Q&A: FCC Partners' C.Y. Huang

Q: Recent proposed regulatory reforms suggest the Taiwanese government is trying to encourage private equity investment. What has caused this turnaround?

A: Two months ago the American Chamber of Commerce in Taipei published a report that said private equity investment in Taiwan in the last two years was nearly the second-lowest in the region - better only than Pakistan. It was humiliating and drew attention from the top. President Ma Ying-jeou heard about it and he urged government officials to look into it. At the same time the Council for Economic Planning and Development (CEPD) has been promoting special economic zones and trying to position Taiwan as a hub for international trade. If Taiwan is unfriendly to foreign capital, whether strategic investors or private equity, how can it attract investment? So the CEPD was applying pressure as well, saying the problems risked damaging Taiwan's reputation.

Q: How significant was Yu-Zhang Chen's departure as head of the Financial Supervisory Commission (FSC)?

A: The CEPD was calling for liberalization but Chen closed the door, upsetting a lot of other officials in the process. He was criticized for being overly conservative and, on private equity in particular, there was little recognition of the value-add buyouts can bring to the Taiwanese economy.

Q: Speaking to AVCJ earlier this year, you identified three problems: the authorities are fundamentally opposed to privatizations; they are overly protective of minority shareholders' interests; and they don't offer clear enough guidance on the interpretation of regulations. Are these now being addressed?

A: With the introduction of the "Yageo Act" there should be more guidance; they have agreed that in the future specific reasons should be given for denying approval of a deal. That's what foreign PE investors want the most - clear rules. The problem in the past was you might fulfill all the criteria requested by but still not get approval. As to whether the government is opposed to privatizations, no one has tried to do one but there is reason to be optimistic. Things are moving and this implies a change in attitude. Finally, the issue with protecting the interests of minority shareholders is "Are you overprotecting and creating an imbalance in the system?" The danger is that every foreign investment will be treated in a negative way. Now, though, there does seem to be a force encouraging the government to be more positive in its approach to deals.

Q: What needs to happen next?

A: We need a couple of deals so that people believe it's real again. MAPE accompanied KKR to meet some government officials. This was just as the firm was raising its $6 billion pan-Asia fund. The officials said they wanted to see more PE investment in Taiwan to which KKR replied that they would love to invest more but needs more clarity on regulation. They also asked what a reasonable amount to invest might be and the officials said 10% of the $6 billion fund. Right now KKR isn't anywhere near $600 million, but it spent $200 million on a follow-on investment in Vietnam. The government knows Taiwan is trailing.

Q: What opportunities are there for foreign buyout firms, assuming it becomes easier to do deals?

A: We have seen from the sale of Golden Jaguar to Apax Partners, HCP Packaging to TPG Capital and Xiabu Xiabu to General Atlantic that foreign investors like Taiwan-managed businesses in China. There are also succession opportunities. In China many entrepreneurs are only in their late 50s; in Taiwan, they are in their 60s and 70s. There will be other deals because Taiwan needs consolidation, globalization and increased efficiency. It's no longer about investing in emerging technology and hoping you make 30x. Companies like HTC and Acer are not doing as well as before and that is an indication that Taiwan's traditional model of original equipment manufacturing (OEM) has reached a limit. We need a change of business model and an infusion of capital - and private equity is good at this. One of the things I have been saying to the government is that PE can help transform the Taiwanese economy.

Q: Are you seeing demand for Taiwan as a public market exit channel for PE in China?

A: There are no exits in China right now, it's difficult in the US and Singapore, and Hong Kong only welcomes the bigger companies. Taiwan is one of the only options left. A number of foreign companies have listed in Taiwan, including Chinese companies, although the owners must have foreign citizenship. There will also be T-shares - the equivalent of Hong Kong's H-shares - whereby China-domiciled companies can list in Taiwan. You will no longer need a red chip offshore structure. There have also been a couple of reverse takeovers. I've had no shortage of inquiries about this from foreign PE firms with investments in China. Part of the attraction is that shell companies are much cheaper in Taiwan than in Hong Kong - T$200 million ($6.7 million) versus up to HK$300 million ($38.7 million).

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• Topics
• Greater China
• Regulation
• Buyouts
• Exits
• Taiwan (China)
• buyout
• regulation
• Exit