3i Group Plc, Europe's largest publicly traded private-equity firm, said last month it is seeking its first investment in Indonesia because the nation offers the biggest growth potential in Southeast Asia.

The London-based firm plans to close a deal in the world's fourth-most populous nation in the next one to two years, said Mark Thornton, its head of Southeast Asia.

3i joins private-equity firms including UK's CVC Capital Partners Limited and Washington-based Carlyle Group that have been drawn to the nation. They're being lured by an economy that has fared better than its neighbours during the global recession and political stability under President Susilo Bambang Yudhoyono not seen since the ouster of former dictator Suharto in 1998.

"You can't dismiss Indonesia; the demographics, the economics, everything is quite compelling," Thornton, who is based in Singapore, said in an interview. "But it's a market that's still very young and the deal sizes tend to be quite small; there isn't a deluge of deals today."

Private-equity investments in Indonesia could increase fivefold to as much as $3 billion (Dh11 billion) in 2010, from $570 million in 2009, according to estimates by the Hong Kong-based Centre for Asia Private Equity Research.

3i started its private-equity business in Southeast Asia in 2003 and has recently invested in Singapore-based companies, including reinsurer Asia Capital Holding, oil and gas services company Franklin Offshore and LHI Technology Pte, a medical-cable maker. In 2004, it invested in oil and gas explorer Pearl Energy Limited, which generated a return of more than 100 per cent.

Minority Stakes

The firm plans to make minimum investments of $30 million to $40 million for minority stakes in industries set to benefit from growing consumption as well as oil and gas companies, and health-care and financial services businesses, Thornton said.

"That's part of the challenge, finding businesses that are big enough where you can take a minority stake with that sort amount of capital," he said.

3i has yet to decide on how best to gain access to the Indonesian market. It is considering a number of options from setting up an office in Jakarta and hiring a local team, as it has done in China and India, to teaming up with an Indonesian private-equity firm, Thornton said. It may also set up a partnership with one of the well-known local families.

Economic growth will likely accelerate to as much as 7 per cent from 2011, providing a case for Indonesia's inclusion in the so-called BRIC economies along with Brazil, Russia, India and China, Morgan Stanley said in June.

Natural resources

Indonesia is the world's biggest palm oil producer and holds some of the largest deposits of natural gas and minerals such as coal and copper. China's and India's demand for resources has boosted raw material prices.

The Jakarta Composite Index reached a record on April 7. Indonesia's stocks are in a bubble and officials are prepared to put controls on capital inflows if needed to maintain financial stability, Perry Warjiyo, the head of the central bank's economic research and monetary policy division said on that day.

"It is easy to say there's an asset bubble in a country or sector; our job is to be stock pickers," Thornton said. "We think we are good at understanding value. If a business is high growth, then it's fine to pay a double digit multiple because on a price-earnings-to-growth ratio the investment looks fine." 3i seeks to make 2.5 times to three times its money from holding investments for a four-to-five-year period, he said.

CVC agreed to buy the retail unit of PT Matahari Putra Prima in January, the London-based buyout firm's first foray into Indonesia. Carlyle, the world's second-biggest private-equity company, is "actively exploring opportunities" for its first investment in Indonesia, Anand Balasubrahmanyan, a Singapore-based director at Carlyle, said in December.

Solid partners

It is important to get "very solid partners" in Indonesia, said Chris Chia, a managing partner of Kendall Court Capital Partners, a Singapore-based investment firm which provides mezzanine financing to companies in Southeast Asia.

"In Indonesia, because of the trickiness of the law, every time we go in we always make sure we ask the question: what happens when things go bad?," Chia said at a private-equity conference in Singapore.

While Indonesia's rank in Transparency International's corruption perception index rose to 111 last year from 126 in 2008, it remains in the category of nations perceived as corrupt.