Gulf Trip: the Genesis

The idea flowed, frankly, from a piece I read early last summer in The Wall Street Journal. One of the many global banks had just signed a large strategic financing deal with a Sovereign Wealth Fund (“SWF”), and the article got me thinking. Although I am generalizing to a certain extent, Canadians are such prisoners of our geography and history. The British Columbia economy looks to Japan, China and APEC; they even call it the “near West”. Quebec has a unique business and personal relationship with France. Ontario businesses think of the U.S. market first and foremost, as do many in the Maritime provinces. Few think about the Gulf region.

Canadian companies, particularly in the Innovation Economy, are justifiably proud that perhaps 85-90% of their revenues come from outside Canada. Broken down, however, the vast majority of our nation’s exports go to the U.S. (at 77%), particularly in Central Canada. The luxury that Canadian firms have vis-à-vis our proximity to the giant U.S. market can also be a bit of a crutch, as the trade horizons of the world are invariably viewed through the lens of “speed to market” and comfort with a culture, language, legal system or currency.

Ottawa’s approach to global diplomacy and trade is based, at least in part, on deep traditions. Thoughtful, methodical advances within the diplomatic corps is the tradition, and for good reason. But individuals can make a difference. Former International Trade Minister Pat Carney turned the federal government’s attention to the opportunities in Asia via her Asia Pacific Initiative, and having been born in Shanghai, she brought a truly unique perspective to the cabinet table in the 1980s. People like Marcel Masse, as then-Defence Minister, ensured that the size and scope of the Canadian diplomatic presence in France in the 1990s far exceeded the actual commercial relationship between the two countries.

In the United Kingdom, the fact that Queen Elizabeth the Second still reigns as our Monarch ensures that Canada’s attention to the U.K. is second only to the U.S.A., despite the fact that the U.K. has far deeper political and economic interests elsewhere in the world than it does in its colonial offspring. With $14 billion of annual trade in 2007, and a $4 billion trade surplus, it makes sense that we continue to focus on the U.K. But are we prisoners of our heritage, missing opportunities elsewhere?

The sheer number of Chinese immigrants to Canada ensures that we have at least some appreciation for the economic opportunities there. The late Eddie Goodman certainly recognized the opportunity of the Chinese market, and he dragged people like Magna’s Frank Stronach over the Pacific Ocean 12 or 15 years ago to size up the potential; and Goodmans LLP set up shop in the Country over a decade ago.

Former BMO Chairman Matt Barrett would travel to Beijing in the early 1990s merely to lay the groundwork for a future banking licence, knowing that he “was doing this for the next generation of bankers”. When Chinese banks went public years later, his personal efforts (and those of BMO CEO Bill Downe and former BMO Capital Markets CEO Yvan Bourdeau) were rewarded when the underwriting syndicates were chosen, for example.

Our NATO and NORAD relationships ensure that Canada is forever rubbing shoulders with most of the European military powers, large and small. We even have the beginnings of a free trade agreement with the European nations who are not members of the European Union: such as Switzerland and Iceland.

There are two themes to Canada’s current presence in the Gulf region, and that isn’t all bad.

Canada has no natural history or ties with Gulf States to draw upon. And that creates a bit of a blind spot. Despite the obvious similarities of our natural resource-based economies, the links of immigration, heritage and proximity just don’t exist.

We have a colonial relationship with Britain, we share a language with France (and Quebec just enjoyed their 400th anniversary as a city that began with French stock), the Americans have largely tolerated our differences since well before the war of 1812. Canada had two military bases in Germany for decades, with Canadian soldiers and pilots ready to give their lives to defend German soil from a surprise Russian ground attack. In Australia, our similar colonial upbringing bridges thousand of miles of ocean. In the Netherlands, Canadians are still lauded – literally – each year in cities such a Nijmegen for our role in their liberation 63 years ago. The list goes on.

France and Britain have been politically succeeding and failing in the Gulf Region for centuries. The U.S.A. is omnipresent to a certain extent, commercially and politically, and firms such as Haliburton have moved their headquarters there. The massive populations of India and China just cannot be ignored by Gulf leaders. Canadians, however, are starting largely from scratch (other than our Gulf War role in 1991, which is of most relevance in Kuwait and Saudi Arabi). If not from starting from scratch, we are at least very late to the party.

Any Canadian who plans to be in many sectors of business 20 years from now needs to understand the Gulf Region. What the opportunities are, if any, for your business and your portfolio companies in the case of Fund Managers. What it takes to succeed, and how one needs to factor the region’s growing influence into your business plan.

20 years ago it was the Four Tigers, and we did a decent job there as a Nation. This decade has been about China. For approximately 150 Canadian companies, there is already some business activity in the United Arab Emirates, for example. That’s the other story: some folks have already led the way. But as a group, our “flag” doesn’t really fly as it might given the sheer numbers of firms that are trying to make it work. Or who should be trying, like us.

Our Consulate in Dubai, U.A.E. even cancelled the annual USA-Canada summer BBQ a couple of years ago according to one Canadian who had been to several in a row prior; seemed that the new Chief in town didn’t think it was worth the effort. No wonder local folks think we’ve gone underground, at least relative to the Brits, Chinese, French, Americans, etc.

Everyone will assume that I planned my trip just to raise capital, but there’s plenty of capital in North America for a smallish fund such as ours. For a good North American GP, many Canadian pension funds and institutional investors can write cheques that are the same size as most of the SWF’s. Up until KPMG dropped the “S” bomb last week, it was a Canadian pension fund leading the largest LBO in the world, after all, not a Gulf-based SWF. Capital is just one facet of the Gulf, and that speaks a bit to our collective blind spot.

With more than two dozen portfolio companies at Wellington Financial, most of which already do an excellent job of selling their wares in North America, Europe and/or Asia, there is so much more for a Fund Manager to consider about opportunities in the Gulf than to merely see it as the notional source of endless capital that you read about in the press. There is definitely 2-way business to be done for many firms here at home.

Over the next number of days, I’ll take you on a day-by-day trip through three of the important centres in the Gulf: Abu Dhabi, Dubai and Kuwait.

It was a great life event, and the opportunities I saw were different that anything I expected to encounter. There is capital there, but what the business people and government officials I met in the Gulf really want to hear about are our companies, technologies and any opportunities to fast-forward their economy.

MRM