Global private equity funds have found a window of opportunity to invest in Taiwan's financial sector, making acquisitions with the hope of turning a profit when the market opens to China Inc in the years to come.

It's a matter of catching the right wave, said Kenneth Zhou, a M&A lawyer with U.S. firm Wilmer Cutler in Beijing.

Private equity firms can make considerable profits if they pick one or two (Taiwanese financial) firms, stick to it for a couple of years and then sell it off to a Chinese corporates when the time is ripe.

The theory is that with warming ties between Taiwan and China and Taiwan's easing of restrictions to allow Chinese investments in sectors, such as transportation and tourism, Chinese ownership of financial institutions is merely a matter of time.

Analysts say Chinese companies will want a stake in everything in Taiwan both for business and political reasons.

There will be some political considerations (for Chinese banks to come to Taiwan), said Jonathan Lee, an analyst at Fitch Ratings. Otherwise, this is probably the least profitable (banking) market in the world, so why will they invest?

Second-tier banks such as SinoPac with sound financial books and good growth potential could be next in line in the wake the widely watched sale of AIG's Taiwan insurance unit, Nan Shan.

The Nan Shan deal, likely to be worth over $2 billion, is seen as a valuation benchmark and could help expedite similar deals by other funds like Kohlberg Kravis Roberts & Co KKR.UL in Taiwan with capital markets recover quickly.

Over the past two years, some private equity firms have spent hundreds of millions of dollars to buy controlling stakes in Taiwanese banks in order to gain a board seat in the hope of improving management expertise.

TPG Capital TPG.UL has already invested in Taishin, Taiwan's No. 3 financial firm, and analysts said they would be looking at good opportunities to sell their stakes in coming years.

They said it would take at least months, if not a year or two, before Taiwan allowed Chinese companies to buy into Taiwan's financial firms.

BUYERS BEWARE

But the buy-now-sell-later-to-China-Inc strategy is not without its risks.

Analysts said private equity firms will have to choose their acquisition targets carefully, especially after some bought beleaguered banks with little market share over the past two years and are facing difficulties exiting those investments.

Cosmos and EnTie, invested by SAC Capital and Longreach respectively, have been posting losses over the past few quarters, and are widely seen in the industry as unsuccessful deals.

Stiff competition in Taiwan's overcrowded banking industry, now Asia's fourth-largest with nearly 40 banks serving just 23 million people, could also deter some private equity from entering the market quickly.

In terms of price-to-book ratios, Taiwan banks generally fare lower than Hong Kong's, though they are higher than South Korea's.

It can't be state-owned financial companies too because that might have to go through complex legislative approval, one analyst said, naming Chinatrust, Fubon and SinoPac as likely targets for private equity investments.

Already potential Chinese investors have been sighted.

Industrial and Commercial Bank of China, the world's largest bank by market value, and China Merchants Bank are keen on Taiwan, Asia's fourth-largest insurance market and No. 3 in wealth management.

China's Merchants Bank and Shanghai Pudong Development Bank are eager to offer wealth management services to Taiwan customers through new branches or acquisitions of local players, analysts said.

Wealth management might not be the main money spinner for Taiwan banks now, but it's definitely a factor for consideration, said another banking analyst in Taipei.

(Editing by Valerie Lee)

Investment China