Canada offers significant potential to Chinese investors looking beyond their borders for investment opportunities. Yet it can be very difficult for Chinese investors to find opportunities with the right fit, at the right price and with the ability to provide their desired return on investment.
The challenge is that Canada’s stable economy, positive attitude toward foreign investment and strong M&A environment mean that high-quality companies are quickly snapped up, while other valuable companies may not be for sale at all. Opportunities to invest in high-target sectors, such as real estate, are also becoming harder to find following several years of intense investment activity.
To achieve investment success in Canada, Chinese investors need to start thinking outside the box. While the availability of top-tier, top-dollar investments may be declining, excellent opportunities still exist—and often at cut-rate prices. One area of opportunity involves Canadian companies facing specific challenges such as cash flow issues or stakeholder pressure to sell. At first glance, these types of opportunities may appear to be poor investments; however, they can be quite lucrative with the right financing and management commitment and support.
To date, many Chinese investors have overlooked these types of Canadian opportunities, deeming them too complex or too difficult to take advantage of effectively. for investors willing to do the due diligence, investing in these kinds of companies can allow access to markets, assets or technology that could lead to extraordinary results.
A structured approach to realizing value from unique opportunities
Taking a more structured approach toward identifying, evaluating and making unique investments in Canada can be critical for investors to achieve the success they’re looking for. As a starting point, consider the following six-step process for identifying and realizing value from unique investment opportunities.
Step 1: Find opportunities with confidence
When it comes to identifying unique Canadian investment opportunities, Chinese investors must emphasize gathering initial information. This step includes the following key activities:
- Conduct financial analysis: Investors should conduct detailed financial analysis in order to examine macro trends, analyze Canadian industries susceptible to downturns or market fluctuations and identify market inefficiencies that might have resulted in companies facing specific challenges. Knowledge of these trends can help investors determine if they have the resources, knowledge and skills to both renew a company and avoid future pitfalls.
- Use data analytics: Investors should work with advisers to conduct detailed data analytics in order to identify opportunities or challenges that might not be readily apparent. In addition to corporate multi-year financial data, investors should look at macro, census and industry trends in order to gather a full historical picture of a company and create a predictive model for the future.
- Make the most of local knowledge and relationships: Investors should use any existing partnerships they have in Canada to gather information about potential opportunities, in addition to identifying any additional advisers who can provide specialized information on opportunities in the Canadian market.
Thinking outside the box is critical at this first stage, as unique investment opportunities are rarely straightforward. A company that may look like a poor investment at first glance may simply just require better management or refinancing to be turned around.
Step 2: Develop a strategy for managing investments and targeting returns
Acquiring challenged businesses can be a high-risk endeavour. To help mitigate risks, Chinese investors should work to develop a sound strategy for managing businesses in challenging situations to achieve their investment goals. This strategy should focus on the following activities:
- Focus on real value: Investors need to be confident they understand the real value of the company they’re looking to invest in or purchase. This step will be unique based on the specific situation of the target company, but it could include activities like developing future performance scenarios, analyzing the liquidation value of a company or conducting a going concern valuation based on various changes that would be made during restructuring.
- Turn risks into opportunities: Chinese investors making unique investments also face unique risks. When developing an investment strategy, investors need to consider all possible operating issues (e.g. cultural differences, industry risk, customer and employee retention, inventory, environmental obligations, pensions, supply contracts, leases and litigation risks). They should also focus on determining which relationships, contracts or people are critical to future success. Understanding and managing risks and opportunities is essential for achieving desired investment returns.
- Make the most of previous experience: For Chinese investors with little experience making investments in challenged Canadian companies, it can be helpful to use the experience and knowledge of those who have worked with companies in similar situations. Identifying specific subject matter experts and advisers who can help ask the right questions and who can provide insights into the Canadian market can help ensure no critical risks are overlooked during the decision-making process.
Creating an informed investment strategy based on full knowledge of the risks and opportunities associated with different investments can significantly improve an investor’s ability to achieve their goals.
Step 3: Perform due diligence
Conducting an appropriate level of due diligence not only manages risks but identifies issues that can help form part of the road map to guide post-deal planning and highlight key negotiation points. This step includes taking a deeper dive into the unique situation of the Canadian company in order to understand its performance, profitability and any options for turning the company around.
Conducting due diligence on a company facing unique financial or operational challenges can be a complex exercise, particularly for Chinese investors who may not have in-depth insights into the reasons behind the company’s problems. When conducting due diligence on transactions involving challenged companies, consider the following factors:
- Comparability: It’s important to remember that the analysis of historical results needs to be comparable with the go-forward business plan. Historical information is really only relevant to the extent that it informs post-deal projections. To better understand how a business could look post-deal, not only do Chinese investors need to look back in the company’s history, they must also understand the go-forward picture. Investors should also try to be as granular as possible in their due diligence to allow for meaningful sensitivity analysis when modelling the impact of different restructuring scenarios.
- Timing: In order to win a bid for a challenged company, timing is often of the essence. When conducting due diligence, Chinese investors should concentrate on significant value drivers and look for ways to be as efficient as possible.
- Access to management: Over the course of the due diligence process, Chinese investors should consider the management team carefully—identifying who needs to be replaced, who needs to be retained and who is critical to the success of any turnaround plans.
Given that most unique investment opportunities are time-sensitive, Chinese investors should consider working with an independent adviser who can help them accelerate the due diligence processes without missing anything important.
Step 4: Structure the deal
Often deal structuring can make or break an investor’s ability to achieve their desired outcomes with respect to investing in or buying a company facing challenges. As part of the deal structuring process, Chinese investors should focus on the following activities:
- Start with the big picture: When entering the deal structuring process, Chinese investors should know how they want to invest—for example, whether they’d like to buy assets or restructure the company to acquire and control the existing equity. The correct path will depend on an investor’s specific risk tolerance and the specific circumstances of the opportunity.
- Appeal to stakeholders: Unlike a conventional transaction, where shareholders typically select the winning bidder, conducting an M&A process related to a Canadian company facing specific challenges often requires working with different stakeholders (e.g. creditors, lenders, shareholders, pension committees and unions). Chinese investors shouldn’t underestimate the value of taking the time to understand and respond to each stakeholder’s unique concerns.
- Stand out from the competition: In order for investors to increase the likelihood of deal success, it can be useful to focus on speed, certainty and simplicity when proposing deal terms. Historical experience shows that Canadian companies facing challenges typically prefer deals with little closing risk to deals that offer higher prices but come with conditions. To compete, Chinese investors in particular, need to demonstrate that they have the right team in place and are serious about closing to overcome this very important hurdle,.
- Plan for contingencies: Given the amount of uncertainty associated with unique deals, it can be beneficial for investors to use a flexible financing structure so that they can deal with any contingencies more effectively.
Chinese investors in particular should also make sure to consider any unique requirements related to conducting a deal in Canada—and potential regulatory, tax or other issues that might arise as a result of the transaction. Before confirming the structure of a deal, Chinese investors should consider obtaining an international tax perspective to help reduce any cross-border complexities from a legal and tax standpoint.
Step 5: Close with confidence
In order to close a deal with confidence, Chinese investors must ensure their deal team and their advisers are working together to cover off all key issues and manage an efficient bid and negotiation process.
In certain circumstances, there may be a need to obtain a fairness opinion to avoid the rejection of the deal by the target company’s board of directors or stakeholders. Obtaining a fairness report by a credible, independent party can improve the chances for a deal to succeed.
Step 6: Realize value
It is important to have a post-deal plan prior to closing a deal including strategies on how to deal with the unique challenges that put the target company in distress. It’s important to move quickly on the plan to turn the business around and bear in mind much of the work will need to be done during negotiations prior to deal close, especially in relation to key employee retention, significant commercial arrangements, and transition agreements.
At the same time, Chinese investors need to recognize that some of a company’s issues may not be fully understood until after the transaction has been completed. As sound as a pre-close 100-day plan might be, it will likely need to be reassessed and adjusted quickly as new issues emerge. An investor’s ability to realize value from challenged businesses is often highly dependent on their ability to adapt and move quickly and with confidence to take over a target and work with the team to turn a business around.
Making the most of unique investment opportunities in Canada
Canada offers significant investment possibilities for Chinese investors—particularly those willing to look outside the box. While targeting challenged businesses can come with higher risks, if investors plan their investment strategy and approach carefully, they can achieve returns well beyond any traditional investments they might make.