Taiwan's local PE industry requires careful cultivation - AVCJ Forum

Reforms introduced in August with a view to channeling more long-term capital into the economy mean Taiwan's securities investment trust companies (SITCs) can now set up separately-run private equity units. But it difficult for these GPs to raise significant sums from third-party investors due to a lack of relevant PE experience. SITCs that are part of large financial corporations should, therefore, leverage group resources and investment capabilities to build up expertise.

For example, Fubon Financial Holdings has been engaging VC and M&A, domestically and overseas, under different subsidiaries - Fubon Life Insurance, Fobon Securities and Fobon Bank - for several years. "If all these internal resources could be integrated and shared, then we can establish a recognized investment team," said Philip Hu, chairman at Fubon Asset Management. "We could also partner with external GPs to set up co-GP joint funds under different themes. Once we grow to a large platform, institutional LPs will be comfortable investing in us."

The government wants SITCs to invest in local companies, but there are concerns about the availability of high-quality deals. Indeed, managers serving Taiwan's insurers, which have a lot of capital to deploy in the asset class, are looking at opportunities overseas as much as domestically. "We are now planning some products - which are at the early stage of development - to invest not only onshore, but also offshore," said Wei Liu, an executive director of insurance business at J.P. Morgan Asset Management in Taiwan.

In terms of sectors, the government plans to commit up to NT$420 billion ($14 billion) to infrastructure over the next four years, with green energy expected to be a strong theme. While this creates an investment opportunity for local GPs, they must be able to participate in other sectors as well to create a fully functioning PE industry ecosystem.

"GPs need to expand beyond renewables, investing in water treatment and waste facilities, for instance. The government should open up different sectors for private investment in order to grow the talent pool – including financial advisors, lawyers, and accountants – as part of the ecosystem. That's how you can be sustainable in the long term," said Kok Leong Toh, assistant vice president for Asia private infrastructure at Partners Group.

Mike Shang, a managing director for Greater China at Rivendell Ventures, added that the local private equity industry can only flourish if GPs work closely with global investors and adopt best practices. As such, the government should support more bridging initiatives that encourage participation from international PE firms. For example, the NT$100 billion Industrial Innovation & Transformation Fund, which was launched by the National Development Council (NDC) to focus on transitional industries and promoting the new economy, can co-invest with foreign GPs in Taiwan-based companies.

"In Taiwan, it takes time to understand different industries and develop relationships with management teams. After doing that, GPs might be able to invest. It is not like other mature PE markets where GPs can easily invest through referrals from investment bankers or brokers," said Shang. "There are a few foreign investors with a long-held understanding and interest in Taiwan. The NDC could leverage its local networks and invest alongside them in local companies."

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