Rendy believes his firm, which he declined to name, established in the early 2000s, could at this point conduct an IPO, which would let him as the founder allocate more time and attention to research and development.
“Considering the source of my business capital, which is primarily self-funded and derived from [business operations], I believe it would be wise to consider an IPO in the future,” Rendy said.