Australia’s stance on passive Chinese LPs hardened in 2020

All Chinese investors were essentially classed as sovereign capital by the government last year, sources say, but the stance may be softening in 2021.

In our five themes for 2021 Deep Dive earlier this year, we identified the continuing growth of economic nationalism as a threat to cross-border infrastructure investment.

Nations generally turned inward in 2020, for obvious reasons, with governments keen to prioritise the health of their own economies, leading some to tighten the reins when it came to opportunistic foreign investment.

We used Australia as a case study then, as the country significantly tightened foreign investment restrictions at the start of the pandemic before loosening them somewhat later in 2020.

Crucially, though, scrutiny of inbound investments into the country has increased overall, with a laser-like focus on critical infrastructure coming to the fore.

The definition of what is critical infrastructure is only broadening, too, now including digital infrastructure assets such as data centres, as well as healthcare assets and mineral resources.

A partner at one of Australia’s biggest law firms told us recently that it was “fairly rare” for a deal to not encounter any issues with the Foreign Investment Review Board – and over the last 12 months Chinese capital has been almost blacklisted from investing in certain types of assets.

“If you had a big Chinese sovereign in your fund, or as a significant investor, that’s a real problem,” he said.

“FIRB has been looking at who is invested in commingled funds for years, but now, particularly on critical infrastructure, they are telling people that a deal is unlikely to get through [with certain investors in your fund]. I advised on a process on the sell side recently, where we told [vendors] if you have investors in this category, it’s going to be very difficult for you to become owners of these assets.”

An advisor who specialises in transactions that require FIRB approval told us that the Australian government last year essentially considered all China-based investors as sovereign-linked capital, thanks to the Chinese government’s powers that theoretically allow it to compel any company to provide information to the state for national security reasons.

“There is no doubt that any material interest from Chinese investors in a fund, including passive LPs, would generally tip it against being able to own critical infrastructure,” the advisor said, with a general guide that ‘material’ was being defined as anything above 5 percent of a fund or co-investment.

This resulted in several investors being knocked back from deals behind the scenes last year, he said, without giving specifics.

While it is true that FIRB has always had these issues in mind – choosing to reject a Chinese-led bid for Ausgrid in 2016, for example – the advice appears to have become stricter and more explicit.

When asked to comment, a FIRB spokeswoman said: “Australia’s foreign investment framework is non-discriminatory and applications will continue to be assessed on a case-by-case basis. All communications from FIRB reflect this.”

The advisor who has worked on multiple potential investments said that FIRB’s stance does appear to have softened since the new year, as the Australian government continues to grapple with a thaw in diplomatic relations with China.

But this has yet to be tested with any major infrastructure transactions, so time will tell as to whether Chinese capital can make a comeback in Australia in 2021.

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