Taiwanese institutional investors have welcomed the move to allow local mutual fund houses to launch private equity funds, saying they see it as a way to help diversify their portfolios.

Local asset owners, such as state pension manager the Bureau of Labor Funds (BLF) and insurers Cathay Life and Fubon Life, look set to take a cautious approach to such investments. Their initial focus is likely to be on specific projects such as green energy and high-tech firms – segments where the government wants to encourage development. 

Low PE allocations

Currently Taiwanese institutional allocations to private equity or venture capital are relatively low and tend to be in overseas assets. This is probably because there is less diversity of investments locally than in markets such as the US and China, said Janet Li, director of investments for Greater China at consultancy Willis Towers Watson.

PE investment in Taiwan peaked at $4.5 billion in 2007, according to a report co-published by Deloitte and the Taiwan Mergers & Acquisitions and Private Equity Council in September last year. Volumes have since fallen short of that figure, standing at $2.5 billion in 2015, added the research.

VC investment in Taiwanese companies totalled $43 million this year as of August 16, $125.6 million in 2016, $332.8 million in 2015, $273.9 million in 2014, by Preqin data.

BLF has not invested in domestic PE or VC projects, given their relatively high risk, said a spokesperson. It only made its first foreign PE investments early last year, as first reported by AsianInvestor. The fund, which had NT$3.75 trillion ($123 billion) under management as of June 30, did not say how much it would commit.

Cathay Life, the country’s biggest life insurer with NT$5.1 trillion ($168 billion) under management, also favours private assets in foreign markets. The firm told AsianInvestor it had PE and VC investments both onshore and offshore, with some 90% of them overseas. Its domestic private investments are mainly in VC projects, while its overseas allocations are more diversified, said a spokesperson.

Investor optimism 

Yet BLF and Cathay Life are both upbeat about the Financial Supervisory Commission’s opening of the PE industry to local fund houses.

The move is in line with international practice and will help attract capital for long-term projects and stimulate domestic economic growth, said a BLF spokesperson. PE funds may be relatively high risk but they can potentially generate high returns, the spokesperson added.

BLF will assess PE projects on a case-by-case basis with a view to investment diversification and improving the efficient use of its capital, in light of “the swift changes in global financial markets and the increasing volatility in global stock markets”.

  Taiwan: green energy focus

The Cathay Life spokesperson told AsianInvestor: “We’ll decide whether to invest in domestic PE funds after studying their investment strategy, underlying projects and structures.”

PE opportunities in Taiwan will mainly come from two areas, said the Cathay Life spokesperson: corporate mergers & acquisitions or divestments; or the seven strategic sectors in which the government wants to promote development, including green energy, advanced technology, biomedical technology, smart machinery, national defence, agriculture and the recycling economy.

The BLF spokesman said: “We hope the development of PE funds will help trigger investments to drive innovation in all industries in Taiwan, improve the international competitiveness of Taiwanese companies and help construct a solid foundation for the sustainable development of Taiwan’s economy.” 

Meanwhile, a Fubon Life spokesperson told AsianInvestor that the insurer was, in principle, interested in PE funds, as long as the management team has sufficient experience and a good track record.

Local advantage? 

Certainly, local managers have a potential advantage over foreign players in that they might have more information for some projects, said Li of Willis Towers Watson.

Plus they have researched and invested in the relevant industries before and have been preparing for the new business for some time, said Ray Huang, secretary general of Taiwan’s Securities and Investment Trust and Consulting Association.

Indeed, products are already in the pipeline. Cathay Securities Investment Trust is preparing to launch the first fund targeting NT$10 billion, investing in green energy, with expected annualised return of 6% to 7%. JP Morgan Asset Management’s Taiwan business is also lining up a PE fund launch.