In today’s dynamic marketplace, large corporates and state-owned enterprises are no longer the only Chinese investors looking abroad for financial opportunities. Many high net worth individuals and families are also looking to diversify their investments and build global portfolios. With its relatively stable economy, strong financial system, and highly educated workforce, Canada is quickly becoming an attractive destination for investors, particularly those who understand what they want and how to make the right investments.
However, individual investors can find investing in Canada difficult. Many do not have the local experience, expertise or reach required to identify good deals. Before moving ahead with a deal in Canada, Chinese investors should consider the following key activities.
Defining the investment strategy and rationale
Individuals invest in Canada for any number of reasons – from supporting a potential immigration bid to creating a sustainable source of revenue in Canada or gaining access to technologies that could be leveraged in China. Whatever the reason, investors should define why they want to invest in Canada, what the investment should look like, and what they want to achieve from their investment long term. This process should include identifying targeted industries (e.g. technology, construction, real estate), considering locations (e.g. Vancouver, Toronto, Montreal), and determining the acceptable level of risk.
Identifying and selecting investment opportunities
Once there is a clear rationale and longer term strategy, it is important for investors to seek out relevant and appropriate investment opportunities. There are many sources that can assist with identifying potential deals including active sellers, agents, brokers, personal/business network contacts, and professional advisors. It’s prudent to spend time to seek out and understand available opportunities from a variety of sources to increase the chances of capturing better deals. After gathering information on potential deal opportunities, it’s also important to select a short-list of the most suitable options and consult with your trusted business associates and advisors before taking any further steps.
Lessons from the battlefield: Selecting your advisor
Investors may not have the full range of expertise to handle complex international deals, so choosing the right advisors – whether financial, cultural, business, legal, or tax specific – can be essential in order to better navigate the Canadian market, understand local cultural norms for doing business, identify and select the best opportunities, execute on all aspects of the deal and manage the end-to-end deal process.
When selecting potential advisors, investors should assess a range of factors, including relevant experience, trustworthiness, ability to work effectively with you and your team, local knowledge, and language capabilities. A single advisor usually can’t cover all bases so bringing together a multi-disciplinary team that can work well together and with your team can often make the difference between success and failure.
Evaluating potential targets: Due diligence and valuation
Conducting due diligence is crucial to the success of any deal, especially a cross-border one. The due diligence process should always cover fundamental areas such as legal, finance, tax, operations, and human resources. In some cases, the due diligence process might also require a market/commercial study, financial model review, formal valuation, industry-specific technical diligence, or a review of information systems.
The due diligence process should help you understand a target’s critical business matters, including sustainable earnings levels, working capital, quality of assets, liabilities and cash flow. You should also understand the target’s market position, quality of management, legal status, operational efficiencies, the condition of any facilities and equipment, key labour force matters, and the impact of any external stakeholders on the business.
It’s also important for investors to have an appropriate valuation model that captures the economic flows of a target business and incorporates due diligence findings as this will guide you on setting price ranges for the deal.
Structuring, negotiation, and closing
Ensuring that you establish the right deal structure is crucial for legal and tax planning purposes. Many buyers assume that negotiating and closing a deal is the straight forward part of any deal process, however deals often break down at these critical final stages. Negotiating and completing a cross-border deal can be particularly challenging if Chinese investors and their advisors are not able to efficiently navigate differences in business practices and negotiation tactics, or effectively manage risks and issues identified along the way. Working with an experienced deal team is crucial to getting across the finish line and closing a deal.
Lessons from the battlefield: Focusing on all stakeholders
Often the real value of a business lies with its people: their capabilities, knowledge and expertise. For investors looking to invest in Canada, ensuring a target business has the right management team – and can retain key people following the transition – is critical to long-term success. At the same time, managing other stakeholders can also make or break a deal. At appropriate times during the transaction process, investors should proactively engage with management, employees, customers, the community, local government and any other stakeholders so they can see that the investor is open to working together. In this way stakeholders can understand the benefits of the deal and any planned changes, allowing you to pave the way for a smooth transition and longer-term business success.
Making the right investment
For Chinese investors, Canada offers many exciting possibilities. A world-class environment, a current government that is open to Chinese investment, favourable exchange rate trends, and a stable and sophisticated market that makes investing in Canada more attractive than many other jurisdictions, while providing a strong backbone for long-term growth. If you take the time to understand the Canadian business environment – and seek out advisors who, given your objectives, can help identify suitable deals and manage potential pitfalls – you will find that Canada still has many undiscovered opportunities.