The Taiwan Banker

Given the impact of the coronavirus pandemic, Taiwan’s financial market has finally undergone a radical change, bringing about an indescribable economic outlook for 2023. At this key inflection point, newcomers have emerged in Taiwan’s private equity sphere. The newly established Private Equity Association selected David Weng, CEO of Taiwania Capital, as its chairman. Members come from private equity funds and the securities industry, as well as from the ranks of investment trust operators and venture capitalists. Key financial holding companies such as Cathay United, Shinkong, and Taishin Holdings have arranged legal representatives to participate. The Securities Investment Trust & Consulting Association’s newly established private equity fund case group convened six established private equity fund investment trust professionals to act as sitting members under the Association’s Deputy Chair and President of FSITC (First Security Investment Trust), You Zhao-wen. Twenty investment trust operators who have shown a high level of interest in private equity have also been added. The National Development Council’s (NDC) June 2021 key guiding administrative points stipulated that private equity funds should expand due diligence of the insurance industry and other funding sources. There was also good news. The first funds to pass review were Taiwania Capital’s No. 6 Science & Technology Fund, as well as Bowrington Capital. The latter was the first independent investment management company to receive a legal notice issued from the NDC. It was founded by many senior private equity professionals from JP Morgan, particularly foreign nationals with Gold Cards. According to Taiwan’s Merger & Acquisitions and Private Equity Council (MAPECT), Taiwanese private equity funds fall into five categories. The first, independent funds, such as MagiCapital, Zoyi, Mortech, and Worldvista United, are characterized by teams composed of notable industrial, economic, and political figures, a number of early success cases, as well as abundant fundraising networks. The second are industrial in nature, exemplified by firms such as Abico, Innolux, and Taiwania. These funds are defined by investments in industries’ upstream and downstream supply chains for the sake of long-term development. A high proportion of these funds’ invested companies are acquired by the parent company, with funds being provided by both the parent company and major shareholders. The third, securities companies, such as Grand Fortune and Taishin, are characterized by investment in a chain of networking resources, funding, financial advising, underwriting, and stock agency services, where past customers are fundraising partners. The fourth, investment trusts from the past several years, includes firms such as Cathay United, Fu Hwa, and Grand Fortune, which are identified by comprehensive secondary market research capacity, financial product name recognition, as well as high-profit-asset-holding individuals and corporations that can act as fundraising partners. The fifth hail from holding companies, like China Development Financial, and are characterized by being the first private financial organizations to engage in the direct investment industry. They have the most employees and diverse funding, as well as corporations acting as principal fundraising partners. Inauguration of First Private Capital Good things are always connected. First Financial Holding subsidiary FSITC took the lead to invest in public investment trusts, and established First Private Capital, which began its inaugural operations on January 11th. Former Minister of Finance Su Jian-rong (currently serving as a professor of finance at National Taipei University), First Financial Holding President Chen Fen-len, President of the Taiwan Academy of Banking and Finance Hank Huang, and Legislative Yuan Member Chung Chia-pin attended the inauguration, approving of FSITC’s move in this critical moment. Former Minister of Finance Su Jian-rong indicated that this inauguration marked the formal introduction of a government stake into private equity, as well as the first investment by a fund with a government stake in Taiwanese infrastructure, meeting APEC’s calls for diverse funding sources, and affirming the stability and profitability of Taiwan’s infrastructure. FSITC and First Private Capital’s Chairman, Yao Zhao-wen, said that private equity funds have the characteristics of a high-end financial industry, owing to the involvement of professional investors and financial products. Of course, their development focuses on “real asset” strategies, but, at the same time, they actively coordinate with national policy and take part in promoting the development of Taiwan’s infrastructure and public works. “Real assets are the investment trust industry’s major position when investing in private equity,” said Yao Zhao-wen. This development strategy is able to conform to the needs of the situation, bring in stabilizing cash flow following investment, and sustain growth and innovation momentum. In particular, after overall rates rise, it can protect the function of existing capital. When it comes to First Private Capital’s long-term development direction, Yao Zhao-wen and FSITC’s CEO, Liao Wen-wei, are not promising too much. At the same time the company was being established in November of 2022, the management team deployed its capital in the market, and received several development proposals. Tainan’s Shalun Smart Green Energy Science City’s Build-Operate-Transfer (BOT) management system was the first planned application. At an investment press conference in Tainan, Liao Wen-wei pointed out that this would be the first case of a private equity fund’s involvement in a Public-Private-Partnership (PPP) through a trust, as well as the first public financial holding company to have financed BOT via passive bank lending. In response to finance ministry policy, First Private Capital invested in local public works proposals, whilst also building confidence in investment trusts and pursuing clean green energy sources and smart construction, all in complete accordance with the ESG (Environment, Social, Governance) spirit of BOT. Liao indicated that First Private Capital had already signed a letter of intent to cooperate with the solar and energy management specialist Green Harvest. Additionally, it has formed a team with information and big data specialist Acer to help manage and link industrial, academic, and non-governmental forces, as well as professional participation in the project, hoping to become a domestic leader in private equity participation in PPP. Building an industrial chain platform “The FSITC team is serious,” said KYMCO Capital partner and General Manager Gary Ting. The team has visited many times, consulting him on PE fund operational details. Similar investment trust PE funds have already been established in the Taiwanese market. With investment targets that are mostly composed of 5+2 industries, ESG themes, and the New Southbound Policy, as well as its adherence to policy requirements, finding cash flow returns, and provisioning of a clear business model for the PE industry, both the parent company’s holding and wealth management committees have found the team persuasive. Owing to his experience with both foreign and domestic banks, as well as in asset management, Ting is often positioned as a venture capitalist in the capital market. However, he has also interacted closely with traditional industries, alongside the KYMCO Motor Company. His investment regions include China, Taiwan, India, and Southeast Asia. He jointly manages seven property investment funds, with more than NT $10 billion in assets under management. According to Ting, KYMCO Capital’s focus is “building and investing in a global industrial capital integration platform,” placing industry ahead of capital. Ting is not looking simply at early-stage startups, but at the whole private equity model needed by Taiwan. For example, at the beginning of 2020, KYMCO Capital invested NT $30 million in the Southeast Asian ride-hailing leader, Grab. At the time, Ting focused on Grab’s vision of building an electric transport fleet, which just so happened to align with the development plan of both KYMCO Capital and its industrial partner, the KYMCO Motor Company. In the eyes of Taiwanese policy, this was “Taiwanese money headed for the New Southbound countries.” Having won the bid for Grab’s order, KYMCO Motor’s Ionex electric car was deployed in both Jakarta and Singapore, with KYMCO itself moving forward with factory construction in Thailand. In the following year, KYMCO Capital once again allied itself with the Taiwan Taxi Corporation and Global Express, spending another NT $180 million and taking a step towards occupying 90% of the global two-wheeled vehicle market, gradually becoming a major E-mobility industrial platform. The policy result of this deal was the deployment of Taiwanese capital in the Southeast Asian market. According to Ting, KYMCO Capital’s idea is that no investment target “takes an absolute shareholding majority” – the upper shareholding bound for each investment is set at 30%. Nor will KYMCO Capital interfere with businesses’ organization or operations; it must establish trust with the investment portfolio in order to act as a profitable industrial investor. Bowrington Capital’s founder, Raj Thammineni, echoed these points; a PE fund’s investment should not guide its target company’s work. Going a step further, Thammineni said that “it is important for PE funds to pay attention to a particular industry’s supply chain when making an investment.” International independent fund management companies break through The 2023 Lunar New Year saw the establishment of the Private Equity Association, as well as the Private Equity Fund Case Group receive its future operational ability from the Securities Investment Trust & Consulting Association (SITCA). These moves have even greater significance when it comes to invigorating Taiwan’s private equity market, allowing for the quiet cultivation of many years of international PE professionals, thereby further ensuring Taiwan’s long-term development. Raj Thammineni and his Bowrington Capital team are prime examples of this development in Taiwan’s PE market. Bowrington Capital was founded in Taiwan in early 2020. After leaving Hong Kong, founder Raj Thammineni, previously of international investment bank JP Morgan, met with several veteran colleagues in Taiwan. Here, Thammineni raised the idea of starting up a PE fund management company, as well finding friends from well-known local institutions to form a team. At the beginning, the team worked with Taiwan’s preeminent law firm, Lee & Li, Attorneys-at-Law, to set up the new fund. This process included preparing legal documents, as well as establishing an investment process and governance structure—all while completely conforming to global standards and striving to fulfill Taiwan’s regulatory requirements. Simultaneously, the team developed a series of solid local infrastructure proposal sources, allowing the fund to make its investments in a short span of time. Despite this professional orientation, the Taiwanese market has had a bad impression of international PE funds. “I was on edge throughout the process,” said Thammineni. The team walked on thin ice daily. Several of Bowrington’s veteran members acquired Gold Cards, determined to break new ground and work in Taiwan. As the only PE fund management that had not undergone a legal audit, investors were wary of legal restrictions, even if they approved of the team’s professionalism. After a great deal of work by those in the industry, as well as professional market education, NDC chairman Kung Ming-hsin finally agreed to help. In June of 2021, the NDC announced the “Essential Governing Points from the National Development Council to Promote the Private Equity Fund Investment Industry.” Under these points, private equity funds, especially those focused on insurance companies, would need to first submit an application if they intend to fundraise in Taiwan. According to Thammineni, this was a key statute for Taiwan’s PE market, with Bowrington Capital working to understand the materials and prepare its application from the very start. In a display of the international team’s professional strength, Bowrington was the first company in Taiwan to complete its Operating Principles for Impact Management agreement. Moreover, apart from simply bringing in a good return on investment, Bowrington also expects to fulfill its duties as an upright manager, and believes deeply in each investment’s capacity to do all it can for Taiwan’s Sustainability Development Goals (SDGs) whilst also adhering to ESG principles. However, the NDC did not alter its strict examination of the team. In addition to submitting relevant supplementary explanations, both sides also conducted a number of deep discussions in English and Chinese. As a result of all this legal legwork, the National Development Council finally issued a PE Fund qualification letter to Bowrington in December of 2022, making it the first independent fund management company to receive this important qualification. Taiwania Capital’s No. 6 Science and Technology Fund would be the second to receive a letter, following an NDC audit. Thammineni and his entire team nearly cried with relief when they received the NDC’s qualification letter. The team had chosen to believe in Taiwan shifting its development towards international professionals, and now their faith had paid off. Taiwan’s PE fund market is in its budding stages before explosive growth, Thammineni said cheerfully, expecting the Taiwanese market to catch up with the growth of other already developing countries before long. According to FSITC’s Yao, between 2011 and 2021, the scale of global infrastructure fund asset management expanded from $213 billion to $898 billion, growing more than 321% in ten years and marking a more than hundredfold increase in the past twenty years. A number of internationally-known private equity fund companies have already begun investing in Taiwanese infrastructure and renewable energy on a large scale. At the same time, while domestic pension funds and insurance companies have invested an estimated NT $1 trillion in foreign private equity funds, domestic investors and high net worth customers have already shown eager demand for such investment. Now is the time for Taiwan’s asset management companies to seize the moment provided by recent regulations and participate in and support this enormous long-term business opportunity.