New directions for giant CDC: targets poor with $3.1 bn

Giant UK development finance institution the CDC Group has announced a radical new business plan after a review of its organization and activities, following media and political criticism. Chief changes for the leading private equity investor are a return to direct investing from a fund of funds approach, and focusing only on low and lower-middle income countries in sub-Saharan Africa and South Asia.
At the end of 2010, CDC group was invested in a portfolio worth £1.9 billion ($3.1 billion), according to its website www.cdcgroup.com, invested in 143 funds managed by 71 managers and these funds had invested into 930 portfolio companies in 70 different countries. CDC had started investing into funds in 2004 after selling off stakes in Actis and Aureos funds. Like other leading development fund managers it aimed to build capacity among African fund managers.
The change comes after the review in 2010 by the Secretary of State for International Development, Rt Hon Andrew Mitchell MP. A new CEO is to be appointed.

Direct investments and ESG
According to the new business plan, as outlined in a press release, direct investments will be 20% of the portfolio by 2015, and CDC will target businesses with high potential development impact and manage these investments in a hands-on way to gain more expertise. Debt investments will be up to 20% of CDC’s total portfolio by 2015, so that CDC can target frontier markets where investment infrastructure is underdeveloped. Small and medium enterprises are a key target and it will offer guarantees to help businesses to obtain credit, commercial bonds and trade finance. CDC will also explore the role of technical assistance to make capital more developmentally effective. It will aim to match all its funding with equal amounts of third party capital.
In future CDC will concentrate exclusively on the low- and lower-middle income countries in sub-Saharan Africa and South Asia where 70% of the world’s poor live. In lower-middle income countries, CDC will focus on regions and sectors of need where capital is scarce and will avoid sectors which are already attracting capital from other investors.
The group will step up standards of environmental, social and governance (ESG) at investee businesses and there will be independent valuations of the development impact of funds. It says it will “lead the way among DFIs on openness and accountability”. CDC will update its investment code regularly and disclose more information about the organization, its investee businesses and its partners.

Innovation in deals and “appropriate” pay

It will also set up a new innovative finance division to explore opportunities in exceptionally challenging investment circumstances, which need innovation in deal origination and the ability to draw on a wide range of financing approaches.
It will also change the way it pays staff: “Remuneration will be appropriate for a publicly-owned body whose purpose is poverty reduction. CDC must be able to recruit and retain people with the right approach and skills to deliver the company’s development mission. CDC will follow applicable FSA guidance and EU legislation so that variable performance pay will be largely deferred and based on long-term performance.”
Andrew Mitchell MP, Secretary of State for International Development said: “This is a bold and exciting new departure for CDC. The reforms will help them direct their capital better, fostering economic growth in countries which need it most. CDC will be better able to drive investment into areas currently starved of capital. It will become more nimble, flexible and transparent, able to influence and control the impact of their capital and measure its success in reducing poverty, not simply in turning a corporate profit.”

The action begins
The new business plan is already in action. CDC this year invested $30 million in funds helping provide long-term loans and guarantees to address an acute shortage of capital for green energy in developing countries. CDC is investing $30m in a new agribusiness fund in Africa focusing on Zambia, Tanzania, Malawi and Mozambique. A further $30m has been invested in basic African infrastructure such as toll roads, ports, railways and energy.
Richard Gillingwater, CDC’s chairman says: “These reforms deliver a more versatile and pioneering CDC. Our ambition is make the biggest difference possible to lasting development.”
According to a story on the leading website www.privateequityafrica.com, CDC currently has an African private equity portfolio worth £877million, which includes the £122 million it invested in new businesses in 2010. The investor additionally committed funds to 8 Africa-focused managers in 2010, including a maiden fund Catalyst Principal Partners I focused on East Africa.

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