JURNAL OPINIO JURIS
Vol. 18  Mei – September 2015
INDONESIAN VENTURE CAPITAL INDUSTRY:
(ASEAN ECONOMIC COMMUNITY) AEC STRATEGIC
PERSPECTIVE
Yusuf Ausiandra, S.H. LL.M
Abstrak
Industri pembiayaan modal ventura Indonesia sedang mengalami
penurunan ditengah-tengah bertumbuhnya industri wirausaha global.
Penyebab dari fenomena tersebut ditengarai berasal dari lemahnya
pengaturan modal ventura di Indonesia, yang sedang diubah
oleh
Otoritas Jasa Keuangan dengan mengamandemen Peraturan Menteri
Keuangan No. 18/PMK.010/2012 dan peraturan-peraturan terkait. Paper
berikut akan membahas peluang yang bisa diambil dari integrasi ekonomi
nasional dengan Masyarakat Ekonomi ASEAN. Dalam tulisan ini, Penulis
berpendapat bahwa revisi dari regulasi pembiayaan modal ventura harus
turut mempertimbangkan pendanaan modal ventura melalui ASEAN Fund
Passport dan dampak positif lainnya yang berasal dari integrasi ekonomi
ditingkat regional.
Kata Kunci: Venture capital; OJK; ASEAN Economic Community
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Introduction
Indonesia is currently undergoing an economical paradox. In the
globally impacted booming age of venture capital financed start-ups and
its success stories, the appearance of innovative entrepreneurs with
brilliant ideas, Indonesia against the prevailing trend suffers from a
weakening venture capital sector. From a total of 89 companies by the end
of 2012 only 70 companies remain with only 60 companies effectively
operating.1 Furthermore, most of Indonesian Venture Capitals (IVC) are
gradually weakening in terms of capital and 70% of the IVCs are
transforming into bank loan intermediaries or deviating from the purpose
of their juridical form as venture capital firms. The Indonesia Financial
Service Authority (OJK) intends to reform the current conditions by
publishing an upcoming new regulation. In parallel, Indonesia is
progressively liberalizing its financial and services market through the
Association of South East Asian Nation (ASEAN) framework agreements.
Historically, Indonesia is a founding member of the Association of
South East Asian Nations (ASEAN). As an ASEAN Member State (MS),
Indonesia has agreed the ASEAN Free Trade Area Agreement signed in
1
Asosiasi modal ventura Indonesia (Indonesian Venture Capital Association)
website. 6 June 2015. “70% Modal Ventura Berubah Jadi Bank”. The article could be
accessed
on
http://www.amvi.or.id/item-70-modal-ventura-berubah-jadi-039-bank039.html
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1992. This Agreement followed by a more specific agreement on the
liberalization of trade in services2 intends to liberalize trade in good and
services by gradually eliminating tariff and non-tariff barriers by 2015.
The ASEAN Free Trade Area after the liberalization process would form
the ASEAN Economic Community (AEC). The final objective of the AEC
would be to achieve regional economic integration in the form of a (i)
single market and production base, (ii) a highly competitive economic
region, (iii) a region of equitable economic development and (iv) a region
fully integrated into the global economy3. The AEC would include five
elements which are the (i) free flow of goods; (ii) free flow of services;
(iii) free flow of investments; (iv) freer flow of capitals; and (v) free flow
of skilled labor.
The gradual progress towards the formation of the AEC provides
an opportunity to adjust its regulatory reforms regarding the Venture
capital industry while seizing a new scope of action in terms of funding
access and spillovers that could result from cross-border cooperation and
free flow of services, goods, freer flow of capital and skilled labor at a
regional level. In the meanwhile, another more advanced regional
organization, the European Union, has already achieved further financial
integration. This paper would explore through a brief comparison to the
European Union regional regulations concerning venture capital further
2
3
ASEAN Framework Agreement on Services 1995
Declaration on the ASEAN Economic Community Blueprint 2007
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venues to be transposed to the ASEAN progress. This would shed light on
some strategies that could be pursued by the Indonesian government to
complement the forthcoming regulatory reforms. The paper would be
structured as following:
1. The issues encountered in the Indonesian venture capital industry
2. The main regulation in the EU concerning venture capital and the
current state of AEC
3. The required strategy to be pursued by Indonesia in regards to the
AEC.
I. The Legal Framework Indonesian Venture Capital Industry
1.1 The current legal framework
1.1.1
Regulation of the Ministry of Finance 2012
The underlying legal infrastructure for Venture Capital resides in
Regulation of the Minister of Finance Number 18/PMK.010/2012 on
Venture Capital Firms. The regulation of the Minister of Finance permits 3
types of participation with equity, quasi equity (convertible bonds) and
profit or revenue sharing4. The majority of Indonesia Venture Capitals
4
Article 2 of the Regulation of the Minister of Finance Number
18/PMK.010/2012 on Venture Capital Firms
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focus on the third mode of financing. In other words, Indonesian venture
capital firms only become another type of bank. Although legally valid,
the non-equity participation in financing disrupts entrepreneurial
motivation embedded in the venture capital concept itself. Equity or quasi
equity financing constitutes the fundamental contracting tools to stimulate
entrepreneurial through exit valuation rather than purely conservative loan
rents. The underlying concept of venture capital itself would be a form of
financing by equity participation in non-listed companies in order to
finance their incubation stage, their developmental stage until the end of
the fund term, which ideally should end by an exit through Initial Public
Offering (IPO.5 The financed companies are mostly Small and Medium
Enterprises (SME) and technology companies. The companies financed at
its start mostly lack prior track record, valuable industrial assets and often
only have an idea as a starting point. As a result, the start-ups are barred
from capital market and banking finance due to the high risk and
uncertainty of the business. This is where venture capitals become an
intermediary and a business partner between long-term funds such as
pension funds, public funds, and corporate funds and the start-up and SME
businesses.6
5
Gilles Mougenot. 2014. Tout Savoir sur le Capital Investissements. 5th edition.
Paris: Gualino lextenso editions. P.20
6
ibid
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The Indonesian venture capital regulation prohibits direct
fundraising to the public7 as contrast to global venture capital practice due
to a separate prudential requirements regime for equity funds. Indonesia
finance law, distinguishes between private equity contracts managed by
professional fund managers as would be elaborated below and venture
capital funds acting as mere finance intermediary. This schism highly
weakens the capacity of Indonesian venture capital to raise adequate (longterm) funds from adequate investors (professional investors), undermine
the quality of their portfolio companies8 and results in dependency to bank
loans as source of liquidity in financing their portfolio companies. The
structural inadequacy resides in bank loans as a source of financing for
venture capitals (short term debt structure) in one hand and high-risk
equity participation in portfolio companies in the other hand. A more
adequate source of financing would be long-term idle funds such as
pension funds or raising private equity funds from accredited wealthy
investors.
7
Article 41 of the Bapepam LK Regulation No. IV.C.5 concerning Private
Equity Contracts prohibits to contract fund from the public in the form of gyro and
deposits. Indonesian venture capital funds also are prohibited from raising pools of funds
from investors to be invested in their portfolio firms.
8
According to the Indonesian Venture capital Association in 2014, certain
venture capital companies has filed bankruptcy due to a drastic reduction in asset value
and bankruptcy coupled with incapacity to repay bank loans used to finance the
investments.
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1.1.2
Vol. 18  Mei – September 2015
Private Equity Regulation
Indonesian finance law adopts a separate rule governing private
equity contracts and regulates it through Bapepam LK Regulation Number
IV.C.5 Concerning Private Equity.9 The regulation confines the offering of
private equity to professional investors and with a threshold of 50
investors10.
Furthermore,
the
regulation
mandates
a
prudential
organizational structure to manage the private equity contracts such as (i)
minimum paid-up capital of IDR 25 billion; (ii) hiring at least 1 employee
who certified with Chartered Financial Analyst (CFA) or had registered as
fund manager under prevailing Bapepam-LK regulations and have
working experiences as fund manager for minimum 5 years; and (iii) has at
least 1 participation unit in every fund managed by him/her. Those
requirements demonstrate that the regulation prior to managing private
equity adopts a certain prudential level. In return, private equity funds
would be granted access to fundraising from professional investors.
9
Bapepam LK was Indonesian Capital Market Supervisory Agency in charge of
financing institutions along with Indonesian Investment Coordinating Board division and
the Minister of Finance until the shared authority of the three institutions was transferred
to a single authority since 1st January 2013. The single authority is the Indonesian
Financial Service Authority or OJK.
10
Article 2 of the Bapepam LK Regulation No. IV.C.5 concerning Private
Equity Contracts
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Indonesia has no specific definition of professional or accredited investors,
but for the purpose of the private equity regulation a private investor is an
investor with financial capacity to purchase participation in designated
private equity participation unit of IDR 5 billion or in the event that private
equity fund is pooled in foreign currency, net worth of the relevant
participation unit shall be equal to USD 500,000 or EUR 500,000; and
have sufficient knowledge regarding private equity fund investment
risks.11 In contrast to the regulation on private equity, the Indonesian
venture capital regulation12 omits the obligation of management by
specialized fund managers along with the above-mentioned prudential
structure. Henceforth, the Indonesian venture capital legal structure is
reduced to a mere financial intermediary function without access to
potential source of investments as for private equity funds operating under
the Bapepam LK Regulation.
The current regulatory framework for venture capital reveals to be
to fragmented and overly centered on the legal structure rather than on its
management aspects. The absence of a mandatory professional fund
manager function as in the private equity regulation would undermine the
quality of choice in terms of portfolio companies and subsequently hinder
11
Article 11 of the Bapepam LK Regulation No. IV.C.5 concerning Private
Equity Contracts
12
Regulation of the Minister of Finance Number 18/PMK.010/2012 on Venture
Capital Firms
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Vol. 18  Mei – September 2015
liquidity upon exit. Venture capital-backed companies mostly require
further incubation period beyond the 10 year before being able to proceed
to a profitable exit by IPO. This explains the domination of trade-sales exit
over IPO in more bank-dominated economy such as in the European
Union for instance.13 A private sales exit requires an ex-ante financially
sound portfolio of investments hence most of the venture capital
participations would be transferred to other private equity institutions
before being able to precede to a profitable IPO.
1.1.3
Indonesia
Venture
Capital
Structural
deficiencies
From the above-mentioned elaboration, Indonesian venture capital
regulation generates several issues for the industry. First, it favors the
formation of intermediary bank-like institutions rather than a partnership
relation between the venture capital (PMV) and the portfolio company
(PPU). The regulation forsakes the importance of managerial participation
by professional fund managers through equity financing. Secondly, the
regulation hinders access to more adequate source of fundraising in
particular accredited and professional investors falling under a special
13
Elisabete Gomes Santana Félix et al. Exit Decision in the European Venture
Capital Market. CEFAGE-EU Working Paper 2008/01. P. 24
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private equity regime. The venture capital regulation should have adopted
the same criterion for the venture capital industry by rendering mandatory
the management of venture capital under the same prudential regimes as
private equity. This policy would result in the qualification of venture
capital investment parts as a quality asset class for accredited investors.
As a result from the current regulatory deficiency, the Indonesian
Financial Services Authority (OJK) identified certain issues encountered
by the Indonesian venture capital industry in the form of deviation in the
financing model14. OJK through a press conference that 70% of the overall
total 70 venture capital firms in Indonesia avoid using “equity
participation” scheme in financing a business. The present condition infers
that the majority of Indonesia venture capitalists adopt conservative
stances in direct contradiction with the spirit and the term of venture
capital itself. The Indonesian Venture Capital Association posits that the
reason for a deviation is a result of difficulties of funding. The association
advances that Indonesian Venture Capital Association obtains funds from
bank loans15 causing a non-sustainable business structure. Venture capital
by nature differs widely from banks for its industry resides on “high risk –
high return” ventures.
14
http://www.ojk.go.id/siaran-pers-ojk-dorong-revitalisasi-industri-modal-
15
http://www.amvi.or.id/item-70-modal-ventura-berubah-jadi-039-bank-
ventura
039.html
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The problems of ex-ante source funding hereby is combined with
liquidity problems ex-post as observed through a reading of Article 7 of
the Regulation of the Minister of Finance Number 18/PMK.010/2012 on
Venture Capital Firms consisting of exit through IPO; Managerial Buyback or Private Sales (over-the-counter sales). The ministerial regulation
has clearly omitted the recent problems encountered in the venture capital
industry namely: post-investment liquidity problems. The development of
a secondary private market would be a partial solution to the issue. To
resume, the lack of “quality investments” by “qualified fund managers” in
the form of venture capital would also block access to secondary private
markets for venture capital funds. The secondary private market
constitutes an important source of liquidity in the New Venture Capital
cycle.16 The illiquid nature of venture capital investment requires the
establishing of a secondary private market to channel the transfer of shares
at a pre-IPO stage17. In considerations of the current deficiencies, AEC in
particular pertaining to the financial integration could have a positive
impact for the Indonesian venture capital industry.
1.1.4
Upcoming Reform under OJK
16
Mendoza, Jose Miguel and Vermeulen, Erik P. M., The 'New' Venture Capital
Cycle (Part I): The Importance of Private Secondary Market Liquidity (May 3, 2011). Lex
Research Topics in Corporate Law & Economics Working Paper No. 1/2011. Available at
SSRN: http://ssrn.com/abstract=1829835 or http://dx.doi.org/10.2139/ssrn.1829835 . P.11
17
ibid
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The Indonesian Financial Service Authority (OJK) has planned to
publish a new Financial Service Authority Regulation (POJK) in the
following months of 2015 to reform and revitalize the existing regulations
governing the venture capital industry.18 The reform would mirror a once
used Japanese strategy consisting of a Government-to-Government
initiative to enable Indonesian venture capital funds to access funding from
foreign sources. Furthermore, OJK would support the venture capital
industry through tax incentives, equity management programs, the
establishment of a Business Angel Network, and the strengthening of
funding sources by the formation of venture funds.19 By venture fund, OJK
implies the attempt to render possibly available for venture capitalist idle
funds detained by insurances, pension funds and government (public)
funds. Furthermore, OJK plans to impose the “accompanying function”
(surveying and intervening in portfolio company day to day management)
theoretically inherent in any US venture capital mechanism as an optional
fee based business. Up until this the date of writing of this paper, the
planned regulation is still under drafting by OJK.
27 April 2015. “OJK Susun Aturan Soal Modal Ventura”. The article could be
accessed on http://www.hukumonline.com/berita/baca/lt553de83c2f0f4/ojk-susun-aturansoal-modal-ventura
19
The summary of the press conference that took place on the 27th of April 2015
could be accessed on http://www.ojk.go.id/siaran-pers-ojk-dorong-revitalisasi-industrimodal-ventura
18
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In resume, the Indonesian venture capital industry to date still
encounters a dual level issue: (1) Functional – business problems (ex-ante
Investments, ex-post liquidity and management issues) and (2) Regulatory
framework problem. In context, Indonesian venture capital industry in
addition to national regulatory reforms would require (i) Long-term
venture funds; (ii) access to an extensive private secondary market and (ii)
Professional fund managers experienced in managing venture capital
funds.
The reform of the current regulatory structure would require a triptych
reform consisting of Actor, Fund structure and Regional Fund Mobility.
These reforms would be elaborated further below under the light of
regional integration movement in progress in ASEAN. But before
discussing the ASEAN financial integration scheme, a concise review of a
more advanced integration regime would be beneficial. The European
Union regulatory framework for cross border commercialization of venture
capital funds would be an adequate insight.
II. AEC 2015: Towards an ASEAN VC Passport
The European Union financial liberalization model resides on three
main pillars namely: (1) minimum harmonization; (2) mutual recognition
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and (3) home-country control.20 The minimum harmonization pillar refers
to the principle adopted by the commission favoring the “lowest common
denominator” in the process of harmonization amongst national
standards21. The mutual recognition principle resides on the mutual
recognition of the validity of rules in other countries upon minimum
agreement on essential rules. The third pillar, the home country control
principle, imposes responsibility upon the supervisory authority of each
member states when their member states financial institutions conduct
business in the territory of other member states. The three pillars govern
the underlying rational of the regional financial regulation in the European
Union including the Directives and regulation related to the Venture
Capital Industry discussed below.
2.1 EU Regional VC regulation model
The EU law on financial integration including the rules governing
venture capital is composed of a complex body of rules. Subsequently, the
present section would discuss briefly the main points and structure of the
20
Bongini, Paola, The EU Experience in Financial Services Liberalization: A
model for GATS negotiations?. THE EUROPEAN MONEY AND FINANCE FORUM,
SUERF Studies, 2003/2. Available at SSRN: http://ssrn.com/abstract=753502 . P. 12
21
22
ibid. P. 15
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Vol. 18  Mei – September 2015
main legal instruments that affects the operation of the Venture Capital
industry at a European level namely (a) The Markets in Financial
Instruments (MiFID) Directive; (b) The European Venture Capital Fund
Regulation (EuVECA) Regulation and (c) The Alternative Investment
Fund Managers (AIFM) Directive.
2.1.1
The MiFID
22
MiFID Directive
replaces the Investment Service Directive (ISD) and
represents the most complex piece of European Financial Service
legislations in recent years.23 In this regards, this sub-section would sum
the important points of the Directives considering that this regulation has a
limited impact on the over-all operations of most Venture Capital funds.
Two key concepts could be extracted from the Directive inter alia
24
: (1)
Investments firms should be granted access to operate throughout the EU
on the sole basis of authorization in their home member states. In other
words, investment firms could provide cross-border investment services
and establish branches in all Member States under a single passport; (2) a
high level of investor protection should be established wherever they are
established in the EU. MiFID lay down detailed conduct of business rules
22
Directive 2004/39/EC in Markets in Financial Instruments Directive
European Private Equity and Venture Capital Association (EVCA). March
2008. MiFID Technical Briefing Note. P.3
24
Ibid
23
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Vol. 18  Mei – September 2015
for investment firms setting a standard operating procedure for all member
states.
2.1.2
EuVECA Regulation
The European Venture Capital Fund Regulation25 constitutes a
specific regime dedicated to the venture capital industry. A regulation in
the EU law nomenclature has general and direct applicability towards all
member states26. In other words the regime is available in all the member
states with requiring prior transposition in the national law. The principle
elements of the regulation consists of three main features: (1) Fund
managers; (2) Qualifying funds (EuVECA) and (3) Qualifying portfolio
undertaking. The fund managers must fulfill the definition27 of (i) a legal
person whose regular business is managing one or more qualifying venture
capital; (ii) Established in the EU28 and (iii) managing funds below
AIFM29 Directive thresholds30. The EuVECA Regulation provides that the
25
Regulation No. 345/2013 on European Venture Capital Funds
Article 288 of the Treaty on the Functioning of the European Union (TFEU)
27
Article 3 C of the EuVECA Regulation
28
Article 2 (1) (b) of the EuVECA Regulation
29
The AIFM Directive (Directive 2011/61/EU) refers to the Alternative
Investment Fund Manager that would be explained further below.
26
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manager shall be either (i) an external manager, which is the legal person
appointed by the EuVECA or on behalf of the EuVECA and which,
through this appointment, is responsible for managing the EuVECA
(external Alternative Investment Fund Manager)31; or (ii) the EuVECA
itself, which shall then be registered as manager, where the legal form of
the EuVECA permits an internal management and where the Alternative
Investment Funds governing body chooses not to appoint an external
manager. An internally managed EuVECA cannot be appointed as the
external manager or another EuVECA. The Qualifying EuVECA refers to
(i) Undertaking for Collective Investments (“UCI”) other than UCITS32
intending to invest at least 70% of its aggregate capital contribution and
uncalled capital commitments in in “qualifying investments” such as
equity or quasi equity instruments issued by the qualifying portfolio
undertaking, loans granted to a qualifying portfolio undertaking, units and
shares of other EuVECA33; (ii) established within territories of a Member
State (“MS”) of the EU.
The Qualifying portfolio undertakings should be (i) established in
the EU or third country that is not listed by the Financial Action Task
Force on Anti-Money Laundering and Terrorist Financing (FATF) and has
30
31
Article 2 (1) (2) of the EuVECA Regulation
Article 3 of the EuVECA Regulation
32
UCITS relies on another regime laid down by the Directive 2009/65/EC
33
Article 3 (b) of the EuVECA Regulation
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signed tax agreements with the home Member State of the fund manager
and each other member state in which fund is intended to be marketed34;
(ii) in the for of a SME not admitted to trading on a regulated market or
multilateral trading facility, employing fewer than 250 persons, annual
turnover not exceeding € 50m / annual balance sheet total not exceeding €
43m.35
In addition, EuVECAs may only be marketed to investors who
have the experience, knowledge and expertise to make their own
investment decisions and properly assess the risks associated with such
investments.36 In distinction with the AIFM Directive explained further
below, the EuVECA Regulation revolves around the attribution of the
“EuVECA label” for the commercialization reserved for qualifying
venture funds opting in for the status. The intention behind the regulation
would be to provide an efficient framework for the financing of SMEs
across Europe through the formation of a single and simplified regime
within the EU. Fund managers instead of being under the obligation to
comply with 27 national laws would only comply with a single regime.
34
Article 3 (d) (4) of the EuVECA Regulation
Article 3 (d) (i) of the EuVECA Regulation
36
Article 6 of the EuVECA Regulation delimits the scope of professional
investors as those who are (i) elect to be treated as professional clients and (ii) are willing
to invest at least €100,000: and (iii) have confirmed in writing that they are aware of the
risks associated with their investment. A “professional investor” is any investor which is
considered to be a professional client or may be treated as a professional client on request
within the meaning of Annex II of Directive 2004/39/EC
35
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Under this regulation, a registered AIFM can manage a EuVECA residents
anywhere in the EU and can market it anywhere in the EU to professional
and certain other investors.
2.1.3
AIFM Directive
Since the entry into force of the AIFM Directive37, European
Union member states have adjusted their national securities laws in
accordance with the new categorization of the directive. In the
nomenclature of EU law, Directives should be transposed into the national
law in order to have full effect38. The Directive adopts a classification
based on the nature of the funds and the object of the investment vehicle.39
The rational on the directive would be the regulation of certain fund
managers on the premises of the importance of the fund. By importance,
the Directive aims to regulate funds that could trigger systemic issue due
to their volume with the main idea of protecting the investors of the fund.
The directive applies in the event, a fund manager in the European Union
37
Directive 2011/61/EU on Alternative Investment Fund Managers
In accordance with Article 288 of the Treaty of the Functioning of the
European Union (TFEU), a directive is directly binding to the addressed member states as
to the result to be achieved leaving the implementation to the discretion of the concerned
national authorities in regards of the choice of form and methods.
39
Florence Moulin and Daniel Schmidt. 2015. Les Fonds de Capital
Investissement : Principes juridiques et fiscaux. 3rd edition. Paris : Gualino-lextenso
édition. P.87
38
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manages a fund worth of more than €100 million in leveraged funds or
€500 million in unleveraged funds in which redemption rights are blocked
for a period of 5 years following the initial investment. The aim of this
directive would be to enhance transparency of Alternative Investment
Fund (AIF) managers subject to the AIFM Directive towards their
supervisory authorities, investors and other key stakeholders in order to
increase investor confidence and to regulate the main sources of risk
associated with alternative investment management. The Directive defines
AIFs
(Alternative
Investment
Funds)
as
“collective
investment
undertakings, including investment compartments thereof which (i) raise
capital from a number of investors, with a view to investing it in
accordance with a defined investment policy for the benefit of those
investors; and (ii) do not require authorization pursuant to Article 5 of
Directive 2009/65/EC40.
Subsequently, AIFM refers to the legal persons whose regular
business is managing one or more of the AIFs.41 The AIFMD applies to:
(a) EU AIFMs which manage one or more AIFs irrespective of whether
such AIFs are EU AIFs or non-EU AIFs; (b) non-EU AIFMs which
manage one or more EU AIFs; and (c) non-EU AIFMs which market one
or more AIFs in the EU irrespective of whether such AIFs are EU AIFs or
40
41
28
This refers to funds regulated by the UCITS directive
Article 4 (1) (b) of the AIFMD Directive
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non-EU AIFs.
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Vol. 18  Mei – September 2015
The AIFM directive has an interesting benefit for the
funds falling under or opting in the directive regime: the granting of the
European Passport. This attribute permits the funds to be marketed43 in
terms of fundraising all around the European Union. The target clientele is
limited to professional investors.44 The types of funds under the AIFM
regime are long-term and mostly high risked funds employing subtle and
intricate investing strategies requiring the investors to have a thorough
understanding of the nature of the funds. The particularity of the fund
investment strategy renders the funds targeted by the Directive nonadaptable for retail investors. In regards to venture capital funds, the AIFM
Directive would impact the funds in relation to the volume of the fund
hence in certain EU jurisdiction as in France; the category of funds has
been reduced to two types of funds namely OPCVM or UCITS and FIA
(AIFs).45 For the AIFs, a sub-division has been made creating AIFs
42
Article 2 of the AIFMD Directive
The AIFMD in article 4 (x) defines marketing as “a direct or indirect offering
or placement at the initiative of the AIFM or on behalf of the AIFM of units or shares of
an AIF it manages to or with investors domiciled or with a registered office in the EU”
43
44
Professional investors is defined in article 4 (ag) of the Directive as an
investor which is considered to be a professional client or may, on request, be
treated as a professional client within the meaning of Annex II to Directive
2004/39/EC
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dedicated to non-professional investors and AIFs dedicated to professional
investors.
A concise assessment of the EU venture capital regulatory
ecosystem would bring us two common underlying notions: (1) Regulatory
simplification by the creation of an optional unified regime for Venture
capital funds in order to granted market entry through out Europe and (2)
The common recognition of each home country financial supervisors in the
operations of its funds in other countries. These two notions permits to
present to reduce transaction costs by reducing unnecessary red tapes
while still maintaining necessary prudential measures to protect investors.
2.2 ASEAN Integration as Strategic Venue
2.2.1
The Regional Passport Strategy: CIS
At the 13th ASEAN Summit in Singapore in November 2007
ASEAN leaders jointly adopt the AEC Blueprint. Pursuant to the AEC
Blueprint the ASEAN Capital Markets Forum (ACMF) developed the
Implementation Plan approved by the ASEAN Finance Ministers at the
12th ASEAN Finance Minister meeting in Da Nang, Vietnam in April
2008. Amongst the initiatives figured the plan to develop a mutual
45
Article L.214-1, II Code Monétaire et Financier (French Monetary and
Finance Code)
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Vol. 18  Mei – September 2015
recognition framework to facilitate cross border offers of collective
investment schemes within ASEAN Collective Investment Scheme
(ASEAN CIS)46. On 1 October 2013, ACMF announced that the Securities
Commission Malaysia, the Monetary Authority of Singapore and the
Securities and Exchange Commission of Thailand have signed a
Memorandum of Understanding (MOU) to establish an ASEAN CIS
framework for cross-border offerings of CIS (ASEAN CIS Framework).
The ASEAN CIS Framework allows the units of an ASEAN CIS
authorized in its Home Jurisdiction to be offered in other Host
Jurisdictions under a streamlined authorization process, provided that the
ASEAN CIS satisfies the set of common standards specified in the
Standards of Qualifying CIS (the “Standards”).47 BNP Paribas Securities
Services summed up the key features as following48: (i) The Funds must
initially be assessed as suitable for cross-border distribution by Home
Regulator (ii) Funds can only invest in specific assets: transferable
securities, money market instruments, deposits, units in other CIS and
financial derivatives; (iii) Eligible assets have investment restrictions
according to qualifying standards; (iv) Funds must not engage in non-
46
ASEAN Capital Market Forum. 25th of August 2014. Handbook for CIS
Operators of ASEAN CISs. P.3
47
The
standards
could
be
accessed
online
at
http://www.theacmf.org/ACMF/upload/standards_of_qualifying_cis.pdf
48
BNP Paribas Securities New-letter. ASEAN Collective Investment Scheme
(CIS) Framework. The document could be accessed at http://www.securitiesservicesnewsletter.com/debt-issuers-and-arrangers/article/passport-development-opportunitiesseminar-draws-huge-crowd-in-singapore
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permissible activities such as securities lending, repurchase transactions
and direct lending of monies; (v) Additional rules apply for money market
funds, master feeder funds, fund-of-funds and exchange-traded funds ; (vi)
CIS Operators must have at least 5 years of experience in managing CIS ;
(vii) CIS Operators must have at least USD 500 million of Asset Under
Management (AUM) globally in all related companies ; (viii) CIS
Operator must have shareholder equity of at least USD 1 million and
maintain specified capital adequacy; (ix) Trustee and fund supervisor
must be resided and regulated in the same jurisdiction as the CIS it
oversees ; (x) Appointed local intermediaries and representatives must be
compliant with the Host Regulator requirements ; (xi) An independent
party is required for valuation and Net Asset Value (NAV) calculation ;
(xii) Eligible funds are subjected to on-going disclosure according to Host
Regulator requirements. In sum, ASEAN CIS increases efficiency,
accessibility and diversity of funds offered in ASEAN countries.
It seems that ASEAN has adopted a scheme similar to the
European Undertakings for Collective Investment in Transferable
Securities (UCITS)49, AIFMD Fund Passport, and EuVECA European
Passport Scheme in fostering regional integration amongst others. The
49
The UCITS (Undertakings for Collective Investment in Transferable Securities
Directive) Directive (Directive 2009/65/EC) permits collective investment schemes (CIS)
to be operated and commercialized throughout EU member states based on a single
authorization from one member state.
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overall gradual strategy towards regional integration consists amongst
others by: (1) Strengthening prudential regulations and harmonizing the
rules amongst member states (setting of common standards); (2) Listing in
the form of an inventory national laws that could pose an obstacle to
financial integration specific legal areas such merger and acquisitions,
distance marketing, transparency, accounting, bankruptcy law, competition
policy, etc.50 and (3) Mutual recognition amongst member states. As the
same with the EU regional fund passport schemes, the ASEAN CIS
represents an opportunity for the Indonesian venture capital industry in
terms of fundraising and commercialization of venture funds part
throughout ASEAN.
2.2.2
Indonesian Venture Capital Interest
In the midst of restructuring the current legal and business
landscape for the Indonesian venture capital industry, Indonesia could
seize the general trend of financial liberalization to negotiate a framework
with other ASEAN member states in accordance with the interest of the
national venture capital industry. As elaborated above, the Indonesian
venture capital suffers from three levels of deficiencies. First, the lack of
50
Gloria O Pasadilla. Financial Services Integration in East Asia: Lessons from
the European Union. Asia-Pacific Research and Training Network on Trade (ARNTNeT).
Working Paper Series No. 53 March 2008. P. 18
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professional managers seasoned by success investment exit track records
to manage the investments. Second, new sources of optimal and adequate
funds. Third, in order to diversify the risk repartition and extend the
clientele outreach in terms of composition, a regional mobility for
fundraising or the commercialization of the funds would be necessary. In
sum, Indonesian venture capital industry interests consists of: (1)
Professional fund managers; (2) External funds and liquidity structured in
private-public arrangements; and (3) Regional mobility.
2.2.2.1 Professional fund managers
In order to lure and capture valuable highly experienced fund
managers to fulfill the role of managing the venture capital fund, selecting
the portfolio of investments and participating in the management of the
portfolio companies, an attractive labor law regime along with
compensation packages should be put in place. The free flow of services
goal in the AEC blueprint could be geared towards a mutual recognition
for fund managers and other supporting professions followed by enhanced
free flow of professional fund managers between ASEAN member states.
The Mutual Recognition Agreement (MRA) for the accounting profession
constitutes a positive step.
2.2.2.2 Joint Private-Public Cooperation (Fund)
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Various attempts by different nations in engineering a mimetic of
the United States success story - Silicon Valley - has resulted in utter
failure. In classical venture capital literature, the root problem has been
traced to the simultaneity of three elements namely entrepreneurs,
specialized intermediaries (venture capital) and sufficient stock of
capital.51 Yet, attempts to fund a venture capital market solely through
public fund has failed due to passivity or deviation from main purposes of
the funds.52 In other words, a venture capital industry fully backed by an
enormous reserve of public fund could only disrupt the creation of a
sustainable venture capital industry in the long run. The AEC Blueprint
provides certain regional schemes and mechanism for investment in SMEs
in the region.53 One of the schemes scheduled to be accomplished in 2015
consist of the establishment of a regional SME development fund that
would be used as a financial source for SMEs that are undertaking
51
Ronald J. Gilson. Engineering a Venture Capital Market: Lessons from the
American Experience. Stanford Law Review. Vol. 55, No. 4 April 2003 pp. 1067-1103.
P. 1069
52
Two prime examples of these failures could be cited. First, there is the Chinese
experience with the China New-Tech Venture Capital corporation (CNVCC), which
deviated from its initial purpose of funding of financing technological innovation and
engaged in the real estate industry and money lending businesses. Secondly, there is the
German WFG experience which created a passive financial intermediary without
conducting supervising of investments ending in failure of portfolio companies.
53
The AEC Blueprints classifies the regional SME development framework
under the Equitable Economic Development section. The AEC blueprint refers to an even
more specific blueprint: the ASEAN Policy Blueprint for SME Development 2004-2014
(APBSD);
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business in the ASEAN region.54
Albeit the idea deemed positive for novel source of financing, a
Public-Private Partnership in the financing of innovation would constitute
a more positive impetus to develop a dynamic regional venture capital
market.55 The economic rational of this structure would be the spill over
effect or the transfer of knowledge from the private structure to the public
sector along with a lower cost of capital from the participation of the
public sector.56 Hence, the AEC constitute an opportunity for foreign
venture capital funds to cooperate in a public-private partnership scheme
channeled towards independent and competing privately managed venture
capital firms as in the Yozma or Corfu Project. 57 A variant of this scheme
could imply a tripartite cooperation between Indonesian private funds –
foreign (ASEAN) funds and public (national) funds or just a joint
54
Strategic schedule for SMEs development. AEC Blueprint P.54
55
The EVCA itself states its position to support the formation of a private
sector-managed pan-European fund-of-funds with a high commitment to venture
capital in its position statement of November 2014 entitled Accelerating
Innovation & Delivering Growth: Using the Jobs, Growth and Investment
Package to Attract Private Sector Investors to the European Venture Capital
Industry. The document could be accessed at the following link
http://www.evca.eu/media/340371/141109_EVCA_FOF_scheme.pdf
56
Marian Moszoro and Pawel Gasiorowski. Optimal Capital Structure of PublicPrivate Partnerships. IMF Working Paper WP/08/1. January 2008. International Monetary
Fund. P. 12
57
Op cit. Gilson. P. 1097
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investment scheme between Indonesian venture capital funds and foreign
(ASEAN) venture capital funds. The underlying rational remains the same:
lowering capital cost and spillover effects in terms of know-how, and
deterring dependence towards the use of public funds as source of
financing. The constitution of ASEAN level funds of funds configured in a
public-private structure would permit to secure a long-term fund
availability adapted to Venture capital financing.
2.2.2.3 ASEAN Fund Passport Mobility
The study of the EuVECA regulation and the AIFM Directive has
shed light on the strategic idea of a regional passport. As stated above, a
similar framework has been implemented between several ASEAN
member states under the ASEAN fund passport scheme or known as the
ASEAN Collective Investment Scheme (CIS).58 The CIS will allow fund
managers operating in one market to offer CIS (typically mutual funds or
unit trusts) directly to retail investors in the other two member markets. All
members will adopt a set of common standards in areas such as
qualifications, investment limits, and capital requirements for instance, to
58
ASEAN Collective Investment Scheme (CIS) has been established between
Singapore – Malaysia and Thailand A Handbook for CIS operators has been published on
25th of August 2014 on the matters related to different legislative requirements in each
participating jurisdictions and the procedures for the cross-border offering of ASEAN
CIS.
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ensure that retail funds are managed based on industry best practices.
Financial analysts have already estimated a sizeable volume of asset under
management (AUM), around $ 470 billion according to BNP Paribas
analyst in the event that Indonesia and the Philippines join the scheme59.
In the light of the tremendous progress at the ASEAN level,
Indonesia could opt-in the scheme and even proposes further specific
schemes related to the commercialization of venture capital funds
(fundraising) in other ASEAN member countries in analogy to the
European passport through the EuVECA label or the AIFM funds. The
grating of an ASEAN passport for venture capital funds would permit a
broader outreach towards professional investors in other member
countries, diversifying the regional investment options and unblocking
massive passive funds in the form of well needed investments in
innovative SMEs throughout Indonesia and the region. From a strategic
risk management perspective, the ASEAN passport would also be an
opportunity for Indonesia to partially transfer the burden of risk in venture
capital portfolio investments to investors in other region.
2.3 Recommendations
59
Laurel Theo CFA. ASEAN as a Single Market: What, When, How, and
Really?.
21
June
2014.
Accessed
at:
http://blogs.cfainstitute.org/marketintegrity/2014/06/21/asean-as-a-single-market-whatwhen-how-and-really/
38
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After briefly elaborating the structural deficiencies confronted by
the Indonesian venture capital industry, a reform along the above stated
vectors at a national level should be coincided with regional financial
integration
strategies.
A
multistate
cooperation
favoring
mutual
recognitions of venture capital funds as under the CIS scheme could in the
long-term support the liquidity and management problems plaguing the
Indonesian venture capital industry.
III. Conclusion
The Indonesian venture capital industry has undergone a steady
decline in number of firms and funds due to a deficient legal infrastructure.
The current structure of funds merely adopts a finance intermediary
institutional structure while undermining the important role of professional
actors (fund managers), optimum hybrid (PPP) fund structures, and
liquidity of investments alternative exits through fund mobility. The AEC
community represents a temporal venue to adjust the Indonesian industry
towards a regional and even global level. The triptych of vital reform
consisting of fund managers, fund structure and mobility would permit to
comprehend a holistic complement to the upcoming projected reform of
the Indonesian venture capital law by the Indonesian Financial Service
Authority (OJK). Fostering Mutual Recognition Agreements (MRA)
between member states for fund managers, optimization of fund structures
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and the establishing of an ASEAN Passport dedicated for qualified venture
capital funds would permit to revamp the industry. An insight of the
current regulatory framework applied to venture capitals in the European
Union provides valuable insight in drafting a national strategy to further
Indonesian venture capital interests. A referral to the ASEAN CIS
framework in force between Malaysia, Singapore and Thailand could be a
starting point to establish a similar regime for Indonesian venture capital
funds. The goal for Indonesian regulators consists of establishing a
regional cross-border recognition and commercialization regime for
Indonesian venture capital funds investing in Indonesian SMEs.
Furthermore, an ASEAN-wide recognized digital secondary market should
be established to sustain market liquidity in a broader market. If
successful, the Indonesian venture capital industry would be able to obtain
more investments for SMEs, ensure the liquidity of the investments and
transfer risks of investments to broader range of professional investors at a
regional level. In addition, Indonesian funds would be able to benefit from
spillover effects derived from regional integration in terms of venture
business know-how by working in joint cooperation with foreign seasoned
venture capitalist. Perspective of regional financial integration constitutes
an opportunity to be seized by the Indonesian financial services authority
in particular and the Indonesian government in general. In the light of
recent plans to reform the national venture capital regulation, the findings
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presented in the recent papers could contribute to enrich the perspective of
ameliorating the Indonesian Venture Capital Market in the long-term.
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JURNAL OPINIO JURIS
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