Episode Nineteen

Listing Domestically:

Pandu Sjahrir of Indies Capital

13 October 2020

(past transcripts)


ALAN  0:10  
Welcome everyone to the 19th episode of Indo Tekno, and the third instalment of "From Warung to Wall Street," a special series devoted to the path toward an IPO for the Indonesian tech startup. My name is Alan Hellawell. I'm founder of tech startup consultancy Gizmo Advisors, and Venture Partner at Alpha JWC Ventures. Recall that we've hosted Goldman Sachs Managing Director Andy Tai in both Episode 5 and 18 of Indo Tekno to discuss the IPO opportunity for Indonesian tech companies on overseas exchanges such as the NYSE and NASDAQ. Today we look at developments around domestic listings in Indonesia. Just to set the stage, the Indonesia Stock Exchange, or the IDX, is the world's 25th largest bourse by value, with a market cap of more than USD410 billion. It boasts daily turnover of between USD400 million to USD450 million. The iconic tech-heavy NASDAQ, by contrast, boasts average daily turnover roughly 10 times larger at USD4 billion. I've had the pleasure of knowing today's guest for a few years. Quite à propos to today's focus on the IPO, I actually first met Pandu Sjahrir on the floor of the New York Stock Exchange on the day that we IPO'ed Sea Group. That was October 20 2017, I believe. I was Chief Strategy Officer of the company and Pandu was back then, and today continues to serve as, Chairman of Sea Indonesia. Welcome to the show. Pandu. 

Thank you. Thank you so much, Alan. That was three years ago, exactly. And here we are. 

ALAN  1:49  
And here we are. Now Pandu, we could cite any number of reasons to invite you on to Indo Tekno; whether it's in your capacity as a member of the Board of Directors of Gojek, or Founding Partner of leading early stage venture fund ACVentures, or even as CFO of leading mining group Toba Bara Sejahtra. But the main reason we are keen to have you on to join today relates to your recent appointment as board member of the Indonesia Stock Exchange. Could you introduce yourself and also share with us the story of your appointment to the Indonesia Stock Exchange? 

Thanks, Alan for that. Alan knows me as an investor, and that's probably my main work, my main responsibility. With respect to my work with Sea in Indonesia, I'm quite active with Sea in terms of growing the business and also managing the different stakeholders, who are growing in leaps-and-bounds, I would say, for the last three years. And I think we've been very fortunate. We have over 8,000 people in Indonesia helping us build the businesses for Sea. With respect to this recent appointment - and it's still relatively recent, it's only been about two and a half months - this appointment is blessed by the OJK (the Financial Services Authority of Indonesia), which is like the FAS, or similar to the MAS, if you're in Singapore. I represent the listed company. We have a member on the board that has to be part of the listed company. It's an advisory role. And there's two tasks, I would say overall. One is deepening the capital markets with respect to having more local investors, including retail. And number two is deepening the number of issuers. I think of interest to this discussion is the New Economy companies or technology-related companies. 

ALAN  3:30  
Very interesting overview, particularly of the two main roles that you outlined. Any other additional color around your basic responsibilities and focus as a member of the Board of the IDX. 

You know, the IDX itself serves almost a public/private role. I would say it's probably more public because you are serving as a stock exchange. And this is not just related to equities. It includes bonds, and other financial instruments that are daily traded. So there's a number of issuance that can be done. A lot of it is overseeing. A lot of it is also to be able to manage different key stakeholders, and those related to the OJK. 

ALAN  4:08  
Now Pandu, I recall the Indonesia Stock Exchange planned to launch a dedicated technology section in 2019 to host initial public offerings, or IPOs, by startups, and to make it easier for tech companies to be able to list on the IDX, because they would have up to six years after listing to become profitable. Where are we with such a plan? 

The plan is there. Our goal today is to be able to what I call "hunt elephants." We have to chase the very large companies. What we were doing earlier has been very early stage companies. What we want to focus on is companies that are already, I would say, in the growth stage; no longer venture. A part of this new economy, and the companies that you know by name, are ready to consider the public market as a viable alternative to raise capital, which I think in today's environment is actually a very strong value proposition. So what I told the guys and the IDX was: "Hey, let's focus on the elephants, on the big names. Let's try to convince them to list in our exchange. And we tell them why Indonesia and the IDX is probably one of the best places for them to list. So we have to come up with the right reasons why they have to consider us. 

ALAN  5:23  
And so, beside leading "elephant hunts," can you discuss other initiatives that might relate to creating more of a pathway to the public listing of Indo tech companies? 

The Board of Directors of the IDX met with the biggest tech companies in Indonesia. We met the founders and also the leading managers. And what we did is we came up with a list of things why the IDX is a strong alternative. And at that same time, we asked them: "what are the key challenges that you face?" And by doing that, it's almost like a consultative way of doing things. When we met the founders, there's a similar three or four gating items that we need to solve. So that's what we're doing today, working together with the OJK to ensure that these are all issues that are viable, so that they realize that listing on the IDX makes the most sense for them. If you look at the top five tech companies in Indonesia, if they list today in Indonesia, there'll be part of the top 45 companies Indonesia by market cap. And with that, then they'll be part of this thing called the LQ45 Index, which is part of the MSCI. Right away, you're going to be part of an index, which means index investors will start investing in you. And that creates significant advantage. 

ALAN  6:34  
Absolutely. You may recall that one of the challenges with Sea Group was it didn't fit into the MSCI cleanly, by being Singapore domiciled, having operating companies in seven different markets, and then to top it off, being listed on the other side of the world. So that's a real attraction. Now, you talked about other gating factors, Pandu. And so, I guess, what are the biggest practical challenges of enabling these tech listings on the IDX? Sounds like you've been iterating with the elephants, or let's call them the "decacorns." Is it liquidity? Is it valuations? Is it the heavy retail participation in turnover? What is it? 

A couple of things. One, we just have to explain to them what is the fiscal attractiveness of listing. In Indonesia, if you list, the founders and the management: the tax for them to sell, the capital gains tax, is about 0.5% one time, and 0.1% afterwards; versus if you're private, and you sell, it's about 30%. So right away you see the discrepancy. So it's fiscally attractive for companies to list. And if you are selling the company itself or the business itself, selling shareholders only get charged 0.1%, which is much better than any other fiscal regime out there. And number two, the company itself, once you list in the next two years, we're lowering the corporate income tax to 22%, versus today at 25%. This is already part of the regulation. And then moving on will be 20% in 2024 I think if I'm not mistaken. So, the difference with Singapore, for example, is almost de minimis. Singapore is at 19%. And then the third one is about the issue of control of voting shares and the likes. For some founders, they view that as quite important. But we actually have precedents. For example, some of our SOE's have what we call "Red and White" shares, "Mera Putih" shares, where essentially they have bigger veto rights from the government, for example, than any other shareholders. And that obviously will be reflected in the price of the stock if you're a common shareholder. So that has actually been addressed. Now, the big one is obviously with respect to liquidity, valuations, etc. Because we as the IDX, we just have to admit, we haven't had a big IPO the last couple of years. It's been about three or four years since we've had a bigger than half a billion; USD300 or USD500 million of an IPO. And I think the issue is not because the market is not deep. It's just that we haven't had big companies looking at listing. And if you look at the tech companies, they really have gotten bigger only over the last two or three years. So I think this is an opportune time. If you look at the market today globally, most of the large tech companies are considering going public because they see the public as a deeper market than private, a bigger market than private and there's a strong pent up demand for high quality tech companies. And they know this. So now the question is, the typical question is, what about valuation, how deep is our market etc? And my argument is that if you look at retail, retail investors today have grown from 1.6 million last year to today, post-COVID, we're at 3.2 million in the span of less than 12 months. In 12 months too, the market itself has flipped from foreign to local, meaning the local participant now makes up close to 60% of the market. Before it was about 45% to 48%. So in the last 12 months, maybe thanks to COVID, and maybe because of a variety of other reasons, local participation has increased significantly. For foreign investors to be honest, because of COVID, they've pulled away from emerging markets. They've gone to the developed markets to invest. And what's good about this actually: the flow in Indonesia hasn't changed, which means the support from locals has been tremendous. Now, what we need to do is to increase the amount of high quality supply. So that's our job. 

ALAN  10:29  
Some very interesting facts and figures there Pandu. I guess as a continuation of this question, do you feel that there is a critical mass of smart institutional money in the market to support listed tech companies? And if not, what do you think needs to be done? 

Actually, the critical mass was definitely there. What we need is a critical mass of smart institutional companies. That's what we need. So that's why I said "elephant hunting" has got to start now. And our job is to be able to answer whatever questions they have, especially for the tech companies where the majority of their income or all of their income is coming from Indo. We should try to push for them to list on the stock exchange. But I think the demand and supply is definitely there. In fact, for technology, retail participation will be very strong. Because a lot of this retail comes from young people. On average, it's actually 25 to 35 year old middle class young people who see the capital market as a very strong place to invest capital compared to other asset classes, such as real estate. And the good thing is, some of these names are a part of their daily lives. In my generation, I would invest in Coca Cola. Today's generation will probably invest in Gojek, because that's what they see every day. This is the brand that they live with. I think this is as good of a time as any.

ALAN  11:43  
Understood, understood. So, it sounds like one of the biggest sea changes (sorry for the pun), there has been a very significant increase in retail participation in the market domestic account participation. Yes? 


ALAN  11:58  
But with regard to traditional IPO's such as the one you and I participated in, a lot of it's about educating institutional investment and making sure that long term capital signs up to these IPOs. And what are your thoughts about that institutional money in Indonesia?

For typical international investors, I would say that we as a market have to do more education about the landscape, not just about tech, but about Indonesia. For example, we have to do more education about the Omnibus Law that just got past couple of days ago. I think it's a game changer, especially in times of COVID. I think we're the largest country that is passing through a law that improves investment at a variety of levels, making the ease of doing business much better, yet at the same time, not much marketing has been done by us. And something that we need to improve is the quality of our PR and stakeholder relationship. And that's our job too. For the investor community we should do a "teach-in" about this. That's significantly important because the Omnibus Law truly is a game changer. In the last two decades, this is probably the biggest law that's been passed by Indonesia, that makes us far more competitive with respect to almost everything. So that's why I was so excited that it got passed through, but somehow, we haven't communicated it as well as we should. And that's what we need to do now. I think the challenge is to make people comfortable investing outside of China and the US. Then they'll go to India and Southeast Asia. I think that's kind of the way of most international Western investors. If you look at Chinese investors, definitely they're very comfortable with us. 

ALAN  13:30  
Yeah, I started joking during our IPO roadshow as an American citizen that I realized, before even talking about the Sea story, I had to help them find the country of Indonesia on a map. In other words, the levels of literacy around Southeast Asia in the US investment community were very low. But, to your great point, the successful IPO of Sea Group, and then the rising prominence of names such as Gojek and Tokopedia and others, I think, has alleviated that issue. But I do believe that education still is a deficiency with regard to institutional money. So very interesting. How do you think about dual listings Pandu? 

We're okay with dual listings, with the idea. I know a lot of the large tech companies also have shareholders that are international in nature and they're just not as familiar with the IDX, meaning they haven't had an experience. And this is fairly so of tech companies listing on the IDX because, we haven't had one! But our goal is that if you want to do it, or are happy to do it, go to a market where you will be prioritized. And Indonesia for sure, you're going to be "A1" in the way we communicate and we treat you. And if you go to another market, think of a strategic reason why that particular market is best. Will they be respectful of what you're doing and will you be sizable enough for them? I'll give you a good example. If you're in Hong Kong, thinking about Hong Kong, are you going to be as sizable as Ant Financial, because Ant Financial is "A1" for Hong Kong for example. Will you be part of an index if you're listed there? And if you're thinking about going to the US, ask the same question. What level of investor education are you going to do there? The good thing with us is that we've spoken already at the Hong Kong Stock Exchange, and they're very keen to work together in a variety of ways. They've been very open minded. So the good thing is that the communication is already there. And timing-wise it's easier, because there's only an hour difference. So I did tell them, we've gone through listing in the US, so we have the rare opportunity to look at both. And you also have to be structurally ready if you're thinking about dual listing your listing. It's not about the cost. It's about the human capital that you have to put in to be able to serve the cost of doing a dual listing. That sounds nice, but technically, it can also put you in a more difficult position in running a business. So these are considerations which we're trying to share a lot of the founders. For them, this is their very first time even thinking about going public. I know it's a very important decision. It sounds sexy at first, but I'm telling them, the sexy part only comes once. After that there's a lot of work that they have to go through over the lifetime. And I told them when you start to think of delisting, that's also another set of headaches. So just think carefully. 

ALAN  16:09  
Now Pandu, I'm not going to hold you to this answer. But what do you think is the timeline for successful tech listings domestically in Indonesia? 

I have a pretty strong view on this, given what's going on in the market today and our experience at Sea. And I think Sea has been a good precedent for anybody thinking about listing. The public markets today look for good growth, and there has been a lack of supply. So whoever comes first will become that supply. There's tremendous demand. And essentially, whoever comes in first; they're going to enjoy that first stage of demand. And for them too, right away they will be part of a big index. Index investors will be looking at you. And that's significant with respect to flows and in terms of liquidity of your stock. I told them: "I leave that to you guys." But I think everybody is working very hard to try to get it done next year. 

ALAN  17:00  
Wow, that would be great. And a nice "shot-in-the-arm," given how 2020 has gone. 

2020 has been good for the tech companies! 

ALAN  17:06  
That's true. 

For them, there's been a big acceleration of people going from offline to online. A lot of the economic benefit has moved to tech companies. What I told these founders is the fact is in a private market, there may be less appreciation today compared to the public market for the growth that you have. 

ALAN  17:24  
That's a great point. 

That's something that they should just think about. And that's why they're all in action now. 

ALAN  17:30  
Right. Now Pandu, if we think about the creation of a public market for tech stocks as a maturation process, what parts of the ecosystem need to mature more in your mind? Would it be the transparency of companies? Would it be a need for increasing sophistication of the financial tools that are available? What is it in your mind? 

I'll say it's more about the maturation of board membership, governance, transparency of reporting, and that's part of maturing as a company. I would say that Sea is probably one of the most matured ones out there, because they're forced to work in the public sphere, even though all the competition is private. And it's a bit unfair for those that are public. You get viewed every day and measured every day. For a lot of these tech companies, ask the same question: Are you ready for that maturation? Like it or not, they have to be ready. Why? Because you're part of a larger ecosystem now. And your company's also growing bigger and touches many different stakeholders. By going to the public market, you're being forced to become a much better company in terms of not just the business that you're doing, but also overall as a whole, as a structure, as an organization. Financial tools? I'm not too worried about that, because that's where the banks come in. And they're very sophisticated in terms of providing different financial tools available for investors. 

ALAN  18:48  
Exactly. Agreed. Considering this discussion on maturation, let's focus on the private markets. What stage of investment do you feel is well developed? Is it seed and early round? Is that the growth stage? And what stages do you feel are relatively underdeveloped and thus offer opportunity for investors?

I think seed and early round in Indo is becoming more developed, meaning that there's already a couple of market leaders, such as the company you're Partner of. Growth stage to be frank is not as well developed. I think the B and C round are relatively underdeveloped. The good thing about this is that it's still a fast growing stage all across. And another one that's underdeveloped is the business we have, which is the secondary business of Indies Pelago, which is buying secondaries providing liquidity to early stage seed and early round investors and founders. So that's kind of like a derivative of secondary capital. If you look at maturation, there's a bit more maturity in primary capital. There's very little development in secondary capital. But I think as the market gets deeper, both sides will improve and grow very fast. 

ALAN  19:55  
So a lot of interesting growth opportunity going forward. Now, Indonesia has been ground zero for some of the world's most intensive competition in the tech space. And you Pandu have had a front row seat in areas such as e-commerce and the sharing economy. What are your expectations around competition in these areas going forward? 

I would say in e-commerce, I think there are well-developed leaders now. And in terms of ride sharing, I think it's a business that over time needs to develop its economic model. In Indo, they learned early on that the business maybe is not about ride sharing. It's about delivering food, delivering goods, delivering financial services, and lastly, delivering people. For Gojek essentially, that's what it is. And the business model has been very different than the way it is in the US, for example, which makes it interesting. I think the next battleground will be in FinTech. But the large players, because they have economies of scale and number of users, would have advantage, especially those related to the C2C or B2C market. There's going to be a lot of changes. FinTech too has changed a lot in the last three years, positively. And there's probably less capital spent compared to e-commerce, and ride sharing especially. It has been more capital efficient. And I think winners will come in earlier than expected, which is good because investors do expect monetization faster than before. 

ALAN  21:19  
Pandu, a couple of big picture questions. What tech trends are you most excited about? Are there any specific verticals that you're focused heavily on? 

I would say e-commerce is still in the early stage. FinTech is definitely in an early stage. I would focus on that and derivatives related to that. For example, logistics and social commerce are still relatively new, but growing. Anything to do with financial services. FinTech, especially in the processing, not necessarily on the P2P side, or origination of loans. The other one related to Indo which I like, a bit unique, will be Agritech, meaning just using technology to be able to modernize the agricultural industry. And lastly is fisheries because, a bit unique to Indonesia, the fishery industry here is actually quite old and staid, and you can use a lot of technology, mostly on the logistics side, to go from the fishermen all the way to the end customer. Today, you probably need, similar to agri, potentially four to five middlemen before you get to the end market. Imagine if you can just bring it to one. So there's a lot of inefficiencies that many new companies are trying to tackle, which is awesome, because those are all old state economy companies that need to be disrupted for the benefit of those that actually create value. 

ALAN  22:33  
Pandu, how has the pandemic impacted your approach as an investor and frankly, your various other roles? 

The big learning comes from the companies that you invest in. The founders are trying to solve problems earnestly, and they haven't changed. And they've actually grown tremendously throughout this pandemic. And you then find out also that some founders are people that are really just doing it for financial gain and nothing more. And they have not worked as well. So I think the pandemic shows characters. You also see investors like ourselves being tested. When the time gets tough, what do we do? When times are easier, meaning better, everybody's a good investor. But what happens when times are tough? That's when you are really being tested. And the best thing is not just in terms of your performance, which is probably the most important (that's why you get paid), but also in terms of the way you manage the companies and the stakeholders that you have. So crises usually bring out the best or the worst in people. And has been a blessing for me, because in a way, we've the right way of approaching things. 

ALAN  23:34  
Pandu finally, what advice would you give to the aspiring entrepreneur with his or her sights set on an IPO? 

So with respect to aspiring entrepreneurs: look at where your company is and where you are in the lifecycle of your business. If you see that you are now already proven with respect to your business model at scale, you should think about the public markets. I try to encourage, if you're thinking of doing a couple of hundred million dollars type of fundraising, consider the public markets because the public markets are bigger than the private market, and deeper than the private market. And to be honest, as an entrepreneur, you will get less demands that are asked by your investors because they are in the end minority investors. The only thing is that you also have to be ready for the scrutiny from your stakeholders. By stakeholders, I mean not just investors. It's also regulators, the public, the media, because every day they can see the performance of your company. 

ALAN  24:31  
Pandu it was absolutely fantastic having you in today. We wish you and the rest of leadership in the tech and financial world in Indonesia the greatest of success in this "elephant hunting" expedition, and are very hopeful that we'll see the fruits of your labors both as a board member of the IDX and in your various other investment capacities. And let's look forward to an active 2021. Once again, we really appreciate you joining us today. Pandu 

Thank you. 

ALAN  24:59  
Well, that wraps up Episode 19 of Indo Tekno. We're very pleased to have you all join us. Terima kasih untuk mendengarkan. Sampai jumpa lagi!