Foreign PE in Taiwan: Engagement issues

While it is tempting to put the retraction of Taiwan's private equity market in context through comparisons with Vietnam - its economy is about one third the size of Taiwan's, yet in the first quarter of 2013 alone Vietnam received more than five times as much as PE investment as Taiwan got in 2012 as a whole - Australia and Japan are more instructive examples.

In 2005, private equity firms deployed $111.2 million in Taiwan; this jumped to $4.6 billion in 2006 and $4.8 billion in 2007. Australia went from $2.5 billion in 2005 to more than $15 billion in each of the following two years. Japan went stratospheric in 2007, clocking $16.9 billion.

These were investments that rode on a wave of cheap credit and loose lending terms; the global financial crisis duly sank all boats. While Australia and Japan have since resurfaced, albeit not to their previous levels, Taiwan has not. Annual average PE investment was $204 million over the last four years; in Australia and Japan it was $9.8 billion and $5.3 billion, respectively.

Of course, Taiwan is by far the smallest economy of the three. As such it never had the depth and variety of deals as Japan and Australia. While Taiwan's buyouts were dominated by banks and cable TV providers, investors in the other two markets dipped into areas such as infrastructure, high-end manufacturing and retail as well.

What is mildly ironic about the disparity between the three is that Taiwan is the only one where buyouts have not been stigmatized for deals gone drastically wrong. Australia has seen its fair share of write-offs, particularly among consumer plays that struggled in the wake of the financial crisis. Several of the mega deals in Japan have also struggled to manage debt burdens.

In Taiwan, private equity's road block is more fears of what it might do rather than evidence of what it has done. Approvals for high-profile privatizations have been delayed or derailed for a litany of concerns such as supply chain disruption, a weakening of domestic capital markets and potential infringement of the rights of minority shareholders.

It is possible that more conservative elements of the government considered it their duty to stop large local companies collapsing in overleveraged heaps.

Clearly, PE investors contest this view on the grounds that Taiwan has lost more than it has gained by effectively ostracizing foreign buyouts through inscrutable approval processes driven by hidden agendas. It appears that this uncertainty will be gradually removed assuming proposed changes to foreign investment and M&A statutes go through. But this is only half the battle.

The lobbying efforts that have taken place over the last two years - involving the American Chamber of Commerce in Taipei's private equity committee and the Taiwan M&A and PE Council (MAPE) - have included advocacy and education. It is not enough for the industry merely to say, "This is what we want," but also "This is what we do" and "This is how it is of benefit to you."

While rules and even senior personnel may change, attitudes are more pervasive. And based on the response to previous deals from various stakeholders, notably the media and regulatory authorities, private equity hasn't done enough to explain itself and turn these attitudes around.

These efforts will take time - indeed they might be never ending as private equity must track evolutions in regulation and public policy so that problems can be addressed before they become inculcated. Issues vary between geographies but this underlying truth will be familiar to those operating in Australia and Japan as well, each of which presents certain challenges. Proactive engagement is the key.

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