CHINESE investment in Australia’s healthcare sector has surged over the past three years – not featuring at all before 2015 – to reach a total of A$5.5 billion across 16 completed deals, according to a new report from KPMG and The University of Sydney Business School.

The report, Demystifying Chinese Investment in Australian Healthcare, which covers investments into Australia made by entities from the People’s Republic of China through mergers and acquisitions (M&A) and joint ventures in calendar years 2015 to 2017, found that investment has been concentrated in the health supplement and medical treatment sectors in Australia. 

A KPMG spokesperson said to date there had been no significant investment in pharmaceuticals, biotechnology or aged care.

According to the report, $2.55 billion was invested in 2015, $1.35 billion in 2016 and $1.58 billion in 2017 through several very large deals, including the $930 million acquisition of hospital operator Healthe Care in 2015 and the acquisition of Swisse Wellness for more than $1.5 billion across 2015 and 2016.

Major deals in 2017 included the $800 million investment in Ansell’s Sex Wellness Division by Humanwell Healthcare and CITIC capital, and the $337million investment in PRP Diagnostic Imaging by Hengkang Medical Group.

On recent trends, Chinese investment groups in Australia’s health sector are predominantly privately owned. About 80 percent of deals, by value, involved private rather than state-owned Chinese companies – although there is known to be a large crossover between commercial and official governance in Chinese firms. Many investors have health sector experience at home and they have shown a willingness to make repeat investments.

Advantageous international trade agreements combined with progressive domestic initiatives such as the Federal Government’s Medical Research and Innovation Strategy and the National Innovation and Science Agenda are improving Australia’s comparative advantage in advanced health sector industries and helping drive further investment attraction.

Australia is doing well relative to many other countries. By comparison, Chinese investment into US health, pharma and biotech for the three year period reached US$4.7 billion (A$ 5.7 billion).

According to report co-author, Doug Ferguson, who is the head of Asia and international markets at KPMG Australia: Australia’s success in attracting investment is due to Chinese companies seeking the “complete Australia package”.

“Chinese investors have really shifted their investment interests to Australia’s hi-tech, high quality health products and services sector in the last three years,” Mr Ferguson said.

“Australia presents a range of country-specific advantages that include advanced technology application, quality care facilities, strong management systems and the ‘clean, green and healthy’ image for Aussie branded exports back to China.

“As China’s aged care industry develops and its medical treatment sector matures there will be a greater need for these qualities and more demand for the businesses providing them. There’s still a long way to go,” he said.

Beijing-based Jenny Yao, who is KPMG China’s head of healthcare, explained in the report that the central government’s Healthy China 2030 plan provided a very clear framework for the country’s health sector development priorities. China’s healthcare spending is expected to grow by 8.1 percent annually over the next five years, representing a big opportunity for Australia’s health sector.

“The patterns that are emerging in China’s domestic healthcare sector are likely to strengthen investment demand in the coming years as healthcare assets become a key component of many Chinese investor’s portfolios,” Ms Yao said.

GRAPHIC DEMOGRAPHICS

Professor of Chinese business and management at the University of Sydney Business School said the economic and social conditions in China explained the latest investments.

“Changing conditions in China such as rising income, wide-ranging reforms to public healthcare and new consumer preferences for the ageing all suit Australian exporters,” Prof. Hans Hendrischke said. “Foreign investment is important to build global partnerships with knowledge of foreign markets and access to international distribution networks.

“Rather than general health services, many Chinese companies seek to invest in specialist services, such as oncology, radiology, ophthalmology, IVF, and aged care. These services are replicable in the Chinese market and customised to fit the specific needs of China’s middle-to-high end consumer markets.

“Australian healthcare brands have an initial advantage in China due to their reputation for high quality products with consumers,” he said.

The report predicts that investment will broaden across all sectors in the short-to-medium term. The patterns that have emerged in Chinese healthcare investment so far will likely strengthen in the coming years as healthcare assets become a key component of many Chinese investors’ portfolios.

The introduction of Chinese policies to establish a public/private healthcare system built on ‘big health’ presents an opportunity for Australian companies to share their expertise and participate profitably in the industry’s transition and growth.

“For Australian companies, Chinese investment presents an opportunity to access capital and new markets with new supply chains with established local partners,” KPMG’s Doug Ferguson said.

“ The outcome of increased investment will be a highly competitive Australian healthcare sector that can accelerate exports as well as continue private sector investment in research and improve technological capabilities.”

www.kpmg.com.au

KEY FINDINGS

       From 2015 to 2017, Chinese investment in Australia’s healthcare sector totalled $5.5 billion, across 16 major deals.

       53 percent of the investment was concentrated on Australia’s health supplement sector, 47 percent in the healthcare services sector – with no major investment as yet in pharmaceuticals, biotechnology or aged care sectors.

       New South Wales attracted 49 percent of Chinese healthcare investment between 2015 and 2017, followed by Victoria with 45 percent and Queensland with 6 percent.

       80 percent of completed deals (by value) were by Chinese private companies from diverse backgrounds, including hospitals, specialised healthcare providers, pharmaceutical companies, construction companies and private equity.

       Chinese investors are attracted to target companies that are exporting or capable of exporting to the Chinese market.

       China’s healthcare spending is expected to grow by 8.1 percent annually over the next five years.

WHY INVEST IN AUST. HEALTHCARE?

       Mature business services and technology.

       Australia is ranked first among English-speaking countries as a destination, ahead of Canada, the UK and the US.

       The small time difference with China (2-3 hours).

       Stable political environment and low sovereign risks.

       Transparent regulatory environment.

       Long term stable economic return.

       Cultural diversity.

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THE Institute of Public Accountants’ (IPA) pre-Budget 2018-19 submission in January recommended that the Federal Government introduce a publicly-supported venture capital (VC) fund to enhance the entrepreneurial environment in Australia.

“The VC fund could be established by either providing a significant proportion of funds to assist VC managers to attract other institutional investors to publicly-supported VC funds or by becoming an institutional investor in a range of individual VC funds,” IPA chief executive officer, Andrew Conway said.

“This level of support by government to small business equity finance will improve the entrepreneurial environment in Australia and act as a catalyst in identifying and overcoming hurdles to successful and profitable investment. 

“Many young firms face funding problems, particularly in uncertain technological or new knowledge environments because of their unattractiveness to bank lenders.

“It is a lost opportunity to the Australian economy when innovative firms with high commercial potential are constrained by the absence of external finance,” Mr Conway said.

“Any government with a strong commitment to economic growth via research and development and investment which facilitates greater enterprise and innovation activity must ensure that early-stage venture capital finance remains available to high potential, young firms.

“Otherwise, we risk a reduction in new commercialisation opportunities stemming from national investments in science and technology,” Mr Conway said.

www.publicaccountants.or.au

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FEDERAL Treasurer Scott Morrison has called an enquiry into the impediments to business investment in Australia.

“Business has told us that regulations are one major impediment to investment, especially in terms of the volume of regulation and compliance costs,” Mr Morrison said. “Businesses find it particularly difficult when they are required to interact with multiple levels of government.

“The Australian Government has cut more than $5.8 billion of red-tape and will continue to search for opportunities to go further, including through the Small Business Regulatory Reform Agenda I announced in last year’s Budget. 

“An examination of these and other matters will strengthen our understanding of how the multitude of regulatory systems in Australia affect business investment and assist in the development of a regulatory system that enables growth and supports the ongoing transformation of the Australian economy.”

Late last year, the Council on Federal Financial Relations reviewed the report on the Intergovernmental Review of Business Investment prepared by Heads of Treasuries. The report revealed that investment was driven by a complex mix of factors, including temporary and structural factors, policy settings and institutions.

“I have written to the chair of the House of Representatives Standing Committee on Economics, Sarah Henderson MP, to request that the committee undertake an inquiry into the impediments to business investment in Australia,” Mr Morrison said.

“Business investment is critical to economic growth. When firms are empowered to invest in new productive capacity and technology, it supports innovation and helps create new opportunities and employment for Australians.”

Terms of Reference for the inquiry include the interaction between regulatory frameworks across all levels of government and how the cumulative regulatory burden can be reduced to support greater business investment; the impact of innovation policies, at the Federal and State government levels, on business investment and the role of innovation policies in encouraging greater business investment, considering approaches taken in other countries; the role that taxation policy can have on the encouragement of new business investment; the role that energy policies can have on the encouragement of new business investment; and the impact of supplier payment times, including by governments, on business investment for small to medium enterprise.

www.treasury.gov.au

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MINISTER for Revenue and Financial Services, Kelly O'Dwyer has welcomed the Australian Securities and Investments Commission (ASIC) opening up to public consultation on draft regulatory guidance for its oversight of the new Australian Financial Complaints Authority (AFCA).

“ASIC’s draft guidance is another important step in establishing the AFCA — a new one-stop shop for external dispute resolution in the Australian financial system,” Ms O’Dwyer said. 

“We are putting the governance processes in place so the AFCA is ready to start receiving consumer and small business disputes no later than November 1, 2018.”

Parliament passed legislation to establish the AFCA scheme on February 14 this year. Under the legislation, ASIC will have a new 'directions' power that will strengthen its oversight of the new external dispute resolution scheme.

“The draft regulatory guidance sets out ASIC’s approach and I encourage all stakeholders to be involved in this important consultation process,” Ms O’Dwyer said

The draft regulatory guidance Regulatory Guide 139, Oversight of AFCA, will be open for public consultation until April 6 this year..

The updated RG 139 will be finalised and published by the time AFCA launches.

ASIC is also inviting stakeholder views on the need for any transitional relief from external dispute resolution disclosure obligations.

The consultation paper and draft regulatory guide is available on the ASIC website.

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INNOVATIVE asset finance and infrastructure managed services group Northquest has found a way to any CFO’s heart, looking to fund critical infrastructure for sustainable business development.

Northquest has developed an innovative funding solution that offers a prime motivation for any decision maker: Projects deliver immediate economic or productivity dividend benefits.

This is no mean feat when much of the funding Northquest actions introduces new technologies for greater business efficiency, including renewable energy, energy efficiency and critical building and facility infrastructure. Northquest is already looking at backing robotics and automated logistics assets.

It is a big change from just a few years ago when these sustainability and energy efficiency-led transactions would never be approved – they were simply outside the payoff timeframes and prioritized capital allocations. 

Northquest has astutely turned that around by identifying – and meeting – three important criteria for decision makers. Now those transformative technology asset projects are more likely to proceed, than not, through Northquest in Australia.

“What we found over the past five years was that a lot of these transactions just weren’t seeing the light of day,” Northquest infrastructure and energy managing director, Rad Krvavac said. “There was a lot of interest from the client base, whether it was looking at addressing outgoings attached to energy, improving productivity through technology upgrades or sustainability initiatives. When the projects reached approval level there were generally three drivers to get these transactions off the ground that were not being met.”

The first was that any project had to have a positive economic benefit “from day one”.

“Ultimately a lot of these transactions have very long-dated payoffs – especially in energy,” Mr Krvavac said. “It is always difficult to invest in projects with payoffs greater than five years as there is always a better use of company capital.”

Northquest has solved this problem by offering new technology assets as managed services. Northquest owns the asset and provides its benefits as a managed service – so in the case of energy efficiency technologies such as LED lighting, a client company enjoys lower power costs immediately with no requirement for upfront capital. Savings can be projected for the period of the contract and beyond, and are greater than the managed service charge and have the added benefit of reducing the organisations carbon emissions.

The second barrier concerned the handling of the funding of the new infrastructure project on the company’s balance sheet. This has been brought on by a change in international accounting standards which modifies how leased assets are recorded on balance sheets. The third hurdle was the removal of the delivery and performance risk attached to the investment in new technology assets. CFOs were concerned they were moving into areas that were not core business and may prove difficult to manage.

What was required, Mr Krvavac realised, was a paradigm shift in structuring the funding and Northquest had the capital raising networks and the pedigree to make it work.

“The funding historically available in the market for these transactions was predominantly via the traditional banking sector,” Mr Krvavac said. “The funding from a client perspective was being viewed as dumb debt on their balance sheets while the appetite for longer dated funding was not available via the banking sector due to changes in capital adequacy requirements.

“We saw a big change in accounting standards happening behind the scenes in Australia from the new leasing standard AASB 16 [a change to how leases are accounted, part of the International Financial Reporting Standards agreements administered by the Australian Accounting Standards Board].

“All funding, such as operating leases etc, were going ‘on balance sheet’ in January 2019. That standard started having an impact last year with large organisations changing the way they fund projects due to this changed accounting standard. Suddenly all these transactions had to be ‘off balance sheet’ as a prerequisite for approval.”

The reason this IFRS-encouraged change will make a significant difference is that from 2019 all property and equipment leases previously recognised off-balance sheet will be accounted for as right-of-use (ROU) assets with associated lease liabilities. This is designed to bring more transparency about an organisation’s lease commitments and it changes financial metrics such as return-on-capital and EBITDA.

Northquest’s managed service model is an elegant solution that address the delivery of these projects and their impact under the changed accounting standards.

“The third issue we were finding was that when it came to energy efficiency or sustainability projects, they are generally not an integral part of your business,” Mr Krvavac said.  “If you are in the business of healthcare or widgets then you do not necessarily want to take a position on a solar PV (project)”.

“So no-one wanted to take on the risk associated with the delivery of these initiatives. That is when we really started to look at bridging the gap … looking on these projects from not just a finance perspective but a client perspective.” 

Northquest began submitting innovative funding mechanisms that started addressing all three of these issues for potential clients.

“We differentiate from other funders in the market, with our managed service solutions that allow for the delivery of this critical infrastructure under a managed service contract. That allows us to address the immediate economic benefit, off-balance sheet structure and de-risking of delivery and performance risk, in favour of the client.”

TAKING THE INITIATIVE

Northquest’s name itself is a giveaway. This is a company that has quested onward and upward from its own ‘day one’ in 2007.

While it started out as a “fairly traditional asset finance company” according to Mr Krvavac, funding all types of assets, predominantly for the Top 200 ASX-listed companies. (needs rewording)

But Northquest’s founders – Matthew Macdougall, Bill Murfitt and Philip Barclay – knew they were on an epic journey to “remove the roadblocks businesses face when trying to secure the infrastructure and resources they need to grow and improve their businesses”.

Today, with more than 50 experienced staff drawn from some of the world’s most respected blue chip businesses, Northquest has found its astute business model and dependable approach attracts the financial support of some of the world’s largest pension funds and the Australian superannuation giants.

Northquest ‘cut its innovation teeth’ in the commercial application of emerging renewable and efficient energy technologies.

“In 2012 we started getting heavily involved in the renewable energy and energy efficiency sectors,” Mr Krvavac said. “One of our first transactions was a $50 million waste-to-energy plant in Victoria for a large national manufacturing company followed by investments in tri-generation and solar PV.”

This was the proving ground for the innovations that have followed for Northquest clients – where they realised that satisfying these three key requirements for CFOs was the trigger for success.

“Every CFO wants an economic benefit from day one. Not a deferred one,” Mr Krvavac said.

“What we have been able to do is to provide long dated funding. That’s (funding) greater than 10 years and it can be up to 30 years depending on the organisation. By embedding long-dated funding in a transaction that has a normal payoff in, say, 10 years, we can allow that transaction to be op-ex positive from day one.

“The client gets an economic benefit immediately. From a CFO perspective this becomes interesting as they are getting a positive cashflow impact on the delivery of a critical infrastructure project which they normally wouldn’t undertake due to the long term investment horizon.”

Structured under a NQ managed service agreement, Northquest owns the asset and is responsible for its performance over the contracted lifecycle.  This works to ‘de-risk’ the delivery and the performance of the asset, from a client perspective,

“For example if we were looking at a single project like solar, our clients get cheaper power from the solar PV system than what they are currently paying from their retailer,” Mr Krvavac said. “No upfront capital, positive economic benefit from day one, and they have no risk from the performance of the solar PV over the 20-year period.

“That’s where we have been fairly innovative and we are, at the moment, a leader in having alternative solutions for certain infrastructure projects.”

Mr Krvavac said Northquest has so far engaged in specific industry segments, mainly in the education, health care and property sectors, along with multinational industrial sector clients.

“We also provide utility sector solutions across Australasia,” he said.

While Northquest has succeeded in renewable energy and energy efficiency projects, it has provided support for critical building infrastructure technologies such as heating, ventilation and air conditioning (HVAC) upgrades.

“What we find is there is a large pool of clients with ageing infrastructure in their facilities,” Mr Krvavac said. “There are a lot of assets that need upgrading and unfortunately they all require short-term payoffs, so it is very difficult for people to put their hands in their pockets to fund these types of transactions if they are not getting the economic benefit from day one.”

Northquest has a policy of only working with top-tier companies for the delivery of infrastructure and ongoing servicing.

“There is a greater alignment of interests with clients knowing that they have Tier 1 equipment with a lower asset lifecycle cost in their facilities that has a life longer than the service agreement. It removes the headline capital hurdle and puts a focus on lower asset life cycle costs and sustainable investment.

“We work closely with a lot of the major vendors within the markets, whether it’s energy based solutions, whether it’s electrical, mechanical or hydraulically based services within facilities. Ultimately, we are an enabler that unlocks these projects and gets them off the ground while allowing our clients to achieve their objectives.”

CAPITAL IDEAS

One of the ‘no-brainers’ for CFOs about Northquest’s funding solution is the fact that it covers 100 percent of the project cost with the ability to fund for the period of the asset life cycle. Traditional funding structures generally have a much higher inherent cost of capital due to a requirement for equity and project risk. Northquest solutions can be applied to both greenfield and brownfield projects.

“All of our major markets have issues around critical infrastructure and new technology adaption in their facilities,” Mr Krvavac said. “With rising energy prices in in Australia, there is a very large focus on trying to reduce the outgoings around operations using energy efficiency or installing equipment that drives some sort of productivity dividend from day one. 

“There are a lot of opportunities now for corporates to take ownership and address critical outgoings by looking at renewable energy, energy efficiency or new technologies such as automation.

“We are at the centre of a perfect storm now due to the convergence of technology efficiencies and increased energy costs where, with the right solution most projects are becoming viable,” Mr Krvavac said.

“Traditionally to get the projects off the ground, you need a capital allocation from the organisation and the appropriate short dated payoff.  That’s where we come in to drive a positive economic outcome from day one, no upfront capital from the client, and all the risk of performance (covered by Northquest).”

NEW FRONTIERS

With the variety of technologies Northquest considers, the group seems poised to assist innovative new Australian technology companies gain a market foothold.

“There are a lot of new technology companies developing driving improved productivity for clients,” Mr Krvavac said. “These technologies are not just energy related, it can relate to anything.

“The problem a lot of these tech companies have is actually selling their technology into the market they are generally unproven and expensive by nature. We can enable the vendor and the end client to actually get that project off the ground.  We would own that technology with no upfront capital to the client and we would structure it as a managed service contract.

“From a client perspective, they don’t have to put their hands in their pockets, they get the new technology, they get productivity dividends day one. Northquest is matchmaking, in a sense.”

Mr Krvavac said projects could be “quite bespoke as well”.

Northquest has looked at a project best described as “a robotic pharmacy” and another hi-tech automated logistics plant.

“Cutting edge tech can be introduced … and we see more and more of that going forward,” Mr Krvavac said.

Northquest anticipates introducing new Australian technologies, as solutions, to certain markets.

“We are more than happy to take a look at them,” Mr Krvavac said. “This funding model, if it suits a new technology, then those organisations will have a high success rate going forward as they have multiple options to get their product to the market particularly the removal of the headline capital cost and performance risk..

“A lot of start-up organisations try to use their own balance sheets to grow their business however they just do not have the scale to attract sufficient funding. Even if they do, it is often not scalable,” Mr Krvavac said. “Whereas, if these early-stage organisations have the appropriate clients, we can step in and remove that headline capital hurdle for both entities.”

Northquest, he said, had a good understanding of best-of-breed products. Historically, Northquest has tended to lean towards the bigger organisations as suppliers of technology assets and systems, including groups such as Johnson Controls, Schneider and Siemens.

“But with emerging technologies, we are becoming a conduit to enable a client to get that technology,” Mr Krvavac said.

“We actually have a solution for helping early stage best-of-breed tech companies in Australia to do business with the organisations that want and need those technologies. At Northquest, we find that very exciting.”

www.northquest.com.au

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