Episode Nine

The Investor View:

David Halpert of Prince Street Capital

9 March 2021


ALAN  0:13  
Welcome back to the Indo Tekno podcast, Season Two, Episode Nine. I'm Alan Hellawell, Founder of Gizmo Advisors and Venture Partner at Alpha JWC Ventures. Selamat datang kembali. Kami harap Anda menikmati podcast ini. Today, I have the pleasure of inviting onto the podcast an investor whom I've known for many years. David Halpert, founder of Prince Street Capital has been a leading investor in frontier and emerging markets for many years now. I, in fact, owe much of my initial discovery of Indonesia to his expert insights and his personal introductions. I personally think that we are long overdue for a big picture discussion with a leading institutional investor like David about so many the tech trends that we have discussed over the past few episodes. How does Indonesia look to the public markets investor? How does its attractiveness compare to other emerging markets? I'm hoping we can discuss these and other topics with David today. Fun fact: David connected me to Balinese musician Wayan Balawan, who has composed the intro music to both seasons of the Indo Tekno podcast. So thanks for that, David, and welcome to the show.

Thank you, Alan, my pleasure.

ALAN  1:18  
Now, my first question, David: when and where did your connection to Indonesia begin?

So my connection to Indonesia began in the early 1980s as a backpacker, which I always think is one of the best ways to become acquainted with a country. And I just knew, almost immediately, that I wanted to have a long term engagement with the place. And that was followed by first working there, and then marrying a wonderful Indonesian lady. And now, investing in the country, which has been always a challenge, but ultimately very rewarding.

ALAN  1:52  
Now, David, you were one of the first individuals to begin talking to me about Gojek several years ago. What is the origin story there?

Well, I was a huge user when I was in Jakarta, of the ojek service. And as soon as I heard that there was an entrepreneur who was trying to organize these independent contractors and put them together in a more structured product, I thought, this is a huge plus. I think it's important that people understand the nature of Jakarta as a city. This is a place with a huge number of people and terrible traffic. And so Gojek's first order of business was to help middle class customers get to work and back without getting locked in that traffic jam. And I think sometimes foreigners don't appreciate just how useful that service is. If you live in a city with good public transportation like Singapore or Hong Kong, it's not the same experience.

ALAN  2:49  
And so you became an early investor in Gojek. Is that correct?

Yes. As soon as I had the chance to get involved, I was very excited. I should have bought more.

ALAN  2:57  
Understood. You were also one of our earlier investors when I was Chief Strategy Officer at Sea Group. How do you see them fairing in Indonesian e-commerce, gaming and FinTech going forward?

Sea has just done a brilliant job. I mean, the execution that that organization has carried out in that market is rather unique. I'm not aware of any other foreign tech company to essentially achieve local status as far as the customers and the regulators are concerned. So Sea's done a really good job. They've blown away Amazon and Lazada. And they've put Tokopedia to a sweat with Shopee. With FinTech, it's early days, I do see ShopeePay stickers up in markets and stores around the country. But I think it was really with their purchase of a banking license a couple of weeks ago that they showed us where they're gonna go. And it is increasingly my view that it's going to be a two player race between the Gojek-Tokopedia organization and Sea limited. 

ALAN  4:02  
Interesting. Now David, Prince Street Capital coined the term "DigDec" a few years ago. What does the term refer to? 

It refers to "digital decolonization". Strictly speaking, I'm not the first person to have spoken about it, but I may be the first person to have written about it. There is a sense among entrepreneurs and tech users and indeed programmers around the developing world that so much of their work is going to serve customers, shareholders, managers, computers elsewhere in the world. And they feel that the technology networks that are being built; whether Alibaba, Amazon, Tencent, Facebook, Google; these are increasingly kind of colonial relationships with customers, programmers, regulators in the developing world. And you have to think about this not just in terms of day-to-day interaction, but in moments of crisis. And Coronavirus was a very interesting example of this, where you had information being distributed very dynamically out of the US or China or Europe. But that information was frequently in English. That information was perhaps referencing people's behaviors that weren't necessarily the same all over the world. The daily life of a customer in working class Jakarta, let alone working class Lagos, or working class Karachi, is really radically different from the suburban lifestyle of the average American consumer. So these people need different things. They need different services. On their e-commerce sites, they need different currencies for their settlement, they need sometimes low bandwidth applications. And over time, I believe that this basic difference in how people live their lives is going to lead to a different landscape for tech investing. So I think that there will be still wonderful, huge global companies like Alibaba and Amazon, and they will be very valuable and very profitable. But I think there's a huge opportunity for local companies to compete with them and to claim back territory, whether in Southeast Asia, South Asia, Africa, or Latin America. 

ALAN  6:13  
Understood. Now David, what are your two favorite themes in "DigDec" right now?

So the e-commerce theme has gotten somewhat crowded. And so I think this year, the energy transition thematic is going to be important. And I still think the healthtech thematic has a lot of room to run.

ALAN  6:30  
Gotcha. Now, David, I just watched your "Indonesia Maju" vlog, in which you offer some really fascinating updates from the several months that you spent in Indonesia late last year, before coming back to Singapore earlier this year. You specifically offer some really interesting insights into the country's nickel mines, and the plans for vertically integrated battery, and eventually electric vehicle (EV), manufacturing. Can you tell us more about that? 

For sure. So, not every analyst realizes this, but Indonesia is now the world's largest producer of nickel. And it won that crown away from Russia over the last couple of years because of a number of ambitious new development projects in eastern Indonesia. Under the leadership of the Jokowi government, Indonesia has made a point of forcing miners to refine their products domestically. And that's been quite controversial ,with the copper miners in particular complaining that they were forced to do a value destructive capital investment. But in the case of nickel mining, it seems to have worked out, where the nickel mines of Indonesia and also for that matter of the Philippines are being refined in-country and turned into product that is then usable first for the steel industry, and then ultimately for the electric battery industry. Indonesia's plan, which they're quite open about, is to develop an electric battery manufacturing capability leveraging their raw material advantage from nickel. It's a risky bet, and I don't claim with 100% certainty that it's going to work. But I think it's a fascinating effort. And I think they have a better chance of success than most people give them credit for. If you look at Daniel Yergin's new book, "The New Map", which talks about how the map was significantly drawn up by the interests of the oil and gas industry 100 years ago, and now the map has been changed by developments like shale gas in the United States, but also by the energy transition and the shift toward renewables; Daniel Yergin says that the supply of strategic resources like nickel, copper, cobalt, lithium, he believes are going to create geopolitical changes centered around the need to secure the supply chain for the energy transition. And Indonesia has quite a strong hand to play at that as a major producer of both nickel and copper, and also as a sovereign state with a fairly unified central government and pretty dynamic leadership. There's plenty of room to mess it up, of course, and there always is with any kind of government-led industrialization program. But I believe between the labor reform that Jokowi passed into law late last year, and this development, it's looking more interesting than it's looked in a long time.

ALAN  9:11  
Gotcha. Makes sense. But I did want to challenge you on something you mentioned: do you really believe that Indonesia can become the manufacturing juggernaut that it has frankly never been, but that it would have to become, in order to become a builder of EV's?

I think it's important to remember that there are different kinds of EV's, first of all, and also that Indonesia is one of the world's largest manufacturers of motorcycles already. And to the extent that the EV movement is going to find expression in motorcycles, I think Indonesia is quite well positioned. Also for other products over time in specific niches such as furniture, footwear, some garments, Indonesia has achieved market leading positions. So it's not out of the question that, over time, Indonesia will become a significant player in EV's. Do I expect that we will have an Indonesian brand Tesla-type car that will compete in the Western markets toe-to-toe with Hyundai and Volkswagen? No, I don't. I think it's much more likely that Indonesia finds success and market relevance in niche positions in manufacturing. But even if they capture 5%-10 of the value chain over time, that's still a very compelling business from an Indonesian perspective, and a very compelling business for investors.

ALAN  10:41  
Okay, I'll buy that. Now, as I mentioned earlier, Prince Street invests in a number of other "frontier" or "emerging" markets. Which ones are your favorite? And how would you compare and contrast them with Indonesia?

So I'm increasingly finding that to achieve the critical mass that I think is necessary for a world class company and technology, we really need a significant domestic market, and we need a significant domestic population. So I'm increasingly looking at countries that have 100 million consumers, or at companies from smaller systems like Singapore that are able to reach out into regional markets, the way Sea Limited has done, and I'm pretty much agnostic about where the country headquarters is for a company like Sea Limited. I'm looking at ASEAN as a market for them, Latin America as a market for Mercado Libre, and so forth.

ALAN  11:38  
Gotcha. Now, David, I need your advice and input. Six months ago, we were all talking about the eventual listings of Indonesia's unicorns, such as Gojek, Tokopedia, and Traveloka. Today, not only are all three of these companies believed to be moving aggressively toward public listings, but I'm personally getting a number of somewhat panicked inbound queries from many of the country's next tier of tech companies saying: "Help me! I've just been told by this guy who just raised something called a SPAC that I'm ready to list this year. Our IPO target was 2023 as of our last board meeting, what do I do?" And so my question for you, David, is what are your thoughts on today's current situation?

Well, today's current situation is complicated as always, and the SPAC phenomenon, the SPAC revolution, is very recent news. And as interest rates go up in the US, it's possible that all this will come to a crashing halt. However, as long as it is out there, My advice to an entrepreneur of a startup (for example, your friends are mine - In this case, I'm not talking about unicorns, or decacorns, I'm talking about somewhat earlier stage businesses which are still burning cash), you should take this very seriously, because this capital is under a time limit. They have to deploy the money or give it back within a certain period of time. It is not particularly transparent, but the traditional IPO process wasn't all that transparent either. And this SPAC movement may not last forever, but in the meantime, there is capital available. And if an entrepreneur doesn't take the capital, and he needs it, there is a significant risk that his competition will take it instead, or her competition. So my advice is: take these meetings, look hard at it, realize that it's not transparent, but neither were the IPOs. And if it makes sense for you, if you have to change your business plan versus when you go public, it's not the end of the world.

ALAN  13:38  
Okay, but part of it is about the Indonesian startup's readiness to act like a publicly listed company. In your mind David, are Indonesian tech companies ready to share their results with public investors on a quarterly basis, etc?

The three companies that you mentioned, I believe, are essentially ready. And having attended a board meeting of one of them, they are as ready as, or more ready than, many of the public companies that currently trade on the Jakarta Stock Exchange. Now that said, if I get into the second and third tier, of course, there may be people who need to hire CFOs. There may be people who need to get their audits together. There may be people who need to settle their back taxes. There may be people who need to get some of the immediate family of the founder off the payroll. And these are processes which can be done quickly or slowly, depending on the urgency and the determination of the management team. But I believe by the standards of the Jakarta Stock Exchange, several of the tech ecosystem companies are ready to be public. Part of the tragedy of the last 24 months is that the value creation of the technology revolution has left the stock exchanges locally behind. Sea Limited is now the most valuable company from Singapore, and it is not listed on the Singapore Stock Exchange. And "GoToko" (a hypothetical merger of Gojek and Tokopedia) or Traveloka or some of these other enterprises in Jakarta will soon be more valuable than most of the listed companies in the Jakarta Stock Exchange. And if they don't list there, over time, it's not particularly healthy for the capital market. Think about this: If you are a senior employee of one of these companies, you have ESOP (an employee stock ownership plan). Those stock options get transferred into an account and eventually, when they are exercised, there is cash. If that cash is in Rupiah in an Indonesian ESOP account, it is more likely that money gets recycled into other investments in that country. If that cash is in an E-trade account, or Charles Schwab account or a RobinHood account in the US, it probably gets recycled into Tesla and Amazon. So for the ecosystems to really build healthy, thriving communities, It's better if companies go public locally,

ALAN  15:51  
Understood. Well, regardless of some of these challenges, I guess we can say that it's generally been a very good time to be an investor in Indonesia tech, both on the venture side and in the public markets. I know you referenced in your "Maju" vlog, the strong share price performance of tech names listed in Indonesia, such as Emtec. But my question to you is: what could go wrong from here?

There's always plenty of things that can go wrong in tech investing, in Indonesian tech investing, and in all tech investing. These are volatile securities, these are volatile businesses. The valuations are essentially notional. And there is plenty of room for value to be destroyed just as quickly as it was created. That said, this is still a huge country. It's a very significant economy. It's a trillion dollar economy. The capital market is smaller as a percentage of GDP than India, China, Singapore or Malaysia. And it's one of the few places in the world where technology adoption is accelerating rather than plateauing. So for example, Coupang in Korea is going public this week. It's a very impressive story. I met them a couple years ago. I was completely in love with them then I'm pretty much in love with them now. But make no mistake. Coupang is in an e-commerce market which is already substantially mature. And it is highly unlikely to grow over the next couple of years at the same rate as GoToko or Shopee, or indeed Mercado Libre, because it's a mature situation. And then it doesn't mean that Coupang isn't a good stock. It may be a great stock, but you have to think about valuation differently. When the ecosystem is mature. I'm increasingly attracted to the earlier stage ecosystems. I had a call this morning about a Russian company that is very interesting. I also think there's tons of opportunities in Africa.

ALAN  17:45  
That will have to wait for the "Russo Tekno" and "Afro Tekno" podcasts.

Well, Indonesia counts. Indonesia is early stage still. Although e-commerce has picked up, it's still early days. And second and third level business opportunities such as food, health care, etc. Those are still booming in Indonesia.

ALAN  18:06  
Understood. Let's go back to names that you have known for many years yourself, and that we've mentioned a couple times earlier in the podcast. If you were to be in charge of, for instance, let's just say merging Gojek and Tokopedia, what would you pay most attention to?

That's a particular example of two companies that have gotten to know each other quite well. They have investors in common. They have directors in common. As you know, one of the senior executives of Tokopedia used to be a Board Director at Gojek. So that one is kind of a unique story in tech M&A. But, who gets what is of course going to be very important and how management continuity is maintained, obviously that's going to be important. And pleasing the regulator, I think is existentially important in this and in all transactions now in ASEAN. So I believe that the government of Indonesia wants this deal to happen. And I think that's one of the most important reasons why it's going to happen. But as a shareholder, I'm happy and I think it's a much healthier merger than for example, Gojek-Grab or Tokopedia-Lazada, both of which were under discussion over the last few months.

ALAN  19:17  
Understood. Well David, true to form, some very interesting takes on issues of the day. Every conversation is a pleasure and we really appreciate you joining today.

Likewise, my pleasure. And just a message to the Indo Tekno community: it's early days. You have to be patient but you have a great opportunity ahead of you.

ALAN  19:38  
Message well received. 

Dan saya masih optimis sekali mengenai masa depan negera ini dan saya rasa bersyukur saya dapat partisipasi sebagai investor.

ALAN  19:48  
Okay, David. Now I'm really feeling put in my place. Fantastic. So we hope our listeners have enjoyed today's podcast. As always, please consider sharing any feedback that you have about the Indo Tekno podcast with us. Terima kasih telah mendengarkan.  Sampai jumpa lagi!