The PE Committee greatly appreciates the time and effort that the Taiwan authorities have dedicated to the suggestions made in the 2020 White Paper. We understand the challenge involved, as the government needs to look into and reconcile the interests of all industries and stakeholders.
Last year, we recommended providing more clarity on key issues related to the draft amendment to the Business Mergers and Acquisitions Act (M&A Act) that could have a negative impact on the investment activities of PE funds. Although the text of the amendment has not been finalized, we understand that some potentially negative articles of the draft M&A Act were removed in the most recent draft, for which we thank the government.
We were also pleased to note that the labor and public service pension funds are being permitted to invest in alternative assets, including private equity funds and to learn from media reports that the National Development Council (NDC) will likely be assigned to serve as the competent authority for the PE industry. We hope to see confirmation of that role in the near future.
In 2021, the PE Committee continues to suggest that the authorities take steps to facilitate the formation and operation of both single-family and multi-family offices, (i) by treating the activities of such offices as falling outside the scope of securities recommendation and/or securities management for which securities investment consulting and securities investment trust licenses are required, and (ii) allowing such offices to be treated as professional institutional investors so as to facilitate efficient management and the investment of family wealth in Taiwan.
Further, the Committee believes that the COVID-19 challenge presents a great opportunity for Taiwan (already proven to a certain extent) to enhance its role in Asia. We therefore suggest promoting Taiwan to become an Asia asset management center to facilitate regional asset management activities.
Below, the PE Committee elaborates on the above and other suggestions for 2021 in the spirit of continuing the positive trends evident over the past year:
Suggestion 1: Provide greater flexibility in connection with the approval process for foreign direct investment (FDI) and adopt a more proactive government role in promoting FDI from PE and M&A investors.
Most FDI into Taiwan falls within the scope of the Statute for Investment by Foreign Nationals and requires approval from the Investment Commission of the Ministry of Economic Affairs (MOEA). But this Foreign Investment Approval (FIA) process, which was originally designed for operating investments, does not readily accommodate some common features of private equity or M&A investing.
For example, when structuring M&A or private equity transactions, it is common for the ultimate sponsor to structure and obtain regulatory approvals and then create the legal vehicles to carry out the transactions. However, the FIA process does not facilitate this process because it requires the foreign entity investing into Taiwan to exist and apply for the FIA in its own name. The Committee recommends amendment of the “Required Documents and Guidance Notes for Investment Application by Overseas Chinese and Foreign Nationals” (the Guidelines) to permit the sponsor of a new corporation to act as the FIA applicant and then to report the formation of the new corporation and submit documents such as the Certificate of Incorporation after incorporation.
Similarly, item 13.1 of the Guidelines allows investment in the shares of a Taiwan target company by issuing shares of an existing foreign company to the existing shareholders of the Taiwan company in exchange for their shares in the target company but does not allow such a share exchange in the context of a newly incorporated company. Thus, the Committee suggests that the Guidelines be amended to allow the promoter or parent of a company to be newly incorporated to be the FIA applicant so that the transaction model under item 13.1 of the Guidelines can apply.
In addition, we urge the government to be even more proactive than in the past in promoting FDI. We would like to see the MOEA Investment Commission expand its official contact window to receive inquiries from foreign investors regarding all types of direct investment and application issues. The expanded window would demonstrate the government’s determination to attract both traditional FDI as well as private equity and M&A investment.
Suggestion 2: Expand permitted investment by public pension funds in alternative assets like private equity to help meet national pension fund minimum return obligations.
We learned from the government’s response to the 2020 White Paper that the labor pension funds have been permitted to invest in alternative assets, including private equity funds, as long as 1) the amount of investment in any single fund does not exceed 5% of the NAV (net asset value) of the labor pension fund and also does not exceed 10% of the units in the relevant PE fund, and 2) there is an exit period for such investment of seven years. In addition, according to the government response, investment by the Public Service Pension Fund in PE funds is permitted up to 0.6% of the NAV of the Public Service Pension Fund with an exit period that has been extended from five to 12 years. A seven-year exit period is quite short by international standards and the Committee suggests 1) extending such period for labor pension funds to at least 12 years in alignment with the Public Service Pension Fund standard and current PE market practice, and 2) generally expanding both permitted and actual allocations to private equity.
The data is clear that greater allocation to PE by government funds in Taiwan would be consistent with what occurs in other regional and global markets and could drive solid investment returns. Under current internal guidelines and/or regulations related to investment by government funds in offshore mutual funds (including PE funds), investments in offshore funds that invest more than 10% of their assets under management in China is prohibited.
Given that most global PE funds allocate a significant percentage of their investment to the Chinese market, the Committee recommends that such 10% limit be increased or eliminated for PE funds.
Suggestion 3: Categorize family offices (FOs) as professional institutional investors and create a regulatory environment that facilitates their efficient formation and operation.
The Committee appreciates the consistent attention that Taiwan’s regulatory authorities have given to encouraging the development of FOs in Taiwan, including both single-family offices (SFOs) and multi-family offices (MFOs).
Currently Taiwan FOs are treated as general investors for purposes of the types of products and services that can be marketed to them via onshore intermediaries or private-placement safe harbors. However, such offices represent significant family wealth and typically are staffed by experienced investment professionals. We therefore recommend that such offices be categorized as professional institutional investors to facilitate access to a broader range of products and services via intermediaries in Taiwan and private-placement safe harbors.
Also, the current regulatory environment does not facilitate the creation or operation of FO activities within a single entity and imposes unnecessary and burdensome licensing requirements for certain FO activities. Thus, we suggest establishing specific regulations or directions to define the permitted scope of activities of FOs so as to provide them with greater clarity in terms of their legal status and the applicable regulatory process. Specifically, FOs should not be required to be licensed as securities investment trust enterprises or securities investment consulting enterprises in order to carry out their activities and should have a sufficiently broad scope of permitted activities, including activities related to Environmental, Social, and Governance (ESG) funds, venture capital, private equity, and investments related to infrastructure, art, and real estate.
By way of comparison, under the Investment Adviser Act of 1940 in the U.S., an FO that meets certain criteria (such as providing investment advice on securities only to qualified family members or offices) can be exempted from requiring an advisory license. In Singapore as well, an SFO meeting set criteria may be exempted from licensing requirements. Even a non-qualified FO can apply to the Monetary Authority of Singapore for an exemption on a case-by-case basis. Elsewhere, Hong Kong has used its Limited Partner Funds (LPF) structure to retain and seek to attract family offices that might otherwise set up in traditional offshore domiciles such as the Cayman Islands. For such LPFs, there are no restrictions on investment strategy, amount of capital, or number of investors, and the regulatory agency, the Securities and Futures Commission, does not ask for investor information. Moreover, the Commission regulates the conduct of the manager, not the product itself.
Suggestion 4: Promote Taiwan to become an Asia asset-management and project finance center.
The PE Committee suggests that the authorities facilitate and encourage foreign asset management companies to establish their operating hub or base in Taiwan (including but not limited to management of alternative and private equity funds and family funds). For example, we recommend relaxing or removing restrictions on support by onshore SICEs and SITEs for the non-Taiwan activities of their affiliates by means of staff sharing and in-sourcing, as well as providing incentives such as tax benefits or residency qualifications. The advantages of building Taiwan into an Asia asset management center include:
Enhanced ability to attract and retain financial professionals;
The development of supporting infrastructure for cross-border transactions, including legal, accounting, consulting, leverage financing, and other corporate services. In particular, the growing participation of Taiwanese banks in leveraging financing in cooperation with leading PE firms has been profitable for the banks, which have been struggling to find good domestic risk-reward lending opportunities.