Page 14 All smiles in Taipei? · run the new business, which will take on stalled mining projects from around the country. GREATER CHINA Hony to buy Chongqing hotpot restaurant chain

Asia’s Private Equity News Source avcj.com November 11 2014 Volume 27 Number 42

All smiles in Taipei?Pension funds have LP potential, but insurers retain prime position Page 10

AVCJ award winnersAffinity, CVC, CDH, KKR secure top honors Page 8

A race for relevanceTrade treaties are vital to Taiwan’s future Page 12

Why corporate venture capital is flavor of the month in Taiwan

Page 14

Incremental postives for Taiwan PE deal flow

Page 3

Abraaj, Auda, Bain, CLSA, Denham, GIC, Helion, Hera, Hony, IDG, Infinity, Intel Capital, KPCB, Matrix, Mavcap, Pantheon, QIA, Qiming, SoftBank, TDF, TVS

Page 5

EDITOR’S VIEWPOINT

NEWS

FOCUS

PRE-CONFERENCE ISSUE AVCJ PRIVATE EQUITY AND VENTURE CAPITAL FORUM TAIWAN 2014

Zoyi Capital’s Andrew Kuo on the China-Taiwan investment thesis

Page 15

INDUSTRY Q&A

FOCUS2014 AVCJ AWARDS

Unlocking liquidity for private equity investors

www.collercapital.com London, New York, Hong Kong

Anything is possible if you work with the right partner

Number 42 | Volume 27 | November 11 2014 | avcj.com 3

EDITOR’S [email protected]

THE TELLING BLOW CAME IN THE American Chamber of Commerce in Taipei’s (AmCham) 2013 White Paper: Taiwan ranks second last among 17 Asian countries – trailing Sri Lanka and ahead of only Pakistan – in attracting private equity investment. The data used in the report, from 2012, were truly miserable. Just under $57 million was invested, and most of that went into a single PIPE deal.

The Taiwan government promised to revise rules on foreign investment and facilitate the inflow of PE capital. It gave impetus to quiet lobbying of the regulators by the Taiwan M&A and PE Council (MAPE) and AmCham’s private equity committee.

At last year’s AVCJ Taiwan Forum, the minister of economic affairs stressed that the government sees private equity as an important contributor to local economic development. He highlighted draft legislation that promises to ease the deal approvals process. Several months later, Taiwan’s cabinet approved the first amendments to the territory’s Business Mergers and Acquisitions Act in nearly a decade, including a provision that raises the level of shareholder support required for a take-private transaction to go through.

The nadir of 2012 has not been revisited. Private equity investment came to $134 million in 2013 and it stands at $309 million so far in 2014. However, virtually all this capital has been deployed in growth and pre-IPO, PIPE and early-stage deals. According to AVCJ Research, Taiwan has not seen a buyout of any discernible size since 2010, when EQT Partners teamed up with the CEO of Gala TV to buy the business from MBK Partners for around $190 million.

This confirms that the efforts to regain private

equity investors’ faith in Taiwan as a buyout market are not yet complete. Industry participants are adamant that any move to change the rules must be accompanied by consistent application of said rules. They want a more transparent approvals process include calls for publication of guidelines on investment criteria, the release of a list of sectors and companies in which foreign PE investment is unwelcome, and detailed as explanations from the regulator as to why particular transactions are being rejected.

Even if all these requests are granted, private equity investment in Taiwan is unlikely to recapture the boom period of 2006-2008 when $11.1 billion was deployed in a mixture of predominantly financial services and media assets. Like many other Asian markets, in the absence of severe distress it is difficult to see PE investors building up commanding positions in the banking sector.

However, private equity deal flow can still be significant, although its magnitude may not be fully reflected in the data. There have already been a handful of buyouts involving Chinese businesses ultimately owned by Taiwanese entrepreneurs. As these founders approach retirement – perhaps without natural successors in place – and as Taiwan businesses become ever more entwined with the mainland as a production and a consumption market, there will be more buyouts. But they may well be categorized as China deals.

Tim BurroughsManaging EditorAsian Venture Capital Journal

Back from the brinkManaging Editor

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Andrew Woodman (852) 3411 4852 Winnie Liu (852) 3411 4907

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PE investment in Taiwan by �nancing stage

Source: AVCJ Research

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014YTD

US$

mill

ion

5,000

4,000

3,000

2,000

1,000

0

Start-up/early stag RestructuringBuy-out PIPEGrowth/pre-IPO

For a live demonstration or to subscribe, please call Helen Lee at +(852) 3411 4961 or email [email protected]

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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.

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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


Ltd.

Financial Adviser,

Investor (CDH China

Management Co.,

Ltd.)


Banking


Ltd.

Financial Adviser,

Investor (China

Everbright Ltd.)


Banking


Ltd.

Financial Adviser,

Investor (CITIC

Capital Partners Ltd.)


Banking


Ltd.

Financial Adviser,

Investor

(FountainVest

Advisors Ltd.)


Banking


Ltd.

Financial Adviser,

Investor (Nan-chun

Jiang)


Banking

United StatesJP Morgan & Co Inc. Financial Adviser,

Investee (Focus Media

(China) Holding Co.,

Ltd. (FocusMedia))


Banking

United StatesMorgan Stanley - Beijing

Representative Office

Financial Adviser,

Investor (CITIC

Capital Partners Ltd.)


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

Ex-AVCJ chairman elected Nevada state treasurerDan Schwartz, former chairman of AVCJ, has been elected Nevada state treasurer, defeating Kim Wallin, the current Democratic state controller. Republican Schwartz replaces another Democrat, Kate Marshall, who has served the maximum permitted two consecutive terms.

ASIA PACIFIC

Pantheon gets emerging markets mandate from VERPantheon has won a EUR100 million ($124 million) mandate from Valtion Eläkerahasto (VER), the Finnish state pension fund, for investments across Asia and emerging markets. This is the first time VER has been awarded an emerging markets-focused PE mandate.

Auda hires ex-Paul Capital Asia head Lucian WuLucian Wu, previously co-head of Asia at Paul Capital Partners, has joined Auda as a managing director. Based in Hong Kong, Wu has become part of Auda’s secondaries team.

AUSTRALASIA

Denham backs start-up Australia mining platformDenham Capital has backed Auctus Minerals, a Australian start-up mining platform, with a $130 million capital injection. Denham has enlisted Steve Murdoch, former CEO of Karara Mining, to run the new business, which will take on stalled mining projects from around the country.

GREATER CHINA

Hony to buy Chongqing hotpot restaurant chainHony Capital has agreed to buy a 93.2% stake in Chongqing Cygnet Hotpot, a Chinese hotpot restaurant chain. The company was founded in 1982 and operates more than 300 restaurants in China. It was expected to go public but shelved plans due to the global financial crisis and then the embargo on domestic IPOs.

Qatar’s QIA to form JV with CITIC Group

Qatar Investment Authority (QIA), the Gulf state’s sovereign wealth fund, will set up a $10 billion joint venture fund with China’s CITIC Group. Each party will contribute $5 billion to the vehicle. QIA is looking to invest $15-20 billion over in the next five years.

Hepalink invests $22m in TPG biotech fundChinese drug maker Shenzhen Hepalink Pharmaceutical, previously a highly successful PE investment for Goldman Sachs, has committed

$22 million to TPG Capital’s latest biotech fund. The vehicle will make early- and late-stage investments in biotechnology and life sciences.

IDG, Morningside invest in P2P car-rental siteIDG Capital Partners and Morningside Technologies have led a $60 million Series B round of funding for PPzuche, a Chinese peer-to-peer (P2P) car-rental provider launched by Singapore’s iCarsclub. Source Code Capital, Sequoia Capital, Future Captial and Crystal Stream also participated.

SIG, SoftBank back China wearables maker CodoonSoftBank China Venture Capital and SIG Asia have invested $30 million in a Series B round of funding for Codoon, a Chinese wearable electronic devices manufacturer. The round comes eight months after Codoon raised $10 million in Series A funding led by Shenzhen Capital, with participation from CITIC Capital.

VC-backed Chinese dating app Momo files for US IPOMomo, a Chinese location-based social-networking app best known for its “flirting” function, has filed for a US IPO. Backers include Alibaba Group, Matrix Partners, Yunfeng Capital and Sequoia Capital. The app, which launched in August 2011, has 180.3 million users.

Qiming, Innovation Works invest in China Face++Qiming Venture Partners and Innovation Works have participated in a $22 million Series B round of funding for Face++, a Chinese face recognition technology developer. The round reportedly values the company at $100 million.

Intel invests in two Taiwanese tech firmsIntel Capital has backed two Taiwanese start-ups as part of an overall $62 million investment across 16 technology ventures. The two firms are PilotTV, which designs and operates digital signage systems for retail venues; and Thundersoft, which offers developer solutions and technology services for mobile operating systems.

Matrix, SIG commit $20m to laundry appMatrix partners and SIG have committed $20

KPCB China’s Tina Ju launches new fund as TDFKPCB China’s Tina Ju is reactivating the TDF Capital franchise as she looks to raise $200 million for a venture capital fund that will target technology, media and telecom, consumer and healthcare deals.

While Ju is described on KPCB’s website as founding and managing partner of KPCB China and TDF Capital, a source familiar with the situation says the new vehicle is being marketed as TDF’s third fund. She is working with Frank

Wang, who was at KPCB until 2009, when he joined Morgan Creek.

Negotiations are underway with a US-based fund-of-funds about coming in as an anchor investor for the new vehicle. A first close is expected in January 2015. TDF will deploy 80% of the corpus into direct transactions, with the remainder to be used to support several incubation funds that make pre-Series A round investments.

Ju set up VTDF China in 2000 and TDF Capital in 2005, raising two funds with the latter group. In 2007, TDF’s partners - Ju, David Su and Forrest Zhong - joined forces with Joe Zhou, formerly of the SoftBank Asia Infrastructure Fund (SAIF), to raise a China fund under the KPCB banner.

NEWS

avcj.com | November 11 2014 | Volume 27 | Number 426

million in a Series A round of funding for Edaixi, a mobile laundry service app owned by Beijing-based laundry franchise Rongchain.

NORTH ASIA

CLSA raises $210m for second Japan fundCLSA Capital Partners has reached a final close of $210 million on its second Japan-focused fund - Sunrise Capital II. The fund is smaller than its predecessor - which reached a final close of $350 million in 2006 - but will employ the same strategy of pursuing buyouts involving small and mid-cap Japanese companies.

Bain-backed Macromill acquires MetrixLabMacromill, the Japanese online research firm controlled by Bain Capital, has bought Dutch marketing analytics firm MetrixLab. Financial terms of the deal were not disclosed. The newly combined company will boast a global network of over 1,400 professionals across 25 offices in Asia, Americas and Europe, serving 2,200 clients.

Infinity Venture launches third China, Japan fundJapanese tech-focused investor Infinity Venture Partners has launched its third fund - Infinity e.venture Asia III - which will focus on start-ups in Japan and China. The fund has already raised $32 million and is hoping to reach a final close of $100 million next year.

SOUTH ASIA

Bain nets $400m through Hero MotorCorp part-exitBain Capital has completed a second partial exit in five months from Indian motorcycle manufacturer Hero MotorCorp, raising INR24.5 billion ($400 million). The private equity firm sold approximately 8.5 million shares at INR2,874 apiece, cutting its stake in the business from 5.77% to 1.49%.

TVS Capital consortium picks 26% stake in IEXA consortium led by TVS Capital Funds has agreed to buy a 25.64% stake in Indian Energy Exchange (IEX) for INR5.76 billion ($94 million) from Blackstone-backed Financial Technologies

India (FTIL). The deal, which values IEX at INR22.5 billion ($366 million), represents a full exit for FTIL.

Helion provides Series A for packaged food makerHelion Venture Partners has provided INR350 million ($5.7 million) in a Series A round of funding for iD Fresh Foods, an Indian ready-to-cook packaged foods company. Founded in 2006, iD Fresh Foods now employs 600 people and has 6,000 outlets across eight cities.

Forum Synergies leads round for clothing retailerForum Synergies has led a Series B round of

funding worth INR300-500 million ($4.9-8.1 million) for CBazaar.in, an Indian online ethnic fashion retailer. Existing investors Inventus Capital and Ojas Venture Partners also participated.

Pakistan online marketplace gets $3.5mPakistan online marketplace PakWheels.com has raised $3.5 million in funding from Malaysia-based venture capital fund Frontier Digital Ventures. The company is a platform for trading cars and bikes, sharing automotive reviews and news, and checking vehicle prices.

GHV forms partnership with Japan’s WiLIndia’s Green House Venture (GHV) Accelerator has teamed up with Japan and US-based early-stage investor World Innovation Labs (WiL) to back Indian start-ups with the potential to go global.

SOUTHEAST ASIA

Abraaj buys Southeast Asia’s Wine ConnectionThe Abraaj Group has acquired a majority stake in the Wine Connection Group, a Southeast Asia-focused food and beverage chain. Founded in 1998 by French national Michael Trocherie, Wine Connection has a network of 55 outlets in Singapore and Thailand, offering wines from around the world and Western-style cuisine.

Malaysia’s Axiata launches $30m fund with MavcapMalaysian telecom conglomerate Axiata Group has partnered with Malaysia Venture Capital Management (Mavcap) to set up a MYR100 million ($30 million) VC fund to invest in Malaysia’s digital services companies. Axiata will commit MYR50 million while Mavcap puts in MYR20 million, with the remainder to be raised from other investors.

Hera re-ups in Philippines-based CashcashpinoyHera Capital has committed an additional $2 million in a Series B round of funding for Cashcashpinoy, a Philippines-based online shopping platform. The company has more than 1.5 million consumers on its platform with 35,000 transactions made monthly. Hera made its first investment in Cashcashpinoy last year.

GIC invests $391m in Philippines liquor producer GIC Private has agreed to pay PHP17.6 billion ($391 million) for a 9.64% stake in Emperador (EMP), a Philippines-based liquor producer. Its parent is Alliance Global, a conglomerate controlled by local businessman Andrew Tan. This is the Singapore sovereign wealth fund’s third direct investment in the Philippines this year, following commitments to Metro Pacific Investments’ hospital business and canned tuna producer Century Canning Corporation.

GIC will acquire 1.12 billion shares in EMP - representing a 6.95% stake in the business - at PHP11 apiece, for a total consideration of PHP12.32 billion. It will then pay PHP5.28 billion

for equity-linked securities with a seven-year term, which if fully converted, will take GIC’s holding to 9.64%. In addition, the sovereign fund has the option to invest a further PHP4.4 billion, taking its interest in EMP to 11.76%.

EMP is the largest spirits company in the Philippines and the world’s biggest brandy producer. In 2013, it sold approximately 33 million cases of brandy, cornering close to 50% of total spirits volume in the Philippines. The company’s most successful brand is Emperador Light.

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ASIA [email protected]

AFFINITY EQUITY PARTNERS was named firm of the year at the 2014 AVCJ Private Equity and Venture Capital Awards on the back of a strong fundraise, investments in three different markets, and the largest trade sale exit ever seen in the region. The $5.7 billion sale of Oriental Brewery (OB) to Anheuser-Busch InBev also secured large cap exit of the year prize for the Affinity and co-investor KKR, while the two firms won the Operational Value Add Award for transformative work undertaken during the holding period.

A total of 14 awards were presented in a competition enlarged to better recognize mid-cap and venture capital activity. Victor Chu, chairman of First Eastern Investment Group, was also on hand to collect the AVCJ Special Achievement Award in acknowledgment of his place among the pioneers of private equity in Asia.

Affinity announced a final close of $3.8 billion on its fourth pan-regional fund earlier in the year after agreeing with LPs to raise the hard cap from $3.5 billion. Over the 12 months ended September, the PE firm invested in a dairy farming joint venture with China’s Sunlon, bought a stake in Virgin Australia’s frequent flier business, and backed poultry producer Leong Hup International in its debut Malaysia deal.

Accepting the award, K.Y. Tang, chairman of Affinity, looked back to the beginnings of his career as a buyout investor 17 years ago. He paid tribute to his colleagues at Affinity and the industry as a whole for riding out the initial market skepticism and the various cycles that followed to achieve what it has today.

“When we started we had very modest ambitions,” Tang said. “We never thought the buyout business would grow to this size in Asia, so our success is also a testament to the whole industry and everyone who works in it.”

OB, which Affinity and KKR bought from AB InBev for $1.8 billion in 2009 and then sold back to the previous owner for a 5x return, has inevitably drawn a lot of attention. Over the five-year holding period, OB went from being the number two player in South Korea’s beer market to the clear leader.

“What we did particularly well across KKR and Affinity was really enable the management to pursue that effort, first by identifying and prioritizing attractive growth opportunities and then really working closely day-to-day to really implement those strategies,” said Stephen Ko, a director at KKR. He collected the Operational Value Add Award with Y.T. Park and C.J. Lee, managing partner and partner, respectively, at Affinity.

CVC Capital Partners, Quadrant Private Equity and Qiming Venture Partners triumphed in the three fundraising categories, while Flipkart and Alibaba Group won the prizes for VC deal of the year and IPO exit of the year. The other two deal of the year awards went to Chinese investments - CDH Investments for Nanfu Battery, and FountainVest Partners and China Media Capital for IMAX China.

Mid-cap exit went to Japan as Advantage Partners won for United Cinemas. Richard Folsom, representative partner at Advantage Partners, noted that Japan has lived in the shadow of other Asian markets. “Part of that is due to the fact that Japan in terms of market size and deal size has not met expectations in many ways relative to the size of the economy, but there are great deals like United Cinemas happening in the mid-market space,” he said.

The VC Professional of the Year Award went to Jixun Foo, China-based managing partner at GGV Capital, while in the parallel PE category, for the first time, two individuals from one firm – KKR’s David Liu and Julian J. Wolhardt – shared the prize. KKR has committed more than $1.3 billion across five China deals in the past 12 months.

Affinity named firm of the year at AVCJ Awards14th AVCJ Asia Awards: Affinity, KKR win two prizes for Oriental Brewery; CVC, CDH win awards for large-cap fundraising and investment; Quadrant, Advantage, FountainVest triumph in mid-cap categories

K.Y. Tang, chairman of Affinity Equity Partners, receives the Firm of the Year Award, accompanied by Y.T. Park (left) and C.J. Lee


ASIA [email protected]

Dorothea Koo of Baker & McKenzie presents the VC Professional of the Year prize to GGV Capital’s Jixun Foo

Stuart Schonberger (right), managing director at CDH Investments, receives the Deal of the Year - Large Cap Award from Guy Miller, director at RCA

Roll of honor

Fundraising of the Year – Venture Capital: Qiming Venture Partners IV (Qiming Venture Partners)

Fundraising of the Year – Mid Cap: Quadrant Private Equity No.4 (Quadrant Private Equity)

Fundraising of the Year – Large Cap: CVC Capital Partners Asia Pacific IV (CVC Capital Partners)

Deal of the Year – Venture Capital: Flipkart (Tiger Global/Naspers/GIC Private/Morgan Stanley Investment Management/DST Global/Accel Partners/Iconiq Capital/Sofina)

Deal of the Year – Mid Cap: IMAX China (FountainVest Partners/China Media Capital)

Deal of the Year – Large Cap: Nanfu Battery (CDH Investments)

Exit of the Year – IPO: Alibaba Group (Silver Lake/China Investment Corporation/Yunfeng Capital/CITIC Capital/Boyu Capital/Nepoch CapitalAsia Alternatives/Pavilion Capital/Siguler Guff )

Exit of the Year – Mid Cap: United Cinemas (Advantage Partners)

Exit of the Year – Large Cap: Oriental Brewery (Affinity Equity Partners/KKR)

VC Professional of the Year: Jixun Foo (GGV Capital)

PE Professional of the Year: David Liu & Julian J. Wolhardt (KKR)

Operational Value Add: Oriental Brewery (Affinity Equity Partners/KKR)

Firm of the Year: Affinity Equity Partners

AVCJ Special Achievement: Victor Chu (First Eastern Investment Group)


COVER [email protected]

TAIWAN’S LABOR PENSION FUND SYSTEM is in transition. Earlier this year, the silos separating six public labor fund schemes were broken down to create a single investment department – the Bureau of Labor Fund (BLF). With $80 billion in pension, retirement and insurance assets to draw upon, this new entity has the ability to make larger commitments to larger managers.

Alternatives will feature more strongly than before in the combined allocation. Having recently committed $200 million to a global infrastructure GP under a former scheme, BLF plans to invest a further $200 million in alternatives over the next year. This capital will not flow into private equity. The beneficiaries will be real estate investment trusts (REITS) and infrastructure, in accordance with previous practice.

Even without a specific private equity allocation, the move has fueled speculation that Taiwan’s pension fund will soon become a significant new target for international GPs. BLF may end up following the path trodden by many of its counterparts globally in building up exposure to alternatives: start with yield-producing assets such as real estate and infrastructure, then broaden the scope of investments to include other asset classes, including private equity.

“There is a lot of activity, from advisers to gatekeepers, happening in Taiwan, which means they see an opportunity to meet and work with potential new LPs,” says Mounir Guen, founder and CEO of MVision. “We are seeing more regular activities concerning Taiwanese institutional investors. Right now the LPs are mostly insurance companies, but pension funds aren’t that far behind them.”

To many, the labor fund schemes merger is a significant step in this evolutionary process. Others, however, are more skeptical on the pace of progress. If Taiwan’s pension funds are only just starting to consider putting private equity in their portfolios, actual allocations into the asset class are unlikely to happen in any time soon.

Andy Tsai, managing director at StepStone Group, argues that the recent structural reform has nothing to do with looking at new asset classes like private equity. It is an efficiency drive, pure and simple – and a positive one. “By making

more efficient use of investment expertise across the funds, it could potentially take on new investment strategies,” he says. “But in the short term, integration issues have to be addressed between different departments.”

Regulatory spider’s web Prior to labor funds reform, there were four major pension and government-related funds in Taiwan – the Labor Insurance Fund, the Labor Pension Fund, the Public Service Fund and Chunghwa Post, also known as Postal Savings Fund. Between them they had more than NT$7 trillion ($230 billion) in assets.

The $38 billion Labor Pension Fund and $19 billion Labor Insurance Fund were regulated by different government bodies. The Labor Pension Fund Supervisory Committee (LPFSC) was responsible for two labor pension funds – the Labor Retirement Fund and the newer Labor Pension Fund. The former operates under

a defined benefit (DB) model while the latter is defined contribution (DC).

In addition to the labor pension funds, the BLF platform also absorbed four labor insurance and reimbursement schemes, formerly controlled by the Bureau of Labor Insurance Department.

StepStone’s Tsai explains the newer Labor Pension Fund, which replaced the old scheme in 2005, is the most suitable candidate for capital commitments into private equity. As a DC system – where responsibility for providing the pension lies with the employee, not the employer – it has greater flexibility and fewer existing liabilities. However, the newly-established bureau has no plans to invest in PE.

Neither of the other two major pension systems – the Public Service Fund and Chunghwa

Post – have made investments in private equity. Industry participants attribute this to two key factors: an absence of industry know-how and a lack of familiarity with the regulatory regime.

Firstly, Taiwan’s pension funds are used to investing in domestic government bonds and public equities. There is little or no experience of private markets and there are no established investment teams that could redress the balance. Secondly, pension funds have a residual discomfort with illiquid assets, long holding periods and a lack of information transparency.

“High liquidity and a high level of information disclosure do matter to us,” Chao-Hsi Huang, BLF’s director general, told AVCJ. “Although investors could generally obtain higher returns from private equity investments compared to buying stocks, this type of investment might not be what we favor right now.”

However, the fundamental issue is that the government is unaware of the benefits the asset

class could bring – so there is no push, formal or informal to build an exposure to private equity. It would help if a government agency were willing to assume responsibility for promoting private equity investment, but as it stands, none are.

“People would look at this asset class seriously if it started to be regulated. But it’s unclear which agencies should be responsible for taking the lead,” says a senior investment professional with a Taiwan financial institution. “We have tried to promote the asset class to government-related funds. Some government officials have even suggested setting up a sovereign wealth fund (SWF) to generate better investment income. But there have been years of talks without any progress.”

There is a indeed a strong case to be made for the government setting up a SWF to help cover

Hare and tortoiseGPs are watching with interest as Taiwan restructures its labor pension fund system, thinking of potential LP commitments. But insurers remain the most active players in the market, and they want to do more

Taiwan’s largest LPsInvestor Type Assets (US$b) Alternative investments preferences

Chunghwa Post Public pension fund 194 Real estate, infrastructure

Cathay Life Insurance Insurance company 127 Private equity, real estate, infrastructure, hedge funds

Nan Shan Life Insurance Insurance company 79 Private equity, real estate, infrastructure, hedge funds

Fubon Life Insurance Insurance company 71 Private equity, real estate, infrastructure, hedge funds

Shin Kong Life Insurance Insurance company 65 Private equity, real estate, infrastructure, hedge funds

Source: Preqin; public filings


future pension liabilities and other social needs. Like most other countries in the region, Taiwan’s population is aging rapidly.

The fertility rate, which stood at four children per woman in 1970, dropped to 1.2 in 2005. It is estimated to be 1.11 in 2014, according to the CIA World Factbook, ahead of only Macau and Singapore. The old-age dependency ratio – the number of people age 65 and older per 100 working age people (aged 15-64) – is currently quite favorable at 13, but it is expected to increase dramatically to 63 by 2050. Taiwan’s total population will drop from 22.8 million to 19.8 million over the same period.

“The likes of China, South Korea and Japan, and certainSoutheast Asian, all have their own versions of SWFs. Taiwan has yet to develop one despite years of discussions. It’s difficult to figure out why but I would imagine the political environment could be a factor,” says Vincent Ng, a partner at Atlantic-Pacific Capital. “They appear to be moving in the right direction, but it may take some time before a SWF is in place to start investing into alternatives.”

Structural reform aside, industry participants suggest Taiwan should adopt a top-up approach to promote the PE asset class, starting from the government level. Two agencies are seen as well-placed to take the initiative: the Ministry of Labor, which oversees the Labor Pension Fund; and the Economic Development Council, which supervises venture capital investments made by the National Development Fund.

Insurance angleIt may turn out to be the longest of long games, and in the meantime, insurance companies represent Taiwan’s most significant LP constituency.

There are about seven insurance companies looking at alternatives opportunities, with total assets of $6-8 billion. In terms of capital deployment, there are three main groups – Cathay Life Insurance, Fubon Life Insurance and Nanshan Life Insurance. And Nanshan only started making commitments to the asset class last year.

“The insurance companies are at various stages of development as it relates to investing in PE. Groups like Fubon and Cathay started making private equity and alternative investments a lot earlier. They have been in the market for several years, have established deep portfolios, and will continue for investing, while Nanshan is still at an early stage of portfolio construction. Having said that, Nanshan has been very active in the last year or so, investing in some top-tier global GP brand names,” says Atlantic-Pacific’s Ng.

He estimates the group has invested $500 million to $1 billion in alternative assets already, if not more.

Cathay, the largest insurer in Taiwan by assets under management, ventured into alternative investments in the wake of global financial crisis in 2008. It initially invested through fund-of-funds and some separate account mandates, and has accumulated around 60 GP relationships. Most of these managers are in North America and Europe, partly because insurers are only allowed to invest in GPs registered in member nations of the Organization for Economic Co-operation and Development (OECD).

With alternative assets programs still in their nascent stages, the industry regulator – the Financial Supervisory Commission (FSC) – allows insurers to invest no more than 2% of their total assets in private equity and hedge funds. It is a relatively small proportion compared to other

developed markets, where financial institutions can allocate as much as 10%. Nevertheless, with about $130 billion in assets, Cathay has a sizeable $2.6 billion to deploy in PE and hedge funds.

“Apart from GPs’ track records, in recent years we have started evaluating whether they have specialized strategies, such as financial services or energy,” says Allen Lee, head of alternative investments at Cathay. “While we will maintain close relationships with top-tier GPs, we will award separate account mandates or use fund-of-funds to look at mid-market GPs – an area we’re less familiar with. If mid-cap managers perform well and want to raise next funds, we can deal with the GPs directly without going through the third-party groups.”

Lee says yield-generating products are important to Cathay, notably credit, mezzanine and infrastructure funds. These asset classes can deliver income to supplement the current payout burdens on underlying insurance programs. It is very different behavior from the newer insurance groups, though. Nanshan, for example, will focus more on mega funds launched by brand name GPs pursuing buyout strategies, Atlantic-Pacific’s Ng says.

Given the continued low interest rate environment, insurers are eager to deploy capital in order to generate higher returns. But the local market lacks ample supply of diversified investment instruments, such as private equity and other alternative assets.

Last April, restrictions were lifted on the island’s insurance companies acquiring overseas commercial property. The regulators then permitted insurers to make direct investments in overseas financial services sectors. In August, Cathay purchased an office building in the city of London from TPG Capital and Canada’s Ivanhoe Cambridge for GBP311 million ($516 million). It is the first Taiwanese insurance firm to get exposure in this space.

“Taiwanese insurers are desperate and they’re under pressure to look for higher returns in overseas investments. The regulator realized that if it continued to prevent insurance companies from investing in other sectors, industry players would suffer financial losses,” says Sonia Sun, a partner at KPMG Law Firm. “Private equity can’t accommodate the needs of insurance companies to deploy capital, so opening up overseas real assets and financial assets for investment makes sense.”

Future plansThere are a handful of home-grown private equity firms setting up with a view to attracting capital from insurance companies. However, the FSC keeps a close watch over the industry due to its immaturity. While overseas investment approvals come relatively fast, domestic are slow – 3-4 months or more – because they are dealt with on a case-by-case basis. approval is slow as the regulator will review on a deal-by-deal basis.

The general expectation is that the more established insurance players will see further investment liberalization, allowing them to participate in co-investments alongside international GPs. Beyond that, they hope to play the GP role themselves and make direct investments.

“There are two things on LPs’ minds – co-investment and direct investment. Apart from reducing management fees, we could also be more involved in the due diligence, transaction and portfolio management process,” Cathay’s Lee says. “With those in place, we can control the process as well as seek higher returns without paying management fees and carried interests.”

Furthermore, new participants hope the 2% ceiling on private equity and hedge fund exposure will be raised. “We have already started lobbying with the regulator to allow us to allocate more capital to the asset class but it seems this not yet been put into the regulatory agenda,” says one insurer.

COVER [email protected]

“While we will maintain close relationships with top-tier GPs, we will award separate account mandates or use fund-of-funds to look at mid-market GPs – an area we’re less familiar with” – Allen Lee


[email protected]

LAST WEEK, VINCENT SIEW, TAIWAN’S former vice-president, travelled to Beijing for the 2014 Asia-Pacific Economic Cooperation (APEC) summit where he met with Chinese President Xi Jinping in an encounter both parties hoped would soothe relations. Beijing recently rebuked the territory for voicing support for pro-democracy protesters in Hong Kong, while anti-Beijing sentiment has it been simmering in Taipei as the city moves toward its tightly-fought mayoral elections.

Following the meeting, Beijing struck a conciliatory tone, with the state media quoting Xi as saying that the two parties should respect each other’s “choice of development path and social system.” This points to the complexity

behind cross-strait relations and the difficulty Taiwan and China face in balancing their respective political with economic reality.

Taiwan’s future prosperity depends on relations with China, not only because the mainland is its largest trading partner – Taiwan currently relies on China and Hong Kong for 39.6% of its exports and 18% of its imports – but also because of these same relations will likely to dictate its future trade agreements with other countries. Taiwan has so far largely been excluded from efforts on delivering greater regional economic integration due to China making objections on political grounds.

The one exception is APEC; China and Taiwan are both members, on the understanding that

Taiwan joined as Chinese Taipei and its president agreed never to attend meetings.

“The China permission element is always going to be a wild card any time Taiwan wants to negotiate a bilateral multilateral trade agreement with somebody,” says William Bryson, chairman of the American Chamber of Commerce in Taipei’s (AmCham) PE committee. “China has issues with Taiwan entering into multilateral agreements that China is not part of, and even if they do. it will not necessarily support Taiwan membership.”

Reaching out? This is not only an issue for potential investors – including those in private equity who see free trade agreements (FTAs) as a driver for liberalizing

foreign investment laws – but also for Taiwan’s broader economic development. Cross-border agreements will inevitably rely on cross-strait relations, but nurturing the latter can be complex.

Despite having sixth largest GDP in the region ($474 billion, according to 2012 figures), Taiwan has seen very little PE deal flow with just $134 million transacted across 31 deals last year and $309 million across 14 deals so far this year. By contrast, Singapore – which ranks behind Taiwan in terms of GDP – saw $3.2 billion across 97 deals and $3.6 billion across 65 deals, in 2013 and 2014 so far, respectively.

However, some industry participants have been encouraged by recent efforts to enter into agreements with a number of countries.

Taiwan has already signed the Economic Cooperation Framework Agreement (ECFA) with China; this happened in 2010 and it opened the way for Taiwan to sign FTAs with other countries. Treaties have since been concluded with New Zealand and Singapore. In both cases, Taiwan entered into these agreements not as a sovereign state, but as the “Separate Customs Territory of Taiwan, Penghu, Kinmen and Matsu” – which also forms the basis of its membership in the World Trade Organization (WTO).

More recently, President Ma Ying-jeou said in his New Year address that joining the Trans-Pacific Partnership (TPP) – currently being negotiated by a bloc of 12 nations – would be a goal for Taiwan. The group includes the likes of the US, Japan and Australia, but not China. Taiwan is also reported to have entered into preliminary FTA discussions with other countries, although these have since hit a roadblock.

Problems arose when the Cross-Strait Service Trade Agreement (CSSTA), a trade treaty signed by China and Taiwan in June last year under the umbrella of ECFA, was not ratified by the Taiwanese legislature. Ratification was prevented by protestors against the pact occupying the Legislative Yuan for 19 days.

“There are six countries that have either have signed an agreement with Taiwan or have been in negotiations – all have been put on hold, partly because these countries do not want to upset China,” says C.Y. Huang, president of FCC Partners and founding chairman of the Taiwan M&A and Private Equity Council (MAPE). “So China is a bit like a big brother; if these countries can get Beijing’s blessing they can go ahead.”

What Taiwan’s government must do now is reassure the public that strengthening trade ties China is the right course of action in order to push through the CSSTA and then hopefully restart the stalled FTA negotiations. For many Taiwan business leaders at least the case for CSSTA is strong. AmCham’s 2014 business climate survey revealed that of 423 businesses polled, 69% agreed that the CSSTA is mutually beneficial for China and Taiwan. However, convincing the broader public is a different matter, with many feeling that integration with China has already gone too far.

“Our politics and economy is somewhat segmented by pro-China and anti-China attitudes,” says Sonia Sun, a partner with KPMG

Beyond BeijingTaiwan’s future success as a foreign investment – and a private equity – destination largely hinges on the future of its free trade relationships. But the territory must first it must manage its ties with mainland China

Taiwan’s international trade

Source: Taiwan Bureau of Statistics

Mainland ChinaImports: Other Mainland ChinaExports: Other

ImportsExports

2005Imports

Exports

2006Imports

Exports

2007Imports

Exports

2008Imports

Exports

2009Imports

Exports

2010Imports

Exports

2011Imports

Exports

2012Imports

Exports

2013

US$

mill

ion

350

300

250

200

150

100

50

0

[email protected]

Law Firm. “So the government has been doing what it can to educate people on the importance of opening up.”

FCC’s Huang describes how those who are against greater integration through the CSSTA fear that the mainland has become a strong competitor to Taiwan’s high-tech industry. However, he points out that Taiwan is left with few alternatives.

“People say we should not rely on China and focus on globalization, but globalization without China – when the other countries view China as their biggest trading partner – is simply not feasible,” Huang says. “Talking about TPP without CSSTA is like talking about graduate school when we didn’t even get a high school diploma.”

Even if Taiwan is able to proceed with its ambitions of joining the TPP – without ratifying the CSSTA – the practical hurdles to entry are significant. AmCham’s Bryson describes the TPP as representing the gold standard for trade concessions. Again, there is the issue of convincing the public, industry and the Taiwan legislature that making the necessary concessions will secure better access to some of the largest economies of the world.

“The first question is whether the executive can make those concessions, and do they have the political will to make the modifications to existing

laws and regulations that would be required to qualify for membership to TTP,” Bryson says. “The second question is how long would it take?”

Accentuate the positive On the positive side, Taiwan has already made some moves in the right direction with the Financial Supervisory Commission (FSC) loosening controls on private equity by allowing domestic asset managers to raise funds for commodity-linked PE investments. Meanwhile, the same AmCham survey cited earlier shows that 65% of business leaders feel that Taiwan is capable of meeting the high standards required for TPP membership. But much still needs to be done to bring regulatory practices in line with international norms.

“Some of our industries are well prepared, but not all of them and that is why it has been hard for the government to speed up the process,” says KPMG’s Sun. “In particular, Taiwan needs to prepare its weak industries, such as agriculture, which are not that competitive. Because once you open up to free trade, you have to open up all industries.”

Sun’s sentiment is reflected by AmCham’s Bryson who also highlights agriculture as a potential stumbling block. He questions whether Taiwan will be able to demonstrate it can comply

with an agreement once it is adopted. “Taiwan in general has done well with its WTO

obligations, for example, but some in Congress have publicly pointed out Taiwan’s failure to live up to the beef trade protocol, or expressed been frustration at the dispute over its imports of US pork, and that doesn’t help,” he says.

Despite the ongoing uncertainty over FTAs, and questions about Taiwan’s future relations with China, many remain upbeat regarding the territory’s competitiveness in the region. “When we speak to our multinational clients – particularly those from Europe and Japan – they view Taiwan as a good partner,” says Audry Ho, a partner at EY. “ Many of our clients are now saying that their first priority is focus on places like Taiwan before mainland China where issues over corporate governance and financial reporting systems can make it challenging.”

AmCham’s Bryson adds that many Japanese companies have used Taiwan as a springboard to other markets within the region. This trend may gain momentum as the cost of doing business in Japan and China equalizes.

“China was clearly a place to invest in for a long time but the cost of doing business in China is going up and as they reach parity you begin look at other factors, so there is a push to look at Taiwan more,’ says Bryson.

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STARTING A SOFTWARE COMPANY IS relatively simple and cost-effective, but scaling up can be much more of a challenge. AirSig, a Taiwan-based mobile authentication app that launched in June of last year, is currently facing this very issue.

Its main product, Air Signature, allows users to unlock devices – such as mobile phones – by writing their signature in the air. The technology can also be used in a wide range of hardware devices, such as smart home systems or private cars. Three months ago, AirSig received $2 million in Series A funding from Taiwan electronics giant Foxconn Technology Group.

“Capital isn’t our main concern. The key consideration is how we set up alliance with a large corporation that is using our technology. Foxconn is well-established in the global market, so it could help us expand overseas quickly,” says Moss Chuang, technical director of AirSig.

Foxconn is one of numerous traditional hardware players seeking solutions to make their businesses more internet-related. With independent venture capital funding stagnant in Taiwan over the last few years could corporate VC play step into the breach?

“It’s a transition time, which requires corporates and start-ups to explore what tech applications are going to be like in 2-3 years,” says Joseph Chan, a partner with incubator appWorks. “In the past, corporates mainly invested in their own supply chains. Now they are thinking about how to integrate technology into their hardware to meet consumer demand.”

Growth momentumGo back 10 years and VC funding was readily available in Taiwan from multiple sources. Large PC makers such as Acer were actively investing so independent VC players were willing to do the same, backing a string of local start-ups. But when the world moved on to internet technology, Taiwan’s start-ups got left behind. The VC firms followed the innovation, entering China and Southeast Asia.

“Funding has dried up in Taiwan in recent years. There is still some early-stage VC investment but most of it is capital-intensive, targeting areas such as biotech. Those investors are more familiar with traditional businesses like semiconductors and PCs. They are less familiar

with internet innovation, so they won’t put any capital into those kinds of start-ups,” says Lucas Wang, CEO of TMI, a Taiwan-based angel investor group.

Corporates are already filling the gap. Two months ago, Acer established a NT$1 billion ($34 million) VC fund – Acer Venture Capital Fund – to invest in start-ups. The corporate investment arm will help speed up Acer’s cloud-computing strategy for Acer. Although the new fund has yet to make any investments, Acer has formed partnerships with incubators and accelerators – including appWorks – to promote start-up using its existing resources and technology.

According to industry participants, a number of other listed technology firms have followed

suit, including Asus. At the same time, a number of key shareholders in listed companies are making angel investments. Momentum is picking up, to the point that corporates are now a meaningful source of Series A funding.

“We have got a lot of good start-ups, but we haven’t established an ecosystem from the funding side, which means we only have early investment at this stage. Moving forward, I think we still lack Series A investors. But we do see corporates doing early-stage investments. A couple of local VCs are also starting to do later stage of investments in internet companies,” says TMI’s Wang. ‘I think the whole environment is changing in a practical way, but it’s very slow.”

Government actionIt remains to be seen whether corporates can be

a sustainable source of capital for local start-ups. The check sizes are relatively small and the investments are strategic in nature, which means the money could equally well go overseas in search of technology to support the parent’s expansion plans. As a result, the government is also trying to reboot the start-up ecosystem.

Last month, the $10 billion National Development Fund (NDF) initiated a new program to attract international VCs to invest in Taiwanese start-ups and also help local companies expand into overseas markets. Any foreign VC firm with a presence in Taiwan could feasibly receive a grant equivalent to 40% of the total fund size. However, all the capital must be invested in local early-stage firms. The NDF has

also introduced other measures designed to reduce the bureaucratic and economic burden on start-ups.

Local industry participants identify IPO deregulation as another potentially useful move. At present, listing applicants must have a track record of profitability, but this can be a big ask for a start-up in expansion mode. The regulator occasionally makes exceptions but the approval process is long and uncertain. VC firms are put off by the lack of liquidity.

“The technology industry doesn’t lack capital,” says appWorks’ Chan. “The main issue lies with liquidity as every investor wants to realize their investments. Government funding is an encouraging move, but it would also be helpful if the government allowed companies that have yet to post a profit to go for IPOs.”

Captive elementTaiwanese corporations are launching captive VC units to invest in technologies that can update their product offerings. The new source of funding is welcome in the absence of independent VCs, but is it a panacea?

No. of deals

Start-up and early-stage investment in Taiwan

Source: AVCJ Research

60

50

40

30

20

10

0

20

15

10

5

0

US$

mill

ion

Dea

ls Amount (US$m)

2009 20112010 2012 2013 2014


Q: What led to the three of you [Pei-Pei Yu, formerly of Goldman Sachs, Eric Chen, formerly of Temasek Holdings, and Kuo] setting up Zoyi?

A: We saw lots of opportunities in China – no one questions the potential of that market – and we thought we could leverage our respective connections to Taiwan and Hong Kong companies that have been in China for many years, as well as local mainland companies, to identify good investment opportunities. These companies need more help. A lot of them were export-oriented with manufacturing plants in China, but now they recognize China is an important consumption market. Domestic marketing is often the weak point – they don’t have the knowledge base to do the branding, for example – so our senior industry professionals and functional experts can bring in the talent required to run these companies. We emphasize the value-add element. At the same time, these are mid-cap companies so the global private equity firms will not focus on supporting them.

Q: And then there is the succession-planning opportunity…

A: When I was a banker with J.P. Morgan over 10 years ago, if you went to see company founders in Taiwan and Hong Kong and asked them if they would consider selling their business, the immediate response was, “You must be kidding.” At that age, around 50, these entrepreneurs think they can carry on running the business and then their children are studying overseas so they

are trying to build a platform for succession. Now they realize the younger generation is not coming back to take over the business. The founders are in their late 50s and 60s and the competition is getting more intense. The succession-planning issues are obvious..

Q: So how many of your deals are control transactions?

A: We have closed five deals – in one case we own 60% and in another we are the single largest shareholder, Eric is chairman of the company, and we are driving the future strategy and development. But all our deals involve close cooperation with management. There are many reasons why a deal might come and succession could be one reason why we can get control. But beyond that it is a question of who can upgrade a company and add value. Most of our deals come through our personal relationships rather than through third parties. All three of us have made investments in China so we know how to own and operate a business there. When you have a long relationship with someone, and they know your background, they are more comfortable talking to you.

Q: To what extent are you targeting Taiwanese companies?

A: The targets are not only in Taiwan. We invested in a company in Beijing founded by two mainland Chinese but they have a group of managers from Taiwan and one of our partners previously invested in the firm. We invested in Vigor Kobo, a Taiwan-based company that sells pineapple cakes, and it has

a shop in Shanghai’s Yuyuan Garden and a manufacturing plant in Kunshan in Jiangsu province. It is very difficult to find even a mid-cap company that is only doing business in Taiwan – any business with annual sales of $30-50 million or more has a China element. In some cases, these companies still get the majority of their sales from Taiwan but they have a Greater China dream.

Q: The pan-regional buyout firms have experienced some problems in Taiwan with getting approval for certain deals – particularly privatizations – and exiting businesses. Is this a concern for Zoyi?

A: In any part of the world, there are restrictions on investment in certain industries. Telecom and financial services are more

regulated than most sectors and the global buyout firms were very active in these areas in Taiwan. That is why they can’t get out easily. We try to avoid these sectors. We focus on consumer-retail, high-end manufacturing with certain technology hurdles, and then services. If you are not in a highly-regulated industry and you have a good local partner, the chances of getting blocked are less. In the same way, take-privates should not be a problem, provided there is proper communication with regulators. I worked on the take-private of Primax Technologies in 2007 when I was at H&Q Asia Pacific. The deal closed in 2008 and then the company re-listed in Taiwan last year.

Q: What do you see as the most attractive exit channels for your portfolio companies?

A: When we talk about a deal we are up front with the owner and management team about the fact we will need to exit at some point. We know how to list companies, but we only want to do public market exits for about 50% of our deals because the markets can be volatile. We also want to demonstrate that trade sales are available. For a lot of global manufacturers, Greater China is still a relatively small portion of their overall asset base. They will continue to make capital investments in the region. If we make an auto parts investment, for example, maybe a big international brand would be a natural buyer for the business. We hope with our international experience and knowledge of capital markets and M&A, we can give our companies more choice over an exit.

ANDREW KUO | INDUSTRY Q&A [email protected]

The Greater China opportunityAndrew Kuo has spent two decades working on China deals, first as a banker and then as an investor with H&Q Asia Pacific and The Blackstone Group. He formed Zoyi Capital to focus on the China-Taiwan angle

“There are many reasons why a deal might come and succession could be one reason why we can get control”

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Page 14 All smiles in Taipei? · run the new business, which will take on stalled mining projects from around the country. GREATER CHINA Hony to buy Chongqing hotpot restaurant chain