The Committee appreciates the government’s openness to dialogue with industry stakeholders and acknowledges recent reforms aimed at addressing issues that had been discouraging PE investment in Taiwan. These reforms include amendments to the Company Act and Mergers & Acquisitions Act, as well as Financial Supervisory Commission regulations permitting securities companies to invest in PE and venture capital funds through subsidiaries.
The treatment of two major acquisition cases in the past year also represented important progress. KKR & Co. received approval to acquire a majority stake in LCY Chemical Co. via a “‘take-private” transaction, and Morgan Stanley Private Equity Asia was permitted to acquire a controlling interest in Microlife Corp. These deals injected needed capital into the acquired firms, which occupy important roles in Taiwan’s petrochemical and medical device industries respectively.
Further action to advance PE in Taiwan would significantly benefit the economy. According to McKinsey’s 2018 Global Private MarketsReview, the more than 7,700 PE firms in the world held a record amount of uncommitted capital of approximately US$1.8 trillion as of 2017, including about US$130 billion in Asia. Taiwan has much to gain if more PE investment capital flows into its economy. While Taiwan is not short of capital, international PE investment brings additional advantages not otherwise easily gained. PE provides enhanced and focused global management best practices to build the capacity of Taiwanese enterprises, and it brings regional and global linkages that can help Taiwanese firms expand beyond the local economy.
Like the Taiwanese society at large, Taiwanese companies are aging, with many founders now nearing retirement. PE offers a pathway to build institutions and provide succession planning for enterprises where succession remains an open question. By solving the succession question, PE can help ensure that many great enterprises built in recent decades will continue to prosper and contribute to Taiwan’s economy long into the future. Ensuring that Taiwan remains open to international PE also raises standards and increases the competitiveness of domestic PE firms, improving their own prospects to expand into adjacent markets.
The Committee offers the following recommendations as ways to continue the positive trends evident over the past year.
Suggestion 1: Provide more clarity on remaining issues that may be potential obstacles to PE investment.
The Committee would like to continue its dialogue with Taiwan’s investment and financial authorities with the aim of identifying obstacles and seeking solutions to enhance opportunities for domestic and international PE funds to contribute to Taiwan. The key issues needing greater clarity include:
Rules and procedures governing “take-private” transactions that involve de-listing from the stock exchange. The process needs clearer standards and greater transparency. De-listing should not be considered as a negative reflection on the Taiwan equity market. Rather, it is a frequently necessary step to facilitate the restructuring of an enterprise and refreshing of its management under the guidance of the PE investor. Re-listing often occurs after completion of that stage.
Also with regard to potential de-listing privatizations, whether the government maintains any official or de-facto restrictions based on the size of a transaction, market cap of the enterprise involved, or industry sector. If so, the government should provide information on the reasons for these restrictions.
Whether the government maintains official or de-facto ownership limitations or related qualifications or approval processes for international PE firms seeking to invest in specific sectors. In the past, some sectors have been deemed (or seemed) sensitive, including the financial services, telecommunications, and media sectors.
Whether the government has established or seeks to impose performance requirements or limitations as part of the M&A approval process. Examples might include those related to labor or employment guarantees or specific types of financial structures.
The PE Committee looks forward to the government’s views on these matters and will be pleased to be a resource for the government in what the Committee sees as our shared objective of fostering investment to build a more prosperous Taiwan.
Suggestion 2: Make a greater effort to attract projects from large-cap international PE firms.
Until recently, large-cap international PE firms, which typically focus on bigger deals and more mature companies that may already be publicly traded, have at times faced challenges obtaining necessary regulatory approvals in a timely manner, such as for equity market de-listings. This situation has impeded the inflow of large-cap investor funds that could otherwise assist with restructuring and re-energizing mature Taiwanese companies to position them for renewed long-term success.
Failure to attract large-cap international PE funds has placed the Taiwan economy and its companies at a disadvantage compared to its competitors. Data from the Asian Venture Capital Journal show that for the three-year period of 2015-2017, Taiwan attracted a total of only about US$1.4 billion in international PE funds. This figure compares to around $18 billion for Hong Kong, $29 billion for Singapore, and $36.8 billion for South Korea. Even many less-developed countries are faring better than Taiwan, including Malaysia with around $3 billion, the Philippines at $2.2 billion, and Vietnam at $1.8 billion.
Suggestion 3: Encourage the opening of Family Investment Offices as an important part of the PE ecosystem.
The creation of offices dedicated to managing the investments of a single wealthy family or group of families is an increasingly common trend – complementary to PE – both globally and in Asia. Many traditional hedge fund operators have closed their funds in order to open family-office types of investment vehicles. Given Asia’s ability to attract capital from around the world, some of these family offices are moving into the region, most often to Singapore and Hong Kong. Taiwan, with its large number of family-owned enterprises, is also seeing a similar trend domestically as well-to-do families open offices to manage their wealth and make investments.
The Committee looks forward to working with Taiwan’s regulators to develop an environment that will both attract international family office funds to invest in Taiwan and assist Taiwanese family offices to better understand important trends and operate more effectively.