Trouble in Taiwan

Asia-focused private equity investors have understandably focused much of their attention on China’s growth story in recent years, while neighbouring Taiwan has garnered much less interest.

But Taiwan – and more specifically, its attitude to private equity – stole the headlines in June, when its Investment Commission, the body charged with screening and approving foreign investments, blocked Kohlberg Kravis Roberts’ $1.6 billion bid for electronics products manufacturer Yageo.

The deal’s debt level was reportedly less than four times EBITDA and thirty banks had “put their hands up to join the deal”, a banking source told Reuters. Nonetheless, the regulator was apparently concerned about the deal’s $1.08 billion financing package. It also said Yageo’s minority investors were not given sufficient information to determine whether the acquisition was in their best interest.

The deal would have a substantial impact on Taiwan's capital markets

Fang Liang-tung

Fang Liang-tung, executive secretary of the commission, suggested the buyout firm only had itself to blame. “They never explained enough to clear regulators’ doubts,” he told Reuters. “The ruling was based mostly on the weakening of Yageo’s financial structure, and the deal would have had a substantial impact on Taiwan’s capital markets.”

The regulator has come in for some criticism over its decision, but Liang-Tung dismissed this as “totally groundless”. It wasn’t the case that Taiwan was anti-private equity, he insisted; after all, this was the first time the regulator had rejected such a bid. Then again, he also told Reuters: “A leveraged buyout bid is sensitive. A leveraged buyout plus an MBO is even more sensitive. If they come and then leave with quick profits, no countries would ever welcome their investments.” So he sounds like a bit of a sceptic, to say the least.

What’s more, this is not the first Taiwanese private equity deal to hit a snag. AIG’s failed sale of its Nan Shan Life Insurance to Primus Financial Holdings, and The Carlyle Group’s long-drawn-out exit from cable television operator Kbro are two of those to have recently encountered difficulties.

In fact, there have now been no large private equity deals recorded in Taiwan since 2007, when CVC Asia Pacific paid $550 million for curtain-maker Nien Made, MBK Partners purchased cable broadcaster China Network Systems for $930 million and Oaktree Capital Management took golf club maker Fu Sheng private for $853 million.

Clark Su, secretary general of Taiwan Private Equity & Venture Capital Association, suggests that regulators have never been particularly supportive of private equity deals. “We’re still trying to understand [the regulators’] attitude,” Su says, noting that foreign investment in Taiwan has declined for the past five years. “I don’t think [Taiwanese regulators] really understand the value private equity could bring to these companies.”

Unlike China, which has been approving various measures to encourage private equity investment, Taiwan’s regulatory environment remains opaque when it comes to buyout deals. “There are no official regulations or documents to define what private equity is,” Su says.

I don't this [Taiwanese regulators] really understand the value private equity could bring to these companies

Clark Su

At press time, the TVCA was in the process of drafting a proposed definition. “It is better to have the rules set first, because people would then have a better idea what to do and what not to do. International private equity firms would no longer need to be haunted with fear over whether or not their deals would be approved,” says Su.

The current impasse is unfortunate, not least because insiders believe the island could offer a wealth of opportunities to private equity firms.

“Taiwan’s expertise in technology and manufacturing know-how provide a foundation to grow its trade relationships with emerging market economies, where demand for these types of capabilities is strong,” says Juan Delgado-Moreira, managing director for Asia and Europe at fund of funds Hamilton Lane. “Private equity can act as facilitator, in a number of forms, in matching supply and demand for Taiwan’s commercial strengths,” he adds.

Taiwan also has a key part to play in China’s growth story, of course. The integration of Taiwanese technology with China’s massive population “is a very important trend to watch for the next three to five years,” according to Su. “Opportunity is huge and the profit is huge too. Japan has been doing [the same thing] as well.”

Taking private equity capital seems like a logical way for Taiwanese companies to build the necessary scale quickly. But as long as the authorities retain this apparent ambivalence towards the industry, investors may decide that pursuing these opportunities is more trouble than it’s worth.