While Taiwan's publicly listed companies can invest in China, the government limits the amount in an effort to safeguard investment outflows from Taiwan. Analysts have warned that the cap, currently between 20 and 40% of the local firm's net value, could make it more likely that Taiwanese companies will leave the country's stock exchange.
Because of such restrictions, there is also concern that local companies are attractive targets for takeovers by foreign firms. There have been calls for these rules to be relaxed to allow Taiwanese companies to expand in China at their own rate, thus reducing their appeal.
Analysts have speculated that private equity firms are especially interested in companies that feel their growth is restricted by the cap. It is thought that these firms could purchase local publicly traded companies, and then de-list them from the Taiwan Stock Exchange. The private equity firm could expand the companies' operations in China, with the expectation that the companies would become more valuable once they were able to freely invest in China. Eventually, the private equity firms could list these companies on another exchange, such as the Hong Kong Stock Exchange, where they could reap the profits of their investment.
Following a report in the local press that a private equity firm was looking to acquire 20-25% of a Taiwanese construction and leasing company, Prince Housing and Development Corporation, the company stated at the end of March that at least one such firm had expressed interest in buying shares in the publicly listed company. While not specifying which private equity group had approached the company, Prince Housing did say its main shareholders have not expressed any interest in selling. This news comes as many in the industry are speculating that some of Taiwan's biggest companies may be takeover targets for private equity firms.
An executive from a Hong Kong-based securities firm told the local press last week that foreign private equity firms were looking at the 10 top Taiwanese companies as possible takeover targets. It has been suggested that most of these companies have assets in China approaching the 40% limit that is imposed on Taiwanese companies.
With the global trend of increased private equity activity, many fear it will weaken capital markets and encourage investment outflows, as companies are taken private. Regulators in Taiwan have expressed concern that private equity firms' interest in the country's biggest sectors could eventually lead to such an outflow.
Last week in Taipei, KPMG, an international audit, tax and advisory firm, held a conference on the impact of private equity. David Nott, the head of KMPG's Transaction Services Asia-Pacific, said that IPOs around the globe could, in the next two years, exceed the number for the past decade.
Nott also said that as investors' attention increasingly turns to Asia, Taiwanese firms could expect more interest from private equity funds due to the number of world-class manufacturing and high-tech companies.
Last year's still pending bid of $5.4bn for Advanced Semiconductor Engineering (ASE), a chip packager, by private equity firm, Carlyle Group, has set a record in Taiwan. Many felt the investment cap was one of reasons for the bid. However, a government spokesman said that ASE's investment in China was around 10% of its capital, well below the 40% limit for a company of its size.