The PE Committee appreciates the government’s efforts to engage in dialogue with industry stakeholders and undertake recent reforms aimed at removing hurdles for investment in Taiwan. These reforms have helped create a friendly business and investment environment for management, shareholders, and other stakeholders through continuous follow-up of clarification and communication with the industry on the Company Act amended in 2018 and the proposed amendment to the Business Mergers & Acquisitions Act (M&A Act) in 2020.

In our paper last year, we recommended greater clarity on key issues such as take-private transactions, delistings, etc. We understand that the proposed amendment to the M&A Act responds to these suggestions to a certain extent, although it doesn’t go quite far regarding the delisting threshold and disclosure requirement. We assume that the implementation rules to be adopted under the proposed amendment will provide clearer disclosure requirements.

PE investment has made important contributions to Taiwan’s economy. In the first and second financial reforms in 2001 and 2008, for example, PE funds helped stabilize conditions by acquiring non-performing loans, making substantial investments in various financial institutions, and assisting the Taiwan financial industry in improving its performance.

Transparency has never been an issue for the PE funds. The above-mentioned transactions not only successfully brought in new technologies, resources, and concepts for the top-line market players, but also provided Taiwan products and services with exposures to global market. Given the current market turmoil due to the recent COVID-19 outbreak, it may be an appropriate time to partner with PE investors to assist in any recovery program by leveraging their global resource. The PE Committee is more than pleased to work with the Taiwan administrations to provide foreign investors (including PE funds) with a fair and open investment market.

While it is expected that the coronavirus outbreak will continue to have a significant impact on the global economy and reshape our way of living, the PE Committee believes that this also gives the industry a spectacular chance to find new business opportunities and learn how to thrive on challenges. The Committee notes that the strengths brought in by international PE funds include advanced industrial technologies, operational strategies, financial discipline, human resources, management techniques, new marketing ideas, ESG (Environmental, Social and Governance), etc. In this way, PE can make a great contribution to the industries earmarked by the Taiwan government for priority development, especially the 5+2 Innovative Industries that the Taiwan government has been focusing on for the coming decades.

The PE Committee offers the following recommendations as ways to continue the positive trends evident over the past year.

Suggestion 1: Enhance clarity on key issues that may be considered obstacles to PE investment. 

1.1       We are aware of concerns regarding PE funds investing in Taiwan banks, insurance companies, and other financial service providers, as well as concerns regarding circumvention of restrictions on Chinese investment via fund structures.  The Committee hopes to actively work with the government to develop guidelines to address these concerns in a manner that will set clear and balanced parameters while facilitating appropriate PE investment.

1.2       The Committee hopes that forthcoming amendments to the M&A Act will strike a balance between protecting minor shareholders and encouraging M&A activity. The draft amendment proposed by the Ministry of Economic Affair emphasizes the protection of minority shareholders’ rights, such as allowing minority shareholders voting against a merger or acquisition in a shareholders’ meeting to exercise appraisal rights, the disclosure of interests involved and the voting tendency of 10% of shareholders (whether having conflict of interest or not) before a shareholders’ meeting, and raising the delisting threshold from 2/3 of total shares to 3/4. The PE Committee urges that equal attention be given in the amendment to how to provide a friendly regulatory framework for M&A activities that may help improve business operational efficiency as indicated in Article 1 (Preamble) of the M&A Act. Further and most importantly, foreign investors should be treated equally and fairly, whether in terms of procedures, incentives, or taxation.

1.3       The Committee understands that the Taiwan government has introduced the 5+2 Industrial Innovation Plan which sets out a blueprint of industrial focus for the coming decades. We welcome a more friendly investment regulatory framework to allow more foreign PE resources and capital to participate in the plan, particularly large-cap international PE firms.

1.4       The Committee suggests that the Taiwan administration establish a task force to provide an efficient communi-cations channel through which the PE funds and PE Committee may share their global experience and help shape the governance level of the capital and investment markets in Taiwan.

Suggestion 2: Explore how prudent investment by public pension funds in alternative assets like private equity could help meet national pension fund obligations.

Taiwan is grappling with very high public pension obligations, with the National Audit Office projecting total contingent liabilities stemming from public pension payments of around NT$18 trillion (US$600 billion) over the next 30 years. There are several ways to address this challenge. Taiwan could reduce public pension benefits, which is already being done in some cases even if it is not always popular. Another option is to increase contributions from employees to close the gap between revenue and outlays for pension funds, but this step would place an increased burden on workers. Finally, pension funds could seek to meet their obligations by increasing the returns on their invested capital. This choice would reduce the pressure on the government and pension funds to take the unpopular steps of either reducing benefits or increasing contributions.

Investment by public pension funds into alternative assets such as PE is now an established practice in such developed global markets such as the U.S. and Canada and a growing trend in Asian markets including Singapore, South Korea, and Japan. These alternative investments are typically made up of a mix of PE, hedge funds, real estate, and infrastructure. There has been limited investment into alternative assets by public pension funds in Taiwan. By contrast, for large platforms in the U.S. such as CalPERS and Texas Teachers, allocations to PE and other alternative investments constitute 20% and 32%, respectively, and rise to 42% for the Canada Pension Plan. In Asia, the more mature sovereign wealth funds and pension funds have been increasing their allocations.

Singapore’s GIC had an allocation of 21% by end of 2017. Korea’s KIC had allocation of 16% in 2016 and in a report last September announced plans to raise it to 20% by 2020. The National Pension Service of Korea currently allocates 11% of funds to alternative assets, and according to a 2018 report, Korea’s Ministry of Health and Welfare has announced its intention to increase its allocation to PE and alternative assets to around 15% by the end of 2023 when its assets under management are expected to exceed 1,000 trillion won (US$931 billion).

Additional large funds in Asia that are now allocating to alternatives like PE include Japan Post Bank and Japan’s Government Pension Investment Fund (GPIF). Japan Post Bank reported in March 2018 that it had allocated about ¥1.6 trillion, or around 2% out of total assets of 79 trillion, to alternative assets. It is aiming to grow this to 9.8% of total assets (¥6.9trillion) by March 2021. In 2014 GPIF also announced its aim to increase alternatives like PE to 5% and is currently in this process.

The Committee recommends that Taiwan similarly adopt international best practice through prudent increased investment in alternative assets.

Suggestion 3: Expand the number of products in which family offices can invest in order to further attract single- and multi-family offices to invest in Taiwan.

The Committee appreciates the interest that Taiwan’s regulatory authorities have shown in developing the increasingly significant source of global investment represented by family offices, either in Single Family Office (SFO) or Multi-family Office (MFO) formats. Over 10,000 such offices are operating around the world, with nearly US$6 trillion in assets under management. To help attract such funds and develop this industry in Taiwan and help it better compete with other regional financial centers such family offices currently focus on, including Singapore and Hong Kong, the Committee looks forward to working with Taiwan’s regulators to make available a wider selection of wealth management products.

To help encourage family offices to invest and establish regional offices or headquarters in Taiwan, the Committee suggests expanding the types of wealth management and related services available for these types of investment institutions, including wealth planning, trust and corporate services, tax planning, family governance, and charities and philanthropy. Also, the Committee suggests removing restrictions on some types of investment products, such as eliminating the 30% limit of total net-remitted-in capital on exchange-listed convertible bonds for foreign institutional investors, while expanding the number of ESG investment funds and products available, as these are the subject of increasing interest by international investors and family offices.

We further recommend that establishment of an SFO be considered as part of the qualification for personal residency in Taiwan, similar to Singapore’s “Global Investor Program.” Incentive schemes for funds managed by SFOs could include income-tax exemption for most investment gains, similar to what is available in other financial centers in Asia, and Taiwan’s Double Taxation Agreements with other countries could also be leveraged to attract such investment.

The result will be a more diversified pool of investment for Taiwan, further development of Taiwan as a regional wealth management center in order to attract family office funds, and cultivation of the family office industry in Taiwan to benefit both foreign and local family office-type investment institutions.