KKR deal highlights allure of Taiwanese PE

KKR re-entered Taiwan’s private equity market last week after more than a decade, agreeing to acquire all shares of Taipei-listed LCY Chemical Corporation for about $1.56 billion.

The global private equity giant invested from KKR Asian Fund III, which closed on $9.3 billion in June last year. The KKR-led consortium includes LCY’s employees and some members of its founding family, according to a statement. LCY will be KKR’s first privatisation in Taiwan.

KKR’s last deal there was in 2007, investing $230 million worth of convertible bonds for a 16.1 percent stake in electronic components manufacturer Yageo. The firm made a buyout offer for the company in 2011 which was rejected by the island nation’s Financial Supervisory Commission over concerns about the debt involved in the deal and minority shareholders’ rights.

Private equity deals in Taiwan are few and far between. Some examples are CDIB Capital’s 2017 acquisition of World Gym Taiwan, MBK Partners’ 2007 acquisition of China Network Systems and 2008 purchase of Gala TV, and Carlyle Group’s 2006 acquisition of TV station Eastern Broadcasting.

Government delays and the lack of transparency in approving bids are two main issues private equity firms have struggled with over the years, as seen with KKR and Yageo in 2011, when the island’s regulators blocked a management buyout, and MBK’s long-stalled attempt to offload its stake in China Network Systems to Far Eastone Communications.

Policy instability, restrictive labour regulations, insufficient capacity to innovate and inefficient government bureaucracy are listed as the top four hurdles for conducting business in the country, according to the World Economic Forum’s latest poll of global business executives.

Yet, Taiwanese companies have managed to attract overseas investments in sectors such as technology, media and telecommunications, semiconductors and renewable energy. According to data from law firm White & Case’s M&A Explorer, the TMT sector recorded $50.4 billion worth of private equity-backed deals from FY 2006 to YTD 2018, while industrials and chemicals saw $24.9 billion of deals for the same period.

Baldwin Cheng, a Hong Kong-based partner at White & Case, noted that while private equity deals are limited in Taiwan, the firm is seeing activity in the market. “There are assets in the healthcare sector in Taiwan that could be interesting to private equity investors, particularly in light of the Hong Kong Stock Exchange opening a bio chapter and the prospect of the exchange opening a meditech chapter by the end of the year.” Acquisitions by private equity are still subject to various government approvals, he added.

The country has also emerged as a destination for international investors in the energy sector, White & Case noted in Taiwan: Navigating regulatory and deal risks in a rapidly shifting landscape. By 2025, Taiwan aims to be nuclear-free, with 20 percent of its energy mix from renewable energy and 50 percent from natural gas. Offshore wind is a key component of this goal, with the country targeting 5.5 gigawatts of offshore wind capacity in the next seven years, according to the report. Private equity investors who have already tapped this opportunity include Macquarie Capital and Japanese trading house Mitsui & Co.

Local players have taken notice, especially after the FSC allowed mutual fund managers in Taiwan to set up onshore vehicles for private equity investments. Last year Cathay Securities Investment Trust, Taiwan’s largest fund house, launched its debut private equity fund with a NT$10 billion ($330 million; €280 million) target. Capital raised from the fund will be invested in renewable energy projects in the country.

With KKR backing the largest private equity transaction in the island’s history, the industry will be watching keenly whether more global players will follow suit.