Chinese direct investment into Australia grows to 11 billion

15 April 2016 Consultancy.uk

Overseas direct investment into Australia by Chinese companies saw a significant increase on 2014, reaching more than $11 billion. The majority of the investment was in real estate, followed by renewable energy projects. Investors are generally happy with the ease of doing business in the country.

The Chinese economy has seen significantly growth over the past two decades. While internal investment in the machinery sector for growth, much of it aimed at the export market, has been strong – Chinese companies have also sought to invest in overseas markets as a means of diversification. In 2015, a record $118 billion was invested by Chinese state owned enterprises (SOEs) and private businesses – up 14.7% on a year earlier. The Australian economy was the third largest recipient of investment, behind Luxemburg and the US. In total, Australia has seen $78 billion in overseas direct investment (ODI) from Australia since 2005.

In a new report by KPMG and The University of Sydney Business School, titled ‘Demystifying Chinese Investment in Australia’, considers Chinese ODI into the Australian market, including historic trends as well as future sentiment by a range of investors. The report is based on investments into Australia made by entities from the People’s Republic of China through M&A and joint venture.

Historical OBI trends
The overseas direct investment from China into the Australian economy has been relatively stable in recent years, at between $8 and $11 billion. Over the past 9 years, 2007 saw the lowest level of investment at around $1.5 billion, while 2008 saw investment jump to more than $16 billion. Last year, total investments stood at around $11 billion.

The relatively large jump between 2014 and 2015 was, the consultancy finds, due to a number of mega-sized deals from Chinese SOEs and private companies – with seven deals above $500 million – as well as an increase in the numbers of deals; mainly from private investors seeking to diversify their holdings within relatively stable markets. The depreciation of the Australian dollar made investment in the country more attractive for Chinese investors.

Chinese OBI into Australia
The report highlights that the largest singly chunk of investment went into real estate*, totalling 45% of all investments and a value of around AU$6.8 billion. Renewable energy investments totalled AU$3 billion, while healthcare saw 17 investments with a total combined value of AU2.5 billion.

The large, strategic, position taken by Chinese investors in the real estate market reflects the desire of investors to diversify their asset overseas, and gain better returns on their investments, on the back of long term population and economic growth in the market – the focus on investing in real estate assets are for a large part within the NSW and Victoria region. The creation of a relatively stable investment environment within Australia has increased the appetite of foreign investors to invest in the sector – including Chinese players.

“Following two years of moderately declining Chinese investment, the resurgence of interest and the diversification by Chinese companies in 2015 is a strong endorsement of the attractiveness of Australia’s economy. Alongside continued interest in the NSW and Victorian commercial real estate sectors, there has been activity and major deals in renewables, agribusiness, and for the first time, healthcare,” said report co-author, Doug Ferguson, Head of KPMG Australia’s Asia and International Markets. “Overall we are seeing a strong story of Chinese investment into Australia’s broader economy which is in line with premium products, services and lifestyle-oriented themes.”

Investment interests
The report also considers a range of factors related to the attractiveness of the Australian market to Chinese investors, as well as the future of investment in the region. Top of the list for Chinese investors into Australia is ‘making profits’, with a score of 7.93 on a scale of ten (ten = very important). This is followed by ‘securing resources’ with a score of 7.24. The ‘building up of an international brand’ comes in at number three with a score of 7.07, while ‘access to global markets’ has a score of 6.90. The area of least importance, with respect to the questions posed, were ‘stock market listing’, with a score of 3.92, and availability of finance, with a score of 5.15.

Business ease
According to the analysis, the Australian market is relatively open to Chinese investors’. Chinese and Australian board members’ understanding each other was found to be difficult by 29% of respondents, although the majority were neutral and 18% agreed that it was easy to understand each other. The majority of respondents were neutral about the ease of doing business with trade unions, while 35% of respondents agreed that it is easy to work with Australian managers. The report also found that 47% responding Australian investors agree that working with Australian employees is easy, with 13% saying it is very easy.

Future sentiment
The report also found that investors are generally positive about the prospect of investment in Australia over the coming years. 60% of respondents say that their business outlook is positive, while 31% say it is average – 5% say it is very positive. The buoyant business outlook appears to be correlated with interest in continuing to invest in the Australian market. 50% agree that they are planning to expand their investment in the market over the coming year, while 34% are neutral about the prospect – 5% strongly agree to the sentiment.

Professor Hans Hendrischke, Professor of Chinese Business & Management at the University of Sydney Business School comments: “Our research has also shown that, for Chinese companies looking to expand internationally, Australia is seen as a strong first port of call, allowing them to gain experience and management know-how before taking on other overseas markets. As China embarks upon its next Five Year Plan and continues to develop as a leading global economy, Australia is poised to profit as one of its major trading partners. All Chinese investors we interviewed held a highly positive medium-long term view of Australia and are looking to increase their investments in Australia.”

* “Real estate” referred to in this report does not include residential apartment and home sales.

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Private equity firms ramp up sustainability focus

19 April 2019 Consultancy.uk

In line with business leaders across the industrial gamut, private equity firms are increasingly on board with sustainability projects. According to a new study, the investment arms for major funds are implementing a number of strategies aimed at supporting sustainable economic development in line with global goals.

While the business world has finally begun to acknowledge the danger of climate change, effective action plans remain difficult to achieve. The Paris Agreement has stipulated a clear target for the decades leading up to 2100, although massively reducing emissions while not crashing the economy could be a tall order.

Businesses that are able to acquire capital can use it to boost productivity and output, thereby creating a virtuous cycle of development. However, some businesses are better able to utilise resources than others, both in terms of their relative productivity, as well as the value of the respective outcomes relative to costs (including environmental harms). Financing can therefore provide an avenue to select businesses that are aligned with various global sustainability goals, while shunning those that drive little or unsustainable social value creation.

Top moves made by investment arms towards responsible investment

Profit has for the longest time been the central criterion for investment decisions. Yet profit at any cost is increasingly seen as creating considerable social harms, while often delivering only marginal value. As a result, the private equity sector, which was initially sluggish to change its ways with regards to sustainability, has started to see the topic as an opportunity as much as a challenge.

A new study from PwC has explored how far sustainability goals have become part of the wider investment strategy for private equity (PE) firms. The report is based on analysis of a survey of 162 firms and includes responses from 145 general partners and 38 limited partners.

Maturing sustainability

Top-line results show that responsible investment has become an issue for 91% of respondents. For 81% of respondents, ESG (environmental, social, and corporate governance) was a board matter at least once a year, while 60% said that they already have implemented measures to address human rights issues. Two-thirds have identified and prioritised Sustainable Development goals that are relevant to their investment segments.

Change in concern and action on climate-related topics over time

While there is increasing concern around key issues, from human rights protections to environmental and biodiversity protection, the study finds there are mismatches between concern and action. For instance, concern among investment vehicles around climate change has increased since 2016.

In terms of risks to the PE firm itself, concern has increased from 46% of respondents in 2016 to 58% in the latest survey. However, the number who have taken action remains far below those concerned, at 9% in 2016 and 20% in 2019. Given the relatively broader scope of investment opportunities, portfolio companies face higher risks – and more concern – from PE professionals, at 83% in the latest survey. However, action is less than half of those concerned, at 31%.

Changing climate

In terms of the climate footprint of the portfolio companies, 77% of respondents state concern in the latest survey. 28% of respondents are taking action through the implementation of measures to mitigate their concerns.

Concern and action taken on ESG issues

In terms of the more pressing issues for emerging responsible investment or ESG issues, governance concern of portfolio companies comes in at number one (92% of respondents), while 60% have taken action on it. Firms have focused on improving awareness – setting up policies and a range of training modules for their professionals around responsible investment decision making. Cybersecurity takes the number two spot, with 89% concerned and 41% implementing strategies to mitigate risks.

Climate risks take the number three spot in terms of concern for portfolio companies (83%), but falls behind in terms of action (31%). Health and safety track records are a key concern at 80% of businesses, with 49% implementing action. Gender imbalance within PE firms themselves ranks at 78%, which is being dealt with by 31%. A recent survey from Oliver Wyman showed that there is gender balance at 13% of GP teams in developed countries.

Biodiversity is also an increasingly pertinent topic, with risks from pollution and chemical use increasingly driving wider systematic risks around environmental outcomes. It featured at number eight on the ranking of most likely global risks for the coming decade, with its impact at number six. As it stands, biodiversity is noted as an issue at 57% of firms, with 15% implementing action.