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How Chinese Investment in Canadian Oil Assets Is Taking on a New Form
2015-12-09
Brief:Despite a substantial drop in Chinese FDI in recent years, there are signs some of that capital could be coming back.
 
 
It wasn’t that long ago that Canada’s oil and gas sector was banking on investment from China to propel it to new heights. The December 2012 changes to the Canadian Investment Act that discouraged state-owned enterprises from taking majority positions in the oil sands largely put a stop to that, but a strategic partnership struck by AltaCorp Capital and Nanjing Securities in late September should give some beleaguered – and capital-constrained – energy companies renewed hope. George Gosbee, AltaCorp’s chairman and CEO, says it’s a deal that’s been in the works for a while. “We’ve been working on our international game plan for a year and a half now. At Tristone [Capital Global], what we did was open up offices around the world, but that takes a lot of time and a lot of money. It’s a big investment. We thought by going the joint venture route, similar to what we did with ATB, made more sense.”
 
The timing, he says, couldn’t be much better. As China’s middle class continues to expand, so too does their interest in investing outside of the country and outside the state-owned companies that dominate its economy. “What you saw in the 1990s and the better part of the 2000s was banks chasing China to deal with national oil companies and state-owned companies,” he says. “But since the financial crisis, everything has changed. Now, there’s this corporate community in China and in Asia that’s made up of family offices, conglomerates and privates. They’re all about diversifying their money, and it’s a huge change in the last three years. It feels like you’re going to New York or Toronto and dealing with private individuals as opposed to state or national companies.”
 
And while the recent meltdown in the Chinese stock market – one that saw it shed nearly 50 per cent of its value between June 12 and late August – spooked investors and markets around the world, Gosbee sees it as an opportunity to capture some of the capital that’s flowing out of it. “There’s a massive amount of cash that’s moving out, and it’s going to make its way to investments that help them diversify themselves. A large part of it is going to be in North America, and some of it will be in oil and gas. Doing the deal with Nanjing helped us solidify that type of knowledge base of who those families and wealthy individuals and organizations and conglomerates are.” The kind of capital they bring to the table, meanwhile, has more in common with a pension fund than a private equity shop. “These individuals – these conglomerates and family offices – they’re looking to diversify, and they’re taking a much longer-term approach. It’s almost like dealing with a pension fund that has no terminal value of money. A private equity fund would have a five-year term of money, but a pension fund has no terminal value – they’ll go 20 years on an investment. It’s the same with these Chinese investors. So I think it’s a great form of capital. They want to be here for the long term, and they want to diversify.”
 
Indeed, as a Bain & Company report noted in May, the burgeoning volume of new wealth in China is creating a new class of millionaires. Its population of high net worth individuals (HNWIs) – defined by Bain as those with 10 million RMB, or US$1.6 million – has doubled since 2010, and recently exceeded one million. Most of these newly minted millionaires are under the age of 50, and as such have much different risk profiles than their more traditionally conservative Chinese peers. According to Alfred Shang, a partner at Bain and co-author of the report, “Among the newly rich HNWIs, we’re seeing a more aggressive investment style, an openness towards alternative investments, and increased focus on wealth creation, second only to wealth preservation as their primary wealth management objectives.” And they’re increasingly willing to allow others to do that wealth creating on their behalf. According to Bain, in 2015 these Chinese HNWIs gave 65 per cent of their investable assets to third parties like banks and wealth management firms. In 2009, that figure was just 25 per cent. Their willingness to seek a return outside their domestic market is growing at a similar clip, too. In 2011, only 19 per cent of HNWIs and 33 per cent of so-called ultra-HNWIs told Bain they had overseas investments. In 2015, those figures jumped to 40 and 60 per cent respectively.
 
AltaCorp’s Gosbee says this new class of investors have a lot in common with Li Ka-shing, the legendary Chinese investor who controls the majority of Husky Energy along with a wide variety of other commercial interests. He’s a man who’s known for being methodical and analytical, and knowing how to ride out the cycles and capitalize on them when the time is right – witness Husky’s opportunistic takeover of Renaissance Energy in 2000. “That’s the same mentality that you’re seeing [in Nanjing],” Gosbee says, “except now instead of one Li Ka-shing we have hundreds of Li Ka-shings looking to come over here.” They might start looking even harder, too. After all, the 87-year old tycoon has been selling off billions worth of property and real estate assets in Hong Kong and China, a decision that’s attracted attention – and opprobrium – in his home country. The People’s Daily, an official organ of the Communist Party of China, described his ongoing divestment from China as “eye-catching.” But, Gosbee says, Li is almost certainly not alone in looking for ways to reduce the risk associated with being fully invested in China’s (and specifically Hong Kong)’s overheated real-estate market. “They just want to diversify, and the natural resource sector right now for them is great.”
 
 

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