Taiwan: the outlier

Taiwan is home to 23 million people, with GDP per capita of over $20,000. It manufactures world class technology and is home to a thriving small- and medium-sized business sector. 

Yet its domestic private equity firms can be counted on the fingers of one hand. In 2011, six private equity deals valued at $23 million were concluded in Taiwan. That’s less than one-thousandth of the $25 billion in private equity investment Asia received in 2011 –barely meaningful, from a statistical point of view.

According to one source at a large global private equity firm, Taiwan should have attracted far more private equity investment than it has, especially when compared to a similar economy like Korea. From 2007 to 2011, Korea had close to 2000 private equity investments while Taiwan had only 86, according to data from Thomson Reuters.

“A major difference is [that] deals get approved in Korea,” the source adds. “Private equity firms are still looking at Taiwan, but the numbers speak for themselves.”

So why has the island had such little private equity activity? 

One issue is that the government tends to guard large assets carefully, sources say. Regulators have blocked some big private equity deals, particularly take-private transactions in Taiwan’s technology sector.

For example, the Carlyle Group’s $5.5 billion offer for Advanced Semiconductor Engineering (ASE) in 2007 and last year’s attempt by Kohlberg Kravis Roberts to acquire electronic components maker Yageo in a $1.6 billion buyout were both widely thought to have been scuppered by the government (the latter had even attained sufficient shareholder approval).

One theory is that regulators are worried the companies could be relisted in other countries, removing from Taiwan strategic technology suppliers that play a pivotal role in the global supply chain.

“From an industry perspective, there is not a clear understanding of how the regulators view foreign private equity firms’ attempt to delist big high-tech companies, or whether the regulators have concerns that the private equity-invested companies may get relisted outside Taiwan,” says William Bryson, partner at Jones Day.

The industry is asking regulators for more predictability and transparency on their deal approval standards, he adds.

The Taiwanese government is also concerned about China’s potential to penetrate key industries. Take Want Want Group, a Taiwanese-owned conglomerate with a large China operation. Since 2010, the conglomerate has been trying to acquire Taiwan cable TV operator China Network Systems, which is backed by MBK Partners. The speculation is that the approval delay is due to suspicions of China’s influence on the group. 

As long as this kind of politics is involved, the buyout opportunity in Taiwan is likely to remain elusive.

However, growth capital deals involving minority stakes are available – and they do not concern regulators, says Vincent Chan, partner at KPMG in Taiwan.

Equally, China-related opportunities might seem more attractive as cross-straits relations warm. Taiwan and China share a common culture and language, as well as family ties. Extending a Taiwan growth story to China could be a relatively smooth process.

Such opportunities are already emerging in the consumer space as China moves from government-led growth to consumption-led development, says Shunsa Hayashi, chief investment officer of Ant Capital Partners, which has invested in Taiwan secondaries since 2005. 

Deal sourcing may not be easy, though. Most Taiwan companies are SMEs that have grown from startups. Their owners tend to be pretty business savvy, reflecting Taiwan’s vibrant entrepreneurial culture – and many need some convincing that they need help to expand further. According to one GP: “[The Taiwanese] are excellent at starting up companies –but they don’t want to sell them.”