Taiwan officials this month revealed they are close to final approval of regulatory reformation that aims to promote private equity investment.
The news isn’t going to shake the continent; Taiwan has been a negligible market for years. Private equity deals totaled only $36 million in 2012, according to Thomson Reuters data – one of the better years it’s had since 2009.
“Taiwan embarrassingly ranks second to last among 17 Asian countries – behind Sri Lanka and ahead only of Pakistan – in attracting PE-fund investment,” reads a recent American Chamber of Commerce Taiwan white paper.
It’s odd, because Taiwan seems ripe with opportunity. As Asia’s seventh largest economy, its GDP is ahead of Singapore and Hong Kong. The island’s long-established connection with Silicon Valley has sent people, money and ideas between the two hubs for decades, creating a vibrant technology ecosystem. Most companies in the thriving SME sector haven’t expanded far enough (or at all) in China, a next step that makes sense given the two neighbors share the same language, culture and often family ties.
Why the lack of private equity activity? A key reason, sources in Taipei suggest, is fear and misunderstanding. “The government is concerned about private equity’s high-leverage dealmaking style and the impact on domestic employment,” says one source. “PE is viewed as a money play.”
Politics also fuels the mistrust. Regulators instinctively view a deal through a political lens: will it help or hurt Taiwan? This pertains not only to the economy, but also to the perceived threat China poses to the island’s political existence (though this is a topic for another day).
Cultural suspicion and concern over private equity is nothing new, a point that was most recently emphasized by the US presidential election. But bad perception can be mitigated through transparency, and responsibility for that sits with the industry. Private equity firms worldwide have simply done a poor job of explaining exactly what it is they do. There have been countless examples of resulting ramifications in the West over the years, and, particularly post-Romney, Asia’s GPs should know that dim public understanding results in blowback.
In a sense, they’ve got an advantage in that they can learn from Western GPs’ mistakes and get out in front of the public perception issue. But so far, it hasn’t really happened.
Much of the problem is tradition. In Asia, GPs often come back with the rejoinder “that’s why it’s called `private’ equity” – something that Western GPs have realized just doesn’t hold water with the public, the press or other stakeholders. ‘Private’ isn’t synonymous with `secret’, which is ultimately the message that is projected to the public. Nothing secret is viewed favorably, particularly in countries shaped by unresolved armed conflicts with their neighbors such as Taiwan and Korea, and where foreign capital can be resented for targeting national assets.
A step forward is closer communication between regulators and the industry. Telling strong value creation stories can help as they demonstrate the benefits private equity can bring to a company, its employees, entrepreneurs and the wider economy.
These types of case studies being made public are still a novel concept in Asia, and it’s a mistake to think they are only for the benefit of LPs. The audience, as Taiwan reminds, is also regulators and the public, who ultimately influence whether private equity firms will find a hostile or welcoming attitude towards private capital investment.
Asian private equity practitioners have the chance to avoid – or at least minimize – the ‘locust’ debate that raged on for years in the West. Genuine value creation work, laid bare, is the way to do it. Taiwan’s careful move toward private equity is a good time to remember that.