Tough exit market for PE-backed Taiwan banks

Private equity firms that made Taiwan bank investments on optimistic expectations of cross-straits liberalisation now seek to exit in a depressed market.

Private equity firms wanting to exit their Taiwan bank investments will be hindered by a financial sector that has too many players, more losses than profit, and a poor local credit environment, said Walter Yen, specialist at the Taiwan Private Equity and Venture Capital Association.

“A flurry of private equity investments into Taiwan banks came between 2006 and 2007,” Yen said, adding that the investments are now ripe for exits.

The Carlyle Group’s investment in Taiwan’s Ta Chong Bank may draw acquisition interest from Fubon Financial, the most profitable bank in Taiwan, according to a Reuters report.

“We have to look at what is available in the market, which Ta Chong is, and the valuation as well,” Fubon’s president Victor Kung was quoted as saying in the report.

Another firm, The Longreach Group, which is invested in Taiwan’s EnTie Commercial Bank, would like to appoint Morgan Stanley to inquire about a potential sale, according to dealReporter.

EnTie Bank was in a $575 million loss position in 2007 when Longreach made an investment. The bank turned profitable in 2009 and in 2011 recorded an $89 million net profit, according to data from Longreach. 

“The dramatic turnaround is a result of the work we have done with our core management team, including franchise building within the core business units, persistent income diversification, rigorous credit control and risk management, and old-fashioned cost management,” according to a spokesperson at Longreach.

Carlyle-backed Ta Chong Bank also turned profitable recently after suffering years of losses, according to Yen.

But some of the private equity-backed bank investments are already seen as unsuccessful due to their continuous losses, Yen said. Most private equity firms made their investments in small and mid-sized banks in a sector dominated by large banks.

However, the situation may be improving. Taiwan banks on average are expected to have a profitable year in 2012, according to the Taiwan Academy of Banking and Finance.

Foreign private equity firms were active in buying Taiwan banks in 2006 – 2007 with the expectation that cross-straits investment policy would liberalise. The aim was to sell them to Chinese companies. 

Since then, Taiwan regulators have mildly relaxed cross-strait investment restrictions. However, these investments are still under scrutiny. In 2010, Taiwan regulators firmly rejected a deal between Hong Kong-listed investment company China Strategic, which has mainland ties, and Taiwan’s Nan Shan Insurance.