An Assessment and Analysis of Taiwan’s Private Equity Environment
(Arlington, Virginia, May 28, 2020)
Edited by Lotta Danielsson
Published by the US-Taiwan Business Council
Signs are piling up by the day of a worsening global economic slowdown, exacerbated and deepened by the COVID-19 pandemic, the U.S.-China trade confrontation, and complications from Brexit. Yet private equity companies are still eyeing opportunities in Asia and emerging markets in the coming years, in part for diversification and in part as they seek new opportunities to offset high pricing in developed markets.
Taiwan is not currently a number one target – or even a top ten target – for international private equity investments in Asia. The last peak in international private equity activity in Taiwan was over a decade ago. Since its heyday in 2006-2008, PE activity in Taiwan has been inconsistent. Funding commitment died off as sponsors ran up against political headwinds and irregular execution of the island’s regulatory review process, particularly when trying to exit deals.
However, the opportune time has now come for Taiwan to embrace foreign private equity as a partner to foster growth in its financial markets, its economy, and – as importantly – its international relationships. Competencies that international PE investment firms can bring to Taiwan include access to additional capital, management expertise, better understanding of international best practices, as well as regional and global connections that could help Taiwan companies and industries grow and expand.
Taiwan has many companies with world-class technology and processes that would benefit from the capacity that international PE firms bring. Taiwan is also looking for capital to support its plans to build a connected, green, sustainable, and self-sufficient economy. From offshore wind technology to indigenously developed defense articles, from artificial intelligence to biotechnology and medical equipment, the list of sectors in Taiwan ready to welcome private equity capital and expertise is ever expanding.
Heightened cross-Strait tensions and global challenges also offer an additional incentive for Taiwan to diversify its sources of fundraising. Against a backdrop of political, economic, and trade tensions that introduce uncertainty about established supply chains and flows of goods, Taiwan should look to private equity as a valuable and unexpected ally.
Nevertheless, many of the problems that stunted the Taiwan PE industry in the last decade remain valid today, such as Taiwan’s long-standing lack of transparency and predictability in its investment reviews. Taiwan still maintains a “negative list” of industries that are banned or restricted from investment by foreign nationals and overseas Chinese. Foreign PE firms and their advocates point to consistently complicated reviews, a process that is unpredictable and lengthy, and that is regularly hijacked by public opinion despite their business merits or any approvals already issued
Legacy regulations not reflecting current realities – and a lack of multi-layered, deep capital markets to cover the modern business needs of alternative asset investors – all have made Taiwan the road less traveled for PE heavyweights. Foreign PE investors have also identified significant issues surrounding taxation related to making investments in Taiwan, one involving acquisition costs and amortization, and the other involving financing costs and thin-cap rules.
Recent developments in the PE sector are encouraging, however. The Taiwan government is trying to meet modern business requirements and is attempting to bring more certainty and clarity to the investment application and review processes for all corporate stakeholders, including to alternative asset investors in the PE space.
Amendments to the Mergers and Acquisitions Act, which took effect near the start of 2016, bring flexibility and more certainty for involved stakeholders on both sides of an M&A transaction. In addition, a series of loosening measures initiated by the Financial Supervisory Commission (FSC) in 2017 would allow Taiwan’s insurance firms, commercial banks, securities companies, and investment trusts to set up and/or invest in onshore local private equity funds. The rules allow insurance companies to invest in national-level investment companies, as well as in subsidiaries of investment trusts set up for PE investments.
In November 2018, Taiwan also made a substantial overhaul to the Company Act, which legal experts say should create better conditions for entrepreneurship and innovation by providing increased flexibility in equity fundraising and in shareholder arrangements, improve regulations for foreign companies, and increase transparency.
Taiwan has certainly seen its share of successful PE deals even in the last decade – in less headline-making industries, with smaller funding sizes, and with more local participants. But if Taiwan wants to compete as a market against its regional peers, attracting top-tier capital and gaining first-class international know-how, it is the deals that have fallen apart that provide insights for future progress. The full policy paper provides a survey of Taiwan’s past experience in PE deals, highlights where things can go wrong in the deal-review process, explores the lessons learned, and offers recommendations to encourage a broadening and strengthening of Taiwan’s ties to international private equity markets.
The biggest hurdle for any investor looking at Taiwan investment targets appears to be overcoming the paranoia over Chinese capital, and how it may potentially gain control over Taiwan companies. The case studies clearly show that any hint of Chinese influence or money when bidding for an asset in Taiwan may lead to limbo and delays. This anti-China sentiment could potentially complicate any PE deal-making ahead, and yet re-building ties with foreign PE firms can strengthen Taiwan’s links with global capital and know-how, and can act as one counter to the influence of Chinese capital.
Taiwan’s recent successes at reshoring manufacturing during the U.S.-China trade confrontation, along with its exemplary response to the challenges posed by the COVID-19 outbreak, have well positioned Taiwan to grow as an investment destination. An unprecedented opportunity has arrived for Taiwan to build ties with private equity firms, to re-invigorate the island’s economy, and to raise its international standing as the go-to investment partner.
Improving the PE investment environment in Taiwan will likely require patient dialogue that could help counteract the vocal minority in Taiwan that argues against PE investments because of a perception that it encourages the foreign takeover of a local company. It could also help sway skeptics unfamiliar with the savvy use of debt as leverage to re-grow a company, and help assuage opponents wanting their say in the name of democracy and fairness.
The US-Taiwan Business Council offers the following policy recommendations to address the gaps that have kept private equity from thriving in Taiwan.
– Provide clearly defined regulations for private equity. Doing so – along with detailing exactly how the investment review process will be conducted and how long it might take – will reduce the opportunity cost for stakeholders, and would help formulate appropriate responses in an emotional public debate on the merits of PE cases.
– Educate stakeholders – not only PE firms, local industry representatives, and Taiwan government regulators, but also local shareholders and domestic civil society – in a manner that would allow them to more broadly understand how PE can add value to the Taiwan economy.
– Build a broad private equity community consisting of local companies, bankers, lawyers, shareholders, and regulators with the experience of seeing various forms of private equity deals through from entry to exit. Continuing to make good investments beget good human talent, and good human talent begets good investments in a virtuous cycle. A more robust PE ecosystem in Taiwan would also open greater opportunities for investment into PE funds by Taiwan’s public pension funds.
– Relax the zero-tolerance rule for media firms. Incidental minority shareholding by Taiwan government funds has placed restrictions on media properties, and some PE companies have had investment exit opportunities failing to materialize because of it. The Taiwan government should implement an easing of the zero-tolerance rule to add more flexibility to the process.
– Build and develop Taiwan’s financial and capital markets so that they are deeper and multi-layered rather than a smaller, local market where exits are limited. More efficient capital markets could also allay public concern about market performance and prestige when the deal entails de-listing from the local bourse.
– Improve transparency and make reviews of foreign investments more predictable, including developing a clearly marked separate track review for Chinese capital. Regulations that apply to Chinese capital seeking to invest in Taiwan should not be applied to foreign nationals making investments in Taiwan. Yet as long as the ultimate source of funding is from China, such investment will be required to be reviewed on a separate track. Understanding and transparency by PE funds regarding their deals, and avoiding Chinese funds for deals specifically targeting Taiwan assets, will help shape positive outcomes.