Asia’s Private Equity News Source avcj.com August 27 2013 Volume 26 Number 32 FOCUS ANALYSIS Buyouts are back? With regulators promising reform, Taiwan looks to win over foreign PE Page 7 Hardwired for tech Domestic giants look to VC for innovation Page 12 Buzz on the bourse Taiwan aspires to become a China IPO hub Page 16 Taiwanese GPs identify differentiated mainland China strategies Page 15 Foreign PE’s Taiwan outreach effort requires advocacy and education Page 3 Aavishkaar, American Capital, Bain, Baring Asia, BVCF, Catalyst, Cathay Capital, INCJ, KKR, KV Asia, Longreach, Quadrant, SAIF Partners Page 4 EDITOR’S VIEWPOINT NEWS FOCUS PRE-CONFERENCE ISSUE AVCJ PRIVATE EQUITY AND VENTURE CAPITAL FORUM TAIWAN 2013 INDUSTRY Q&A C.Y. Huang, president of FCC Partners, on PE progress in Taiwan Page 19
Transcript
Asia’s Private Equity News Source avcj.com August 27 2013 Volume 26 Number 32
focusAnAlysis
Buyouts are back?With regulators promising reform, Taiwan looks to win over foreign PE Page 7
Hardwired for techDomestic giants look to VC for innovation Page 12
Buzz on the bourseTaiwan aspires to become a China IPO hub Page 16
Taiwanese GPs identify differentiated mainland China strategies
Page 15
Foreign PE’s Taiwan outreach effort requires advocacy and education
Page 3
Aavishkaar, American Capital, Bain, Baring Asia, BVCF, Catalyst, Cathay Capital, INCJ, KKR, KV Asia, Longreach, Quadrant, SAIF Partners
Page 4
Editor’s ViEwpoint
nEws
focus
Pre-conference issue AVcJ PriVAte equity And Venture cAPitAl forum tAiwAn 2013
industry Q&A
C.Y. Huang, president of FCC Partners, on PE progress in Taiwan
Page 19
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tAiwAn hAs A lot to offer PriVAte equity: it is one of relatively few classic buyout markets in Asia, with control positions, the ability to put in new management, and banks that are willing leveraged lenders. Japan and Australia are the only markets that can boast a similar combination, and although both claim to off er indirect exposure to Chinese growth, Taiwan’s argument is more compelling, simply by virtue of proximity and cultural similarity.
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 fi rst quarter of 2013 alone Vietnam received more than fi ve 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 fi rms 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 fi nancial 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-off s, particularly among consumer plays that struggled in the wake of the fi nancial 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-profi le 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 eff ectively 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 eff orts 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 benefi t 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 eff orts 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.
Tim BurroughsManaging EditorAsian Venture Capital Journal
avcj.com | August 27 2013 | Volume 26 | Number 324
AUSTRALASIA
Catalyst exits EziBuy to Woolworths for $274mCatalyst Investment Managers has exited Australia and New Zealand apparel and homeware retailer EziBuy to Woolworths for NZ$350 million ($274 million). The PE firm bought a 43% stake in EziBuy six years ago for an enterprise valuation of NZ$200 million, partnering with the company founders and management, who are also now selling to Woolworths
Quadrant takes majority stake in pet food supplierQuadrant Private Equity has bought a majority stake in Australian pet food retailer City Products for A$93 million ($84 million). The PE firm will support the nationwide expansion of City Products’ large format stores. The company currently has 31-outlet network, which is currently concentrated in Perth with an emerging presence in Brisbane and Melbourne.
Australia announces $225m biotech VC fund The Australian government will contribute A$125 million ($112.6 million) to the A$250 million Medical Research Innovation Fund (MRIF), with the private sector to make up the other half. The fund is to be set up in response to the McKeon Review on health and medical research, which was released in February.
Oaktree, Centerbridge in renewed Billabong offer Oaktree Capital and Centerbridge Partners have made a fresh recapitalization offer of A$325 million ($292 million) for ailing Australian surfwear brand Billabong to compete with a revised proposal put forward by an Altamont Capital Partners-led consortium earlier this week. The consortium had been forced to restructure an agreement made with Billabong a month earlier after Oaktree and Centerbridge filed a complaint with Australia’s Takeovers Panel.
GREATER CHINA
VC-backed Montage targets $115m US IPOMontage Technology Group, a China-based
semiconductor manufacturer backed by AsiaVest Partners and Intel Capital, is seeking to raise up to $115 million through a NASDAQ IPO.
Cathay Capital invests $20m in cold chain firmCathay Capital Private Equity has agreed to invest RMB120 million ($19.6 million) in Chinese refrigerated transport company Shanghai Zhengming Modern Logistics. The company specializes in cold chain logistics, auto-part logistics, fast-moving consumer goods logistics
and logistics in pharmaceuticals. It has 40 subsidiaries with a sales network covering 90% of China’s major cities and a fleet of nearly 1,000 vehicles.
SAIF Partners, Telescope in retail fund first closeSAIF Partners and China Telescope Investments have reached a first close of RMB300 million ($49 million) on their China retail growth fund. The vehicle - Telescope Consumer Growth Fund I – will support the development of retail and consumer products, particularly in early and growth stages.
CPE backs Adamas China credit fundChina Private Equity Investment Holdings (CPE) is to invest $1 million in Adamas Asset Management’s $275 million Greater China Credit Fund. The vehicle has received commitments from around 35 LPs and is on course to reach a first close of $78 million by the end of August. The fund targets high-return investments in small- to medium- sized enterprises (SMEs) in Greater China.
BVCF leads $25m round for MicuRx PharmaBVCF, a China-focused private equity growth fund specializing in life sciences, has a led a $25 million Series B round for MicuRX Paharmaceuticals, a biopaharma firm developing next generation antibiotics. The round also includes existing backers Morningside Group and Devon Park Bioventures. The capital injection will be used to further the development of MRX-I, an antibiotic targeting infections caused by a multi-drug resistant bacteria.
China’s Jiuding to launch mezzanine fundChina’s Kunwu Jiuding Capital plans to raise a renminbi-denominated mezzanine fund to provide local companies with debt solutions where pure equity is not appropriate. The fund is currently finalizing terms and further details will be disclosed within a week. Local media reported that the GP is targeting RMB10 billion ($1.63 billion), with a first close of RMB1 billion.
AMTT Digital receives $6.5m Series B roundBeijing-based AMTT Digital Services Group, a hotel digital services provider, has received
KV Asia closes debut fund above target at $263mKV Asia Capital has closed its debut fund at $263 million, exceeding the initial target of $250 million. The capital will be deployed in mid-size companies in Southeast Asia. KV Asia reached a first close of more than $100 million last October, with LP contributions from Adams Street Partners, Hermes GPE and Morgan Stanley. The full roster of LPs includes pension funds, endowments, financial institutions and family offices.
“We are pleased with the positive response to our offering and the recognition we have received,” said Karam Butalia (pictured), executive chairman of KV Asia. “We have a high caliber team and are now eager to execute on our commitment to help mid-sized companies grow through operational value-add and cross-border activity.” Butalia, former global head of Standard Chartered Private Equity, founded KV Asia in 2010 with Vibhav Panandiker, another SCPE alumnus, but more recently a managing director with J.P. Morgan Private Capital Asia. The firm has offices in Singapore and Jakarta.
In a difficult market for first-time funds, KV Asia’s success is confirmation of the growing interest in Southeast Asia, seen by some as an alternative to region’s major emerging markets, China and India. Investor sentiment has moderated on the former and deteriorated on the latter.
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avcj.com | August 27 2013 | Volume 26 | Number 326
RMB40 million ($6.5 million) in Series B funding from China Merchants Capital and Shenzhen Green Pine Capital.
Media investor Bruno Wu to raise $500m PE fundChinese media entrepreneur Bruno Wu plans to raise a $500 million media-focused private equity fund. The vehicle will invest in small to medium-sized internet, digital media and e-commerce companies, with a focus on fast-rising “new-age media” that are looking to expand in Asia. The fund will be managed by BT Capital, a media investment house launched last month by Wu and and Thomas Middelhoff, former CEO of German media group Bertelsmann and Arcandor.
NORTH ASIA
Longreach completes Hitachi carve-out North Asia mid-market buyout firm The Longreach Group has agreed to buy precision drilling business Hitachi Via Mechanics (HVM) from Japanese conglomerate Hitachi. It is said to be the first time Hitachi has divested a sizable asset to private equity at group level. HVM is a leading manufacturer of spindle and laser micro-drilling machines for printed circuit boards widely used in consumer electronics devices.
American Capital exits flight school to ANAAmerican Capital has exited its majority stake in the Miami-based Pan Am International Flight Academy to Japan’s All Nippon Airways (ANA) for $79 million, claiming a compound annual rate of return of 16% over the lifetime of the investment. American Capital acquired the company in 2006 for $58 million.
KKR, Bain in final bidding for Panasonic unitKKR, Toshiba Corp. and a consortium including Bain Capital, Mitsui & Co. and Development Bank of Japan are expected to participate in the final round of bidding for Panasonic’s healthcare unit. The deal could reportedly fetch as much as $1.5 billion.
INCJ leads $11m round for blood biotech ventureThe Innovation Network Corporation of Japan (INCJ) has led a JPY1.16 billion ($11.7 million)
investment in Megakaryon Corp, which is developing technology to produce blood platelets using reprogrammed stem cells.SMBC Venture Capital, Mizuho Capital and Mitsubishi UFJ Capital are also said to have taken part in the round.
Nippon Venture invests $1.7m in internet start-up Nippon Venture Capital has invested JPY170 million ($1.7 million) in Japanese web solutions start-up Volare. The Tokyo-headquartered company, which launched in 2007, provides web consulting and search engine optimization (SEO) services. It also runs an app search site called
Appliv, which was launched in August of last year.
SOUTH ASIA
Indian insurers get approval to invest in PEIndian insurers have received the green light to invest in domestic private equity and debt funds regulated under the alternative investment fund (AIF) program introduced last year. It follows a decision in March to allow life and general insurance companies to invest in funds targeting infrastructure, small- and medium-sized enterprises (SMEs), venture capital and social ventures.
Aavishkaar backs ATM outsourcing company EPSIndian VC firm Aavishkaar has invested another $6 million in Electronic Payments and Services (EPS), after putting $4 million in the company last year. EPS provides ATM and retail point of sale payment outsourcing services. It won Aavishkaar’s backing in 2012 after signing a contract to deploy over 5,500 ATMs in rural areas in the state of Maharashtra for public sector banks over the next two years. As of May, EPS had installed a 1,000 ATMs.
SOUTHEAST ASIA
Jungle Ventures, Spring Seeds invest in TaggoTaggo, a marketing start-up that helps retailers turn their Facebook pages into loyalty programs, has raised a Series A round of funding led by Jungle Ventures and Spring Seeds Capital, the investment arm of the Singapore government’s Spring agency. The funding follows an earlier seed round with Stream Global and Singapore’s National Research Foundation.
Phillip Capital takes stake in equipment finance firmSingapore-based Phillip Capital Group has acquired a 9.71% stake in Intan Baruprana Finance (IBF), the financing arm of Indonesian heavy equipment distributor Intraco Penta, through a rights issue. Transaction value was not disclosed. Fred L. Manibog, president director of IBF, said that the new capital would be used to expand and diversify the company’s financing operations into oil and gas, agribusiness, infrastructure and logistics.
Baring Asia to take majority stake in HexawareBaring Private Equity Asia will acquire a 41.8% holding in Hexaware Technologies, an IT and business process outsourcing services firm, from the founders and General Atlantic (GA) for up to INR16.87 billion ($261.9 million). It will then have to make a mandatory tender offer for an additional stake of up to 26%.
GA bought a 14.99% stake in the company in 2006 for INR3.20 billion (then $67.6 million) at around INR142.10 per share. Baring will buy GA’s holding, now 14.1%, for INR126 or INR135 per share, with the higher price payable if the buyer acquires at least 50% of the company. The
founders’ 27.7% is to be bought on the same terms, adding up to a total of 125 million shares for INR15.75-16.87 billion ($244 - 261.9 million). The price for the tender offer to acquire the additional 26% stake has been set at INR135 per share, adding up to INR10.58 billion. ChrysCapital Partners is also an investor in the company, with a 9.59% holding bought for $14.6 million.
The deal values Hexaware at about 8.5x EBITDA. The company’s revenues grew 32.91% year-on-year to INR19.92 billion for the financial year ended December 2012, while net income improved 22.70% to INR3.28 billion. Hexaware has 8,700 employees, over 200 active customers and a presence in 35 countries.
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Number 32 | Volume 26 | August 27 2013 | avcj.com 7
when is A tAiwAn deAl not A tAiwAn deal? Last year, TPG Capital completed one of China’s largest ever control buyouts when it paid $500 million for HCP Packaging, a Shanghai-headquartered packaging company that serves cosmetics, skincare and fragrance industries globally. Although HCP has very much been part of the mainland China growth story, its origins can be traced back to Taiwan in the 1960s.
TPG was buying into the global expansion of a China business, but HCP’s Taiwanese DNA should not be discounted. Its founders, the Chen family, belong to the group of entrepreneurs who were early entrants to the mainland, bringing capital, knowhow and a degree of international experience, and building successful businesses.
HCP is not alone among these companies in coming under private equity control. In 2011, Apax Partners paid $250 million for Golden Jaguar, a restaurant chain founded in Shanghai by Taiwanese entrepreneurs who decided that nationwide expansion would be best executed under new ownership. Hotpot chain Xiabu Xiabu is now with its second private equity owner, with Actis selling to General Atlantic last year.
“A defining story of the Taiwanese economy over the last 20 years is entrepreneurs who have been very successful in opening and expanding businesses in the mainland,” says Mark Chiba, partner and chairman at The Longreach Group, a North Asia buyout firm with investments in Taiwan. “The upside of going via Taiwan you should be able to get control, a reasonable valuation, leverage, management change if needed, and play into that mainland story. To us, that is more attractive than taking minority bets in mainland Chinese companies.”
Test casesMany of these businesses date back to the 1960s, and some were in operation during the Japanese occupation two decades earlier. Now under their second or third generation of family ownership, the shares have been dispersed widely, which can present problems for corporate governance.
Private equity investors have the capital and skills to consolidate these shareholdings, put in professional management and get these companies back on the right track.
This is one of two clear themes that emerge from Taiwan’s cluster of potential buyout opportunities. The other lies in the technology sector, which emerged as a bulwark of the island’s economy on the strength of an original equipment manufacturing (OEM) model that is now being called into question.
“We need a change of business model and an infusion of capital, and private equity is good at this,” says C.Y. Huang, president of FCC Partners and chairman of the Taiwan M&A and PE Council (MAPE). “One of the things I have been saying to the government is that private equity can help transform the Taiwanese economy.”
But is the government listening? After several years of uncertainty, the answer might finally be yes. Promises of reforms to deal approval processes represent the first step in a turnaround
in Taiwan’s attitude towards foreign buyouts – although everyone AVCJ spoke to was quick to qualify their remarks with “but it’s still early days.” Given past disappointments, this is not surprising.
Peaks and troughsTaiwan emerged from relative obscurity to become one of Asia’s most active buyout markets in 2006-2007. Private equity investment reached $9.4 billion during the period, according to AVCJ Research, nearly two thirds of this driven by large
control deals. Only Australia and Japan, the region’s leading leveraged markets, were more active on the buyout side.
Deal flow dropped as a result of the global financial crisis and it has yet to pick up again. In the past four years, PE investment has topped $300 million on just one occasion, reaching just $56.9 million in 2012. Taiwan may be the seventh-largest economy in the region but last year it ranked 16th by deal value, sandwiched in between Sri Lanka and Pakistan.
The recent history of the asset class in Taiwan can be broken down into two phases: pre-Advanced Semiconductor Engineering (ASE) and post-Yageo.
ASE, the leading domestic semiconductor packaging player, was subject to a privatization bid from The Carlyle Group and its chairman in late 2006. They offered $5.6 billion, then upped it to $6 billion, but still failed to find favor with ASE’s advisory panel. Carlyle subsequently withdrew the bid. Despite the Financial Supervisory Commission (FSC) stating that it would welcome any bids for listed companies if they helped local markets internationalize, industry participants were
suspicions of the agency’s motives. It also appeared to set a pattern for regulatory
obfuscation. Since 2010, Taiwan has seen two buyout deals in excess of $30 million and both were either significantly delayed or cancelled due to government intervention. By comparison, South Korea blocked just three of 31 during the same period while Singapore hasn’t blocked any at all.
“They used to keep asking for more facts, information and justification – what you were
Back from the brink?After a spike in buyouts in the mid-2000s, Taiwan sank from view due to private equity firms’ concerns about unpredictable deal approvals. Regulators are now trying to tempt them back with promises of reforms
Asian territories, GDP vs. PE investment GdP, 2012
(us$b)Pe investment, since
2012 (us$m)GdP vs. Pe
ranking
China 8,227.1 34,713.3 -
Japan 5,959.7 10,821.4 -3
India 1,841.7 12,561.1 -
Australia 1,520.6 17,497.7 +1
South Korea 1,129.5 11,140.9 -
Indonesia 878.0 959.8 -4
Taiwan 473.9 96.4 -9
Thailand 365.5 293.3 -6
Malaysia 303.5 2,302.0 +2
Singapore 274.7 1,663.6 +1
Hong Kong 263.2 1,907.7 +3
Philippines 250.2 457.1 -
Pakistan 231.1 18.9 -4
New Zealand 169.6 3,088.0 +8
Vietnam 141.6 646.6 +4
Sri Lanka 59.4 197.4 +1
Mongolia 10.2 432.5 +4
Source: AVCJ Research, World Bank, IMF * IMF estimate
avcj.com | August 27 2013 | Volume 26 | Number 328
supposed to do was be smart and recognize it was their way of telling you to go away,” says William Bryson, chairman of the American Chamber of Commerce in Taipei’s (AmCham) private equity committee. “Word got around fast as to what happened on that deal and for years PE didn’t come here.”
Bryson was working on a much smaller take-private deal while the ASE process was ongoing and it closed successfully in three months. But it wasn’t a high-tech company, it was much lower-profile and the ticket size was tiny by comparison.
Having said that, one of the reasons most market watchers were convinced the Yageo deal would go through in 2011 was because it wasn’t ASE. KKR was already an investor in the company when it teamed up with founder Pierre Chen for a buyout. They bid $1.6 billion, which equated to a public market valuation Yageo hadn’t seen in seven years, for an electronics components manufacturer that didn’t have the scale to sit beside Taiwan’s corporate elite.
Numerous theories circulate as to why the transaction was rejected. While most focus on the regulators, it would appear that KKR and Chen are not blameless. As one industry participant familiar with the situation puts it, “KKR backed the wrong guy. They fundamentally misunderstood the level of antagonism that existed towards Chen and towards the private equity industry.”
For all that the buyers’ reassurances that they planned to grow the business and create jobs, the media response was hostile. Such reactions are not unknown in markets where there is less familiarity with private equity and greater readiness to label practitioners as asset strippers.
“The media can be a problem because it seems to take a negative view of private equity and clearly this has had an impact on the regulators,” says Janice Lin, an equity partner at Tsar & Tsai Law Firm. “I don’t think Taiwan in general has a negative view of the asset class – a
lot of business people now understand the good side of private equity investment.”
Mixed messagesWhat KKR did do – to its credit, according to several market watchers – is refuse to withdraw the bid, inviting the regulator to issue an official rejection. And when the rejection duly came, the regulator’s reasoning drew contempt from the investment community.
The Investment Commission, a group within the Ministry of Economic Affairs tasked with
reviewing foreign deals, told the prospective buyers that they had not mollified doubts “about shareholder and investor protections, whether the offer price is reasonable, and the level of transparency of information disclosure.”
The bid of NT$16.10 per share represented a 14% premium over Yageo’s previous closing price and it was accepted by a majority of minority shareholders. Since then, the company’s stock hasn’t come close to matching the offer price – it is currently trading below NT$10.00 – so those shareholders effectively lost out because the deal was rejected.
“We were told that about 10 deals were lined up behind Yageo, ready to go had it gone through. When Yageo was rejected they all went away,” says AmCham’s Bryson. “That shows you the effect a single deal can have. The ASE deal created an impression among other PE investors that Taiwan had become a hostile environment; Yageo confirmed it.”
In a bid to address these concerns, AmCham’s private equity committee was formed, with participation from a number of regional PE firms as well as foreign and local banks and law firms. Coordinating their activities with MAPE, the mission was to educate and advocate – essentially doing a better job of explaining how the industry works, what it can contribute, and how Taiwan was missing out.
Going into meetings with government officials, at the top of their wish list was regulatory clarity. First, they called for the publication of guidelines on investment criteria. A string of concerns have been expressed by regulators over the years including the impact an acquisition would have on domestic capital markets and supply chains, the need to preserve national economic security and a duty to protect minority shareholders. private equity firms don’t know where they stand.
Second, they asked for a list of sectors and companies in which foreign PE investment is unwelcome. Officials have already indicated privately that bank deals would only be welcome if the targets were in distress, insurance sector investments would be approved if they come with a guarantee of a minimum 10-year horizon, and Taiwan’s “national champions” are off limits.
Third, if a deal is rejected, the FSC should a detailed explanation that is consistent with the published guidelines. And fourth, the assessment process should follow a specific timeline so that investors are not repeatedly called upon to provide documentation in support of deals that are unlikely to happen.
“We need certainty and we need it in writing – this will set a precedent so we know how to structure deals next time,” says a source who participated in the meetings. “We also need specific deadlines. There are cases where proposals are submitted and they never get rejected but neither do they ever get approved. That doesn’t work for us.”
Enter the reformersThe big question is whether the “Yageo Act” – shorthand for proposed amendments to the Statute for Investment by Foreign Nationals – and alterations to the Business Mergers and Acquisitions Act will have the desired effect. Certainly, it promises a more transparent approvals process. The consensus is that the legislation is unlikely to go as far as investors would like but it represents a positive first step.
Of course, changing the rules is one challenge but shifting longstanding attitudes – that impact the discipline with which rules are followed – represents another.
“It’s good that some of the legal requirements have been clarified but I don’t think the changes are necessarily trying to ease concerns about private equity,” says Lin of Tsar & Tsai. “The amendment reflects the views of cabinet members who are more pro-business, recognize that it’s difficult to do M&A in Taiwan, and would like to relax some of the regulations. But when it was first proposed more conservative elements added other measures.”
She cites the inclusion of a clause in the M&A Act intended to further protect minority shareholders’ interests by raising the voting threshold required for a take-private deal to go through. As it stands, a proposal requires majority support if the meeting is attended by shareholders representing two thirds of total outstanding shares, and two thirds majority support if the meeting is only attended by a more than 50% majority of outstanding shares.
This may now change so that two thirds representation is mandatory for a de-listing to occur, although FCC Partners’ Huang observes that private equity investors would prefer a higher threshold and consistent application to a lower threshold and arbitrary rulings on deals.
Other issues are harder to pin down. For example, Taiwan’s regulators are generally uncomfortable with leveraged transactions and this has seen investments win approval only when a host of conditions are attached, such as debt-to-equity ratio ceilings and enhanced reporting duties. These restrict the buyer’s flexibility to generate financial returns.
It is hoped that an FSC described to AVCJ as “overly paternalistic” can make the transition from staunch conservatism to free-market
pragmatism. A change at the top of the agency may represent a new broom. Yu-Zhang Chen, who stepped down as chairman of the agency earlier this year, was criticized for being heavy handed and unfriendly to foreign investors, including private equity. His replacement, Ming-Chung Tseng, is regarded as more liberal. Tseng’s reputation at the FSC’s Financial Examination Bureau was one of toughness but accessibility.
As several industry participants point out, this isn’t a bad combination for PE investors who
want to their concerns to be heard and then receive a clear response.
“From what he has said to the local press, Tseng is open-minded, certainly compared to his predecessor, who was very conservative and low profile,” adds Dennis Chiang, head of financial advisory in China Development Industrial Bank’s corporate and investment banking division. “He is much more supportive and will encourage foreign private equity.”
But he warns that, even with a new FSC head, change takes time. This might explain why foreign private equity firms are still wary of hailing the start of a new era in Taiwan.
Sustainable deal flow?AVCJ asked managers from three pan-Asian buyout funds for their take on the market. One was guardedly optimistic, pending successful adoption of the proposed reforms; the other two were more skeptical, one of them noting that his firm’s recent inactivity in Taiwan had little to do with regulatory uncertainty. “It’s a small market with not very fast growth,” he said. “Give us a choice between expending resources there and
spending time in China, we’ll take China.”This begs the question of how significant the
Taiwan private equity market can realistically become. Of the $9.4 billion deployed across nearly 100 deals in 2006-2007, roughly 70% was split between six bank investments and five cable television investments. At the time, Taiwan’s banks were struggling with capitalization issues that had previously troubled their Japanese and Korean counterparts, and in each market PE came to the rescue. The window is no longer
open. Further cable TV deals are also unlikely given the industry is now dominated by a few well-established players.
It is therefore difficult to see where the deals might come from that return Taiwan PE to its former glories. The counterargument is that it is very difficult to predict future openings – before Carlyle and MBK Partners made their forays into cable TV no one had been there – although big picture issues such as succession planning, corporate restructuring and cross-border expansion will likely feature in some way.
Even if Taiwan can’t eclipse the previous peak, the market surely has more to offer than last year’s $56.9 million – enough to move it up the PE rankings. For some, Taiwan doesn’t have to rise far to be attractive.
“We have consistently been interested in Taiwan because, like Japan, it’s a very tough market to crack so if you have some inside angles and positioning it’s a good market,” says Longreach’s Chiba. “Also, it’s a small market so most GPs don’t see the need to be there. We believe competition is the enemy of returns, so we like Taiwan.”
Taiwan’s largest private equity deals
dateAmount (us$m)
deal type investee industry Pe investor
Oct-06 1,500.0 Buyout China Network Systems Telecom MBK Partners
Apr-06 1,300.0 Buyout Eastern Multimedia Telecommunications The Carlyle Group
Jan-06 840.4 PIPE Taishin Financial Holding Financial services Newbridge Capital
Aug-07 750.0 Buyout Nien Made Enterprise Manufacturing CVC Capital Partners
Jun-07 696.3 Buyout EnTie Commercial Bank Financial services The Longreach Group
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Aug-07 647.4 Buyout Cosmos Bank Financial services SAC Private Capital
May-07 526.9 Buyout Fu Sheng Industrial Manufacturing - Light Oaktree Capital
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tAiwAn is still A formidAble force when it comes to producing technology. Over the last three decades the small island state has transformed itself from a supplier of plastic toys and bicycles into one of the world’s foremost manufacturers of high-tech consumer products and components. As of 2012, Taiwan-based companies were responsible for 89% of all notebooks produced globally and 46% of desktop PCs.
Computers and electronics are vital to the overall economy. According to Thomson Reuters, they account for just below 10% of all exports and around 6% of GDP. But the industry has also seen better days; a decade ago the share was 18.27% of exports and 8.27% of GDP.
The bottom line is that Taiwan’s electronics giants need to innovate. This is where some industry participants see VC playing a role, seeking out new technologies that will shepherd the industry into a new phase of evolution.
“Hardware will continue to dominate the Taiwan’s tech industry but the internet and software related industries are booming,” says Joseph Chan, a partner with incubator appWorks . “Most big electronic companies are reviewing their computing strategy – some are going into infrastructure while others are looking at services. Meanwhile venture companies looking for opportunities in both these areas.”
The primary cause of the electronics industry’s problems is plunging demand for PCs. Shipments fell 13.9% year-on-year in the first quarter of 2013 as consumers switched to smart phones and tablets. The trend is a double-edged sword for Taiwan. The likes of Taiwan Semiconductor Manufacturing Company (TSMC), which makes chips for smart phone processor supplier Qualcomm, and MediaTek, which sold 110 million smart phone chipsets in 2012, are still healthy; but companies that have built their success on PC manufacturing are suffering.
PC exposure extends deep into corporate Taiwan, but the recent performance of Asus and Acer are a bellwether for broader trends.
Acer, which holds around 8% of the global PC market, reported a net loss of $11.4 million in the second quarter of this year. While some of this can be attributed it to the company’s growing investment in product design, revenue for the quarter also declined 19% year-on-year as
shipments fell by 32%. Asus saw PC shipments decline by 41.7% year-on-year in the second quarter to 850,000 units.
Taiwan’s hardware industry includes a number of original equipment manufacturers (OEMs) and original design manufacturers (ODMs) making components and machines for Dell, Lenovo and Hewlett Packard. These companies’ revenues have also fallen – and they operate on far thinner margins than Acer and Asus.
Start-up nation Even a contracting electronics industry still towers over venture capital, but many see potential for growth in the space. According to AVCJ Research, VC investors so far this year have deployed $28 million across 12 deals in Taiwan’s electronics, IT and computer-related sector, already more than in each of 2011 and 2012. The industry could be on course for its best year for investment since the global financial crisis.
If venture capital can offer guidance to hardware manufacturers, it would not be the first
time. VC investment was a key component of Taiwan’s first manufacturing wave.
H&Q Asia Pacific was among the first to invest in Taiwan’s burgeoning tech industry. Back in 1982, the government was keen to create a version of Silicon Valley in Asia and approached investment bank Hambrecht & Quist for support. In 1986 H&Q Taiwan was set up and duly launched the H&Q Han Tech
Fund. The $20 million vehicle set about making minority investments in companies producing components ranging from graphics cards to keyboards – mostly Series A and B rounds. One of its first portfolio companies was a PC integrator and manufacturer called Acer.
Since then Taiwan has become one of the biggest OEM manufacturers in the world. This immense productivity has largely resulted from companies migrating manufacturing across the strait to mainland China.
“These strategic moves took advantage of the cheap labor in China where engineering costs are one third that of the US and assembly line wages averaged around $120 per month,” says Julian Chu, head of international business at Market intelligence & Consulting Institute (MIC) in Taipei. “Facilitated by close proximity and the absence of a language barrier, the move not only reduced costs but allowed Taiwanese companies to focus on R&D, management and marketing.”
But now China has emerged as a formidable market in its own right, with domestic companies
capable of producing quality components at low cost for export or domestic consumption, and drawing on a large pool of local engineers. The country offers relative skill, scale and logistics networks to send shipments on their way.
For Taiwan’s electronic industry, there have been several consequences. First, China is a competitive threat. Spreadtrum, for example, has come from obscurity to establish itself as the
When the chips are downTaiwan has a long history as a tech manufacturing powerhouse, but with the decline of the PC times have changed. Can the wavering tech giants re-invest themselves and what can VC do to help?
Taiwan mainstream ICT product shipment volume
Source: Market Intelligence & Consulting Institute
3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13
Notebooks Tablets Smart phones
Thou
sand
uni
ts
80,000
60,000
40,000
20,000
0
Number 32 | Volume 26 | August 27 2013 | avcj.com 13
second-largest supplier of chips for mass-market phones. It sells components for as little as two thirds of the price charged by Taiwan’s market leader MediaTek.
Second, labor costs in China are rising. The Chinese government wants the average minimum wage to rise by 13% between 2011 and 2015, and it has become clear the country is no longer the source of cheap labor it once was. Workers now get $300-500 a week, well above the $90 and $40 paid in Cambodia and
Bangladesh. T-shirt manufacturers began to relocate several years ago.
In addition, greater pressure has been placed on suppliers to the PC and notebook market by the likes of Apple and Samsung, which are positioning themselves as low-cost alternatives to PCs. “Apple’s iPad, released in 2010, demolished the sales of low-end notebook computer from Taiwan,” says MIC’s Chu. “The post-PC era began and Taiwan got blindsided.”
Due for an upgradePartly as a result of the migration of manufacturing, salaries in Taiwan have stagnated. Despite GDP expanding 1.26% in 2012, wage-adjusted inflation fell 1.98%. There is plenty of anecdotal evidence indicating a brain drain from Taiwan to China as educated locals look for work elsewhere.
On the flipside, the situation presents an opportunity to shore up Taiwanese business. A number of incentives are being offered to manufacturers that relocate high-value production back to Taiwan under the “Strengthening the Promotion of Investment in Taiwan overseas Taiwanese Enterprises” program, which was set up in November.
The government – via its National Development Fund (NDF) – is offering NT$10 billion in special loans to support returning companies. Financing and assistance in acquiring land and establishing plants is also available. So
far some companies have seized repatriation opportunity. They include Largan Precision, the world’s largest mobile phone lens manufacturer, and metal casing maker Catcher Technology that between them will create 3,800 new jobs in Taiwan by 2016.
A free economic zone program has also been launched with a view to increasing private sector investment by NT$20 billion and contributing NT$30 billion to GDP by 2014. Within the pilot zones, Chinese firms are granted the same
investment terms available to foreign players, which means they can participate in Taiwan’s key industries – including semiconductors –without any cap on their shareholding.
Still, several leading manufacturers have concluded that they must shift away from PCs. Notebook specialist Pegatron, for example, now relies on PC-related business for 40% of its sales, down from 60%. The firm – which recently won contracts from Apple at the expense of Hon Hai Precision Industry, also known as Foxconn – saw its revenues jump 40% last year.
The mobile market, however, remains fiercely competitive with South Korean giant Samsung at one end and a host of cheap Chinese manufacturers at the other. Taiwan’s share of the global tablet market has seen a spectacular decline from 94% in 2010 to an expected 53% this year, according to MIC data. As a result, many firms have moving in to entirely new areas.
Both Asus and notebook manufacturer Quanta Computers recently entered the cloud computing services space. Asus has launched Asus Web Storage while Quanta is expanding its server division, which now accounts for up 10% of revenue. The company sells 85% of its servers directly to its clients, including Facebook, that have to process huge amounts of data.
Diversification doesn’t stop there. Hon Hai is looking to develop its own technology, extending its business to provide devices and applications that build on Mozilla’s Firefox
operating system such as smart phones, tablets, TVs, electronic whiteboards and outdoor displays.
The big questionAre these areas in which start-ups can lead the way? “What is clear is the future Taiwan economy cannot depend on hardware,” says Joseph Tai, CEO at Integral Group. “What we are seeing now is that venture industry is increasingly being driven by the rise of the mobile internet and 4G. This will be the next trend.”
While deal flow appears to have increased, many industry participants say there are still hurdles to overcome before innovative start-ups can flourish. Perhaps chief among its challenges is Taiwan’s size. With a population of just 23 million, it lacks a large-scale domestic market in which new technologies can be nurtured.
Furthermore, while Taiwan may have a wealth of talented entrepreneurs, its strengths have always been in manufacturing; there are no household names like Facebook or Baidu.
The government, which had until recently a much more hands-off attitude to VC compared to its Asian neighbors, has been trying to remedy this. Last November the Ministry of Economic Affairs, together with the industrial Technology Research Institute, launched its Start-Up Taiwan project intended to develop the industry by matching new business enterprises with VC firms.
Most recent VC deals have been early-stage investment in the mobile internet space. Cloud gaming solutions firm Ubitus received over $15 million from investors Samsung Ventures; mobile app developer Cardinal Blue raised $2.3 million from a consortium of US investors; and online game provider Pubgame received $4.5 million from local investors appWorks and CID Group.
“I believe Taiwan has a good environment for innovation and early stage investment,” says Vincent Wang, chairman at Sunsino Venture Capital. “Though small, the Taiwan consumer base is also very advanced, so this is a good place to test business models before expanding into other geographies.”
However, it has not yet been demonstrated in a meaningful way that technological innovation at the start-up stage can filter through to Taiwan’s electronic giants – especially with a lot of investment coming from overseas VC rather than domestic strategic investors.
Integral’s Tai believes corporate Taiwan has the capacity to identify, support and then absorb new technologies that complement existing business. But it will be a natural evolution. “We are going to see a change of management control over the next 4-5 years,” he says. “The older generation of entrepreneurs heading up the likes of Acer will give way to a new generation talent and I think there will be an opportunity there.”
No. of deals
VC investment in Taiwan's electronics, IT and computer-related sectors
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Number 32 | Volume 26 | August 27 2013 | avcj.com 15
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 fi rm 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 diff erentiate themselves by targeting companies with a Taiwan connection and helping them build ties with local fi rms.
“The strategy is to invest in foreign and off shore 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-orientedAs the fortunes of Taiwanese technology fi rms 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 fi gures show.
C.Y. Huang, president of FCC Partners, says private equity fi rms 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 fi rm 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. Tariff s 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 fl exibility 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’ confi dence in investing in Taiwanese companies.”
Doors openA 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 fi nance. 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 fi nancial services alone, Taiwanese banks are allowed to set up rural banks in China, while in Fujian province they can establish sub-branches in diff erent 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 fi ve 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 fi nal 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 diff erent 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.
Cross-strait strategiesTaiwanese GPs are looking for investments in the higher growth markets of mainland China. But how do they diff erentiate themselves from Chinese private equity fi rms chasing similar deals?
“It is now easier to repatriate money from mainland China back to Taiwan. As a result, I think the Taiwanese are more daring in their expansion plans in China” – Edmond Ng
Asian Venture Capital Journal
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avcj.com | August 27 2013 | Volume 26 | Number 3216
Public mArket exits Are uncertAin ground for private equity-backed Chinese companies. There have been no IPOs on the domestic bourses so far this year and even if the government-mandated hiatus ended tomorrow it would take years to work through the backlog. The US has become an option once again but only for a lucky few; one VC-invested company has gone public this year and others are in the pipeline, yet to emerge. Hong Kong, meanwhile, at present only accommodates large mainland enterprises, most of them state-owned.
Taiwan, however, is still open for business. The territory is looking to capitalize on the gridlock
by presenting itself as an alternative listing destination – a smart idea but one still beset by regulatory obstacles.
The latest innovation is “T-shares,” basically the Taiwan equivalent of Hong Kong’s H-shares, allowing China-domiciled companies to list on the Taipei exchange. A T-share program was unveiled by Premier Sean Chen at the end of last year and endorsed by the Financial Supervisory Commission (FSC). The FSC’s mainland equivalent, the China Securities Regulatory Commission (CSRC) applauded the move.
Eight months on, no follow-up action has been taken, confirming suspicions that, where cross-strait negotiations are concerned, there is no such thing as an easy victory.
“Functional regulatory cooperation between the two governments should come once the T-shares program is put into practice,” says Jocelyn Huang, head of the underwriting department at Taiwan-based KGI Securities. “But there are capital controls on both sides, so how is a Chinese firm supposed to raise funds in Taiwan and return them to the mainland? This can only be solved through high-level political communication.”
Chinese ownership is the biggest regulatory hurdle for companies looking to go public in Taiwan: A company with 30% or more mainland ownership is considered a Chinese entity and therefore unable to list. Taiwan opened its doors to foreign companies in 2008 and there are now about 50 “F-companies” trading on either the Taiwan Stock Exchange (TWSE) or the over-the-counter GreTai Securities Market.
In order to qualify, foreign companies – including mainland Chinese firms – had to restructure the listing entity so that its shares met a par value of NT$10 apiece before the IPO. This was done under Cayman Islands law so the
entity would be domiciled there. The restriction was lifted last year, opening the door to foreign companies domiciled elsewhere, but as yet there have been no IPOs without a par value.
“We may see the first F-company without a par value or with a par value other than NT$10 per share by the end of this year at the earliest,” says Jessica Wu, head of international investment banking at KGI Securities. “Over time, we will begin to see F-companies registered in jurisdictions such as Japan and the US emerge on Taiwan’s capital market.”
Bending the rulesEven with this reform, the obstacles facing Chinese companies are considerable. If it crosses the 30% mainland ownership threshold, a listing applicant must still go through a special approval process run by the FSC. The chances of an IPO are seen as limited.
Rather than go through this rigmarole, many mainland companies take advantage of a loophole that emerged five years ago when the government was encouraging overseas-based enterprises established by Taiwanese businessmen to list domestically. In most cases,
these enterprises are based in mainland China. According to AVCJ Research, five PE-invested
Chinese companies went public in Taiwan in 2010, raising $1.19 billion between them. In 2011, eight firms raised $208 million. Tainan Enterprises, a clothing retailer backed by Hong Kong-based Excelsior Capital Asia, was among the first batch of China-based companies owned by Taiwanese entrepreneurs to complete an IPO.
“As it was at a relatively early stage for foreign companies listed in Taiwan at that time, the rules were not very clear to investors and company management. It took us two years to complete the IPO process, even for a Taiwanese-owned foreign company,” says John Yang, a partner at Excelsior. “The TWSE spent a lot of time checking the identity of Tainan’s ultimate shareholders, especially for LPs invested in the fund, to ensure Chinese ownership was below the 30% cap.”
The waiting time for listing on mainland bourses, even before the CSRC halted IPOs at the end of 2012, prompted more Chinese companies to consider Taiwan listings. They have typically followed the classic Hong Kong red chip route – restructuring the business offshore before listing in Taipei. “The companies’ operations are in China and they are not owned by Taiwanese, rather by Chinese people who hold foreign passports,” one broker says. As a result, the 30% Chinese ownership cap is rendered meaningless.
Clearly, Taiwan is attractive to Chinese entrepreneurs as an offshore listing market where they have the luxury of greater corporate flexibility. But Hong Kong offers much the same advantages and has already established itself as the IPO hub for Greater China. In this context, the T-shares program is immensely important, representing a direct challenge to Hong Kong.
However, in practical terms it would be much harder for a China-domiciled company to list as a T-share rather than H-share. On a basic level, mainland residents may have to wait several weeks for a Taiwan travel visa, which could rule out visiting for an IPO road show.
Jennifer Wang, a partner at Chen & Lin Attorneys-at-Law, adds that there are two primary reasons for the slow progress of T-shares at a high regulatory level. First, the Taiwan authorities might be concerned about the finances of mainland companies following the accounting scandals that have blighted US-listed
An alternative exitWith the nascent T-shares program plus a string of incentives, Taiwan wants to establish itself as a hub for China IPOs. Can it pare down the regulatory detritus and make this dream come true?
Main Stock Exchange listing figures as of 2012taiwan hong kong singapore malaysia nyse nAsdAq
Chinese fi rms in recent years. Second, Beijing and Taipei offi cials have yet to reach a compromise on how the FSC can investigate the fi nance and operations of mainland listing applicants.
Engaging the localsThis has not deterred the TWSE from actively courting Chinese companies, according to private equity investors. One of the selling points it that local analysts and investors are familiar with tech stocks. More than half the companies on TWSE are technology-related and they trade at an average price-to-earnings multiple of 14x .
“Mid-cap technology enterprises can enjoy higher visibility in Taiwan because analysts cover complete supply chains of high-tech industries in their research reports. This means tech stocks could enjoy higher valuations and trading volumes,” says York Chen, president and managing partner of iD TechVentures. “One disadvantage is that the government doesn’t allow companies with variable internet entity (VIE) structures [commonly used by Chinese internet players to get around foreign ownership restrictions] to list in Taiwan.”
Away from the tech space, there is always the risk that unfamiliarity will lead to illiquidity. While Taiwanese investors like China consumer growth stories, such as retail, distribution, and
branded consumer businesses, if they don’t fully understand them they are liable to steer clear, eroding the valuation and bringing trading to a near standstill.
“It is very important for Chinese companies to allocate signifi cant resources on investor relations
so they can communicate developments to the market on a timely basis and improve the transparency, which can in turn improve liquidity after the listing,” Excelsior’s Yang says.
A fi nal option for private equity investors in need of a quick exit is the reverse merger route, injecting the portfolio company assets
into a listed shell. Taiwan is seen as an attractive destination for this practice because shells tend to be much cheaper than in Hong Kong –NT$200 million ($6.7 million) versus up to HK$300 million ($38.7 million).
Scott Liang, assurance partner at Ernst & Young Taiwan, notes that the recent sharp increases in trading of technology shares that previously had a low turnover rate is often an indicator of reverse merger activity. It can bring down the waiting period – a proper IPO takes between six months and two years – but shell companies often come with bad reputations.
For this reason, reverse mergers are unlikely to become common practice in Taiwan – and even less so if the island state can establish itself as a credible listing location. In addition to pushing forward on the T-shares program, KGI Securities recommends abolishing the 30% Chinese ownership cap, making it easier for companies that already have or would like to restructure off shore to complete a public listing.
“We defi nitely see Taiwan’s capital market will gradually open-up,” says Ernst & Young’s Liang. “The Taiwan government is also learning from the experience of the US and Hong Kong and putting in place better governance procedures. It is striking a balance between investor protection and fi nancial market internationalization.”
“How is a Chinese fi rm supposed to raise funds in Taiwan and return them to the mainland? This can only be solved through high-level political communication” – Jocelyn Huang
The AVCJ Private Equity and Venture Capital Reports provide key information about the fast changing Asian private equity industry. Researched and compiled by AVCJ’s industry leading research team, the reports offer an in-depth view of private equity and venture capital activity in Asia Pacific, as well as in major countries and regions including Australasia, China, India, North Asia and Southeast Asia.
Each AVCJ Report includes the latest statistics and analysis, delivering insights on investments, capital raising, sector-specific activity. The reports also feature information on leading companies and business transactions.
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Number 32 | Volume 26 | August 27 2013 | avcj.com 19
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).
New beginningsC.Y. Huang, president of FCC Partners and chairman of the Taiwan M&A and PE Council (MAPE), explains why he sees the tide turning for foreign private equity in Taiwan and where the opportunities lie
“If Taiwan is unfriendly to foreign capital, whether strategic investors or private equity, how can it attract investment?”
GLOBAL PERSPECTIVE, LOCAL OPPORTUNITY
India 2013 Private Equity & Venture Forum
avcjindia.com
14th Annual
avcjindia.com
5-6 December • Taj Lands End, Mumbai
Knowledge Partners Cocktail Reception Host
Asia Series Partner Partners
Navigating a changing landscapeSAVE US$390 if you register before 30 September
Register now at avcjindia.com
Reasons to attend the AVCJ India Forum:
1 Network with 250 leading executives, including India’s most successful and well-respected GPs
3 Learn what successful funds have done to beat the odds and what others must do to prosper
2 Meet more than 50 LPs including dozens of foreign investors looking to increase their allocations to India
4 Hear honest and thought-provoking discussion about where the industry is headed
5 Enjoy cocktails and canapés with India’s top private equity minds, noted economists, global investors, and government officials who are driving policy
For the latest programme and speaker line-up, please visit avcjindia.com
Exclusive keynote speeches from some of India’smost respected and successful business leaders!
KEYNOTE
Ravi Venkatesan Former Chairman MICROsOFT INdIA
KEYNOTE
Ashishkumar Chauhan Managing Director and
Chief Executive Officer BOMBAY sTOCK ExChANgE
For a live demonstration or to subscribe, please call Helen Lee at +(852) 3411 4961 or email [email protected]
Your ultimate link to the Asian private equity, venture capital and M&A markets
AVCJ database is the ultimate link between Asian dealmakers and those who provide advisory, financial, legal and technological services to the private equity, venture capital and M&A industries. The AVCJ Database gives subscribers access to more than 125,000 companies and facts and statistics on over 90,000 transactions.
■ A large profile pool with around 6,800 funds, 3,800 GPs and 3,000 LPs
■ Comprehensive records, including more than 80,000 M&A transactions; 19,000+ PE/VC investments; over 2,400 PE/venture-backed IPOs; and in excess of 3,400 exits
■ Pan-Asian coverage, including Australasia and Japan
■ Data that is updated daily and tracked as far back as 1990 - the longest and deepest track record in Asia.
■ Data downloads in MS Excel and PDF formats
■ Powerful search functions and accurate statistics for the analysis
■ Customer service via telephone and email
Features
avcj.com
asianfn.com/Research_Database.aspx
Deal Report
NASDAQ listed Focus Media has received a non-binding tender offer of $5.4 per share, or $27 per ADS, of its entire outstanding
common shares from a consortium of investors, including company chairman Nan-chun Jiang, CDH Investments, China Everbright
Limited, CITIC Capital Partners, FountainVest Partners and The Carlyle Group. The consideration would be approximately $2.88
billion based on the 532.95 million common shares outstanding and not held by the chairman.
Announced Date:
Announced (US$mln): Previous Stake:
Deal Stake:
Final Stake:
Company Name Deal Role Industry
Private Equity Buyout
Buy-outs (MBO/MBI/LBO)
Deal Type:
Deal Status:
Stage:
Nationality
17.56%
Involved Companies
82.44%
100.00%
Agreement in Principle
Acquisition Technique:
Acquisition Attitude:
Leveraged Buyout
Neutral
Closed Date: n/d
Aug 12, 2012
Amount(US$mln) Deal Stake
$2,877.9400
Closed (US$mln): n/d
United StatesCarlyle Asia - China Investor n/d n/d Private Equity
Hong KongCDH China Management Co.,
Ltd.
Investor n/d n/d Private Equity
Hong KongChina Everbright Ltd. Investor n/d n/d Finance
Hong KongCITIC Capital Partners Ltd. Investor n/d n/d Private Equity
China (PRC)FountainVest Advisors Ltd. Investor n/d n/d Private Equity
China (PRC)Nan-chun Jiang Investor n/d n/d Unclassified
China (PRC)Focus Media (China) Holding
Co., Ltd. (FocusMedia)
Investee n/d n/d Advertising
China (PRC)Fosun International Ltd. Seller n/d -17.20% Steel
United StatesUndisclosed Shareholder(s) Seller n/d -65.24% Unclassified
United StatesCitigroup Global Markets Asia
Ltd.
Financial Adviser,
Investor (Carlyle Asia
- China)
n/d n/d Securities/Investment
Banking
United StatesCitigroup Global Markets Asia
Ltd.
Financial Adviser,
Investor (CDH China
Management Co.,
Ltd.)
n/d n/d Securities/Investment
Banking
United StatesCitigroup Global Markets Asia
Ltd.
Financial Adviser,
Investor (China
Everbright Ltd.)
n/d n/d Securities/Investment
Banking
United StatesCitigroup Global Markets Asia
Ltd.
Financial Adviser,
Investor (CITIC
Capital Partners Ltd.)
n/d n/d Securities/Investment
Banking
United StatesCitigroup Global Markets Asia
Ltd.
Financial Adviser,
Investor
(FountainVest
Advisors Ltd.)
n/d n/d Securities/Investment
Banking
United StatesCitigroup Global Markets Asia
Ltd.
Financial Adviser,
Investor (Nan-chun
Jiang)
n/d n/d Securities/Investment
Banking
United StatesJP Morgan & Co Inc. Financial Adviser,
Investee (Focus Media
(China) Holding Co.,
Ltd. (FocusMedia))
n/d n/d Securities/Investment
Banking
United StatesMorgan Stanley - Beijing
Representative Office
Financial Adviser,
Investor (CITIC
Capital Partners Ltd.)
n/d n/d Securities/Investment
Banking
United KingdomConyers Dill & Pearman Legal Adviser,
Investor (Nan-chun
Jiang)
n/d n/d Legal Services
1
Copyright 2012 AVCJ Group Ltd. All rights reserved.
✔ New features on selection ✔ Performance data on exits ✔ Portfolio holding period
Plus
For a live demonstration or to subscribe, please call Helen Lee at +(852) 3411 4961 or email [email protected]
Your ultimate link to the Asian private equity, venture capital and M&A markets
AVCJ database is the ultimate link between Asian dealmakers and those who provide advisory, financial, legal and technological services to the private equity, venture capital and M&A industries. The AVCJ Database gives subscribers access to more than 125,000 companies and facts and statistics on over 90,000 transactions.
■ A large profile pool with around 6,800 funds, 3,800 GPs and 3,000 LPs
■ Comprehensive records, including more than 80,000 M&A transactions; 19,000+ PE/VC investments; over 2,400 PE/venture-backed IPOs; and in excess of 3,400 exits
■ Pan-Asian coverage, including Australasia and Japan
■ Data that is updated daily and tracked as far back as 1990 - the longest and deepest track record in Asia.
■ Data downloads in MS Excel and PDF formats
■ Powerful search functions and accurate statistics for the analysis
■ Customer service via telephone and email
Features
avcj.com
asianfn.com/Research_Database.aspx
Deal Report
NASDAQ listed Focus Media has received a non-binding tender offer of $5.4 per share, or $27 per ADS, of its entire outstanding
common shares from a consortium of investors, including company chairman Nan-chun Jiang, CDH Investments, China Everbright
Limited, CITIC Capital Partners, FountainVest Partners and The Carlyle Group. The consideration would be approximately $2.88
billion based on the 532.95 million common shares outstanding and not held by the chairman.
Announced Date:
Announced (US$mln): Previous Stake:
Deal Stake:
Final Stake:
Company Name Deal Role Industry
Private Equity Buyout
Buy-outs (MBO/MBI/LBO)
Deal Type:
Deal Status:
Stage:
Nationality
17.56%
Involved Companies
82.44%
100.00%
Agreement in Principle
Acquisition Technique:
Acquisition Attitude:
Leveraged Buyout
Neutral
Closed Date: n/d
Aug 12, 2012
Amount(US$mln) Deal Stake
$2,877.9400
Closed (US$mln): n/d
United StatesCarlyle Asia - China Investor n/d n/d Private Equity
Hong KongCDH China Management Co.,
Ltd.
Investor n/d n/d Private Equity
Hong KongChina Everbright Ltd. Investor n/d n/d Finance
Hong KongCITIC Capital Partners Ltd. Investor n/d n/d Private Equity
China (PRC)FountainVest Advisors Ltd. Investor n/d n/d Private Equity
China (PRC)Nan-chun Jiang Investor n/d n/d Unclassified
China (PRC)Focus Media (China) Holding
Co., Ltd. (FocusMedia)
Investee n/d n/d Advertising
China (PRC)Fosun International Ltd. Seller n/d -17.20% Steel
United StatesUndisclosed Shareholder(s) Seller n/d -65.24% Unclassified
United StatesCitigroup Global Markets Asia
Ltd.
Financial Adviser,
Investor (Carlyle Asia
- China)
n/d n/d Securities/Investment
Banking
United StatesCitigroup Global Markets Asia
Ltd.
Financial Adviser,
Investor (CDH China
Management Co.,
Ltd.)
n/d n/d Securities/Investment
Banking
United StatesCitigroup Global Markets Asia
Ltd.
Financial Adviser,
Investor (China
Everbright Ltd.)
n/d n/d Securities/Investment
Banking
United StatesCitigroup Global Markets Asia
Ltd.
Financial Adviser,
Investor (CITIC
Capital Partners Ltd.)
n/d n/d Securities/Investment
Banking
United StatesCitigroup Global Markets Asia
Ltd.
Financial Adviser,
Investor
(FountainVest
Advisors Ltd.)
n/d n/d Securities/Investment
Banking
United StatesCitigroup Global Markets Asia
Ltd.
Financial Adviser,
Investor (Nan-chun
Jiang)
n/d n/d Securities/Investment
Banking
United StatesJP Morgan & Co Inc. Financial Adviser,
Investee (Focus Media
(China) Holding Co.,
Ltd. (FocusMedia))
n/d n/d Securities/Investment
Banking
United StatesMorgan Stanley - Beijing
Representative Office
Financial Adviser,
Investor (CITIC
Capital Partners Ltd.)
n/d n/d Securities/Investment
Banking
United KingdomConyers Dill & Pearman Legal Adviser,
Investor (Nan-chun
Jiang)
n/d n/d Legal Services
1
Copyright 2012 AVCJ Group Ltd. All rights reserved.
✔ New features on selection ✔ Performance data on exits ✔ Portfolio holding period
Plus
GLOBAL PERSPECTIVE, LOCAL OPPORTUNITY
Taiwan 2013 Private Equity & Venture Forum
avcjtaiwan.com
3 September • Westin Taipei
avcjtaiwan.com
For the latest programme and speaker line-up, please visit avcjtaiwan.com
Co-SponsorsCo-Sponsors
Knowledge Partners Exhibitor Legal Sponsor
眾達國際法律事務所
one firm worldwide
Simultaneous translation between Chinese and English will be available throughout the event
Only 1 week left.
Exclusive keynote speeches by the most influential public figures in Taiwan:
Chia Juch Chang The Minister
MINISTRY OF ECONOMIC AFFAIRS
Ming Chung Tseng Chairman
FINANCIAl SupERvISORY COMMISSION
RegisteR now at avcjtaiwan.comBOOK NOWCall Pauline Chen at +852 3411 4936 / +86 10 5869 7481E-mail to [email protected] registration at www.avcjtaiwan.com/static/book-now
