Taiwan GPs: Cross-strait strategies

Taipei-based GP Strait Capital launched its latest fund in June with a China-focused strategy - to invest in companies that can take advantage of the consumer market in mainland China. The firm is one of several local PE players who, besides looking at domestic opportunities, are trying to tap the much larger market next door.

While Chinese GPs claim a competitive edge through local relationships and capital, their Taiwanese counterparts differentiate themselves by targeting companies with a Taiwan connection and helping them build ties with local firms.

"The strategy is to invest in foreign and offshore companies so we don't always compete with Chinese GPs. If a business is doing well in the domestic market, we may consider investing in the parent and helping it penetrate the China market," says Jack Lee, partner at Strait Capital.

Over the past 20 years, Taiwanese companies looking for scale and low costs built manufacturing and distribution units in the mainland and hired at least seven million workers there, according to Taiwan's Investment Commission. In 2012, government-approved investment in China was $12.8 billion. But foreign investment in Taiwan has dropped from $13.6 billion in 2007 to $4.2 billion last year.

Consumer-oriented

As the fortunes of Taiwanese technology firms have declined, there has been a rise in the number services-based ventures succeeding in China, helped by a common language and similar culture.

French-Taiwanese joint venture Da Run Fa is the leading supermarket, with a 13% market share and RMB60 billion ($9.7 billion) in turnover at the end of last year. According to the Taiwan External Trade Development Council, of the many local chain operators it helped open new stores abroad last year, 60% were investing in China.

It's a growth opportunity that local GPs are chasing. In 2012 MagiCapital Group committed RMB3 million to Taiwan tea shop chain CoCo Fresh Tea and Juice set up a Chongqing based division. In February, China Development Industrial Bank launched a NT$1.5 billion fund to invest in the island state's consumer products and services companies.

Taiwan has more than 2,000 franchise and chain operators, which collectively generated revenues of NT$1.75 trillion last year. Only 140 of them conduct business abroad, Bureau of Foreign Trade figures show.

C.Y. Huang, president of FCC Partners, says private equity firms should invest in services rather than manufacturing because the days of China as a low-cost manufacturing center are past. "There are many opportunities in services. An entrepreneur might open 10 beef noodle shops in Taiwan but with private equity support he can open 100 outlets all over China," he adds.

Another way to better their chances in the Chinese market would be for GPs to partner with strategic investors. Strait Capital has a leading Chinese department store operator as an anchor investor and operating partner in its $200 million fund. It will help the firm identify consumer goods that are new to China and help portfolio companies navigate through the local marketplace.

Proposed policy changes detailed in the Economic Cooperation Framework Agreement (ECFA), which was signed in 2010, could also prove helpful to Taiwanese investors. Tariffs on items from auto parts to textiles have been lifted and Taiwan's banks are now allowed to conduct business in renminbi onshore, which gives companies more flexibility in moving funds.

"It is now easier to repatriate money from mainland China back to Taiwan. As a result, I think the Taiwanese are now more daring in their expansion plans in China," says Edmond Ng, managing partner at Axiom Asia. "It should also make it easier, or at least provide more channels, for GPs who are investing in these companies to get their money back, which should boost GPs' confidence in investing in Taiwanese companies."

Doors open

A follow-up cross-strait agreement on services was signed in June but has yet to be approved by Taiwan's parliament. It opens up 80 service sectors to Taiwanese investors, such as health and social services, tourism, recreation, transportation, telecom, construction and finance. On the other hand, Taiwan has opened up 64 service sectors to the mainland service industry.

In some respects, the terms are better than the treatment accorded to Hong Kong under the Closer Economic Partnership Arrangement (CEPA). In financial services alone, Taiwanese banks are allowed to set up rural banks in China, while in Fujian province they can establish sub-branches in different cities. Local investors can also take controlling stakes in securities joint ventures in Shanghai, Shenzhen and Fujian.

Foreigners can't invest in hospitals but Taiwan investors can take 100% stakes in provincial capitals in China. Even Hong Kong investors can only invest in five cities. E-commerce has also been opened up, with Taiwan investors allowed to take majority stakes in joint ventures in two provinces. In Fujian, they can also wholly-own port-handling and container-yard businesses.

More deregulation and follow-up agreements are in the pipeline, with the next round of government talks to be on trade in goods agreement and dispute settlement agreement. The conclusion of final negotiations is planned by the end of the year.

While there might be practical details that keep Taiwan investors from actually running businesses in China, the opening up does present possibilities such as portfolio companies of Chinese and Taiwanese private equity doing overseas M&A together.

For now, though, when it comes to Chinese GPs versus Taiwanese as investors in businesses hoping to expand in the mainland - Huang believes that if a company wants to open in different provinces a Chinese backer is probably better. "But if you are talking about the nitty-gritty, tedious management stuff, Taiwan management is probably better," he says.

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• Topics
• Greater China
• Consumer
• Technology
• Expansion
• China
• Taiwan (China)
• Consumer
• TMT
• Growth capital
• Fundraising