CDC Group plc Development Review 2009 Our mission is to foster growth in sustainable businesses, helping to raise living standards in developing countries. Our investment policy is to make more than 75% of new investments in low income countries* and to invest more than 50% of our funds in sub-Saharan Africa.
* Those with an annual gross national income (GNI) per capita of less than US$905 as defined by World Bank 2006 data.
Contents Introduction 51 Chapter 5: Initiatives taken in 2009 1 Development highlights 52 Climate change 2 Statement from the Chief Executive 54 Gender equality 4 Statement from the Chair of CDC’s 56 Updated CDC Toolkit Best Practice and Development for fund managers Committee 57 Chapter 6: External perspectives 5 Chapter 1: About CDC 58 Independent evaluations 6 Why governments invest in 59 An external perspective on development finance institutions (DFIs) measurement of CDC’s development 7 Where CDC invests impact 8 How CDC invests 60 Other approaches to measuring and 9 The Investment Code – CDC’s quantifying development impact principles for sustainable and 64 Audit of CDC’s processes to responsible investments implement its Investment Code on ESG 10 Governance of ESG 68 Independent assurance report to CDC Group plc 13 Chapter 2: CDC performance 14 Financial performance 69 Chapter 7: Adding value in emerging markets 17 Economic performance 70 Reaching markets and sectors with 19 ESG performance poor access to finance 21 Serious incidents 70 Building local capital markets and 22 Private sector development local investment capacity 23 Evaluations 72 Support and training for fund managers 25 Chapter 3: Regional reviews 73 Third party capital mobilisation 26 Asia 75 International collaboration 31 Sub-Saharan Africa 77 Emerging markets challenges 36 Other regions 79 Appendix 39 Chapter 4: Sectors in focus 80 CDC’s Investment Code 40 Alternative investment 44 Agribusiness and forestry 85 Footnotes 47 Financial services 87 Data disclaimer 49 Consumer 88 Acronyms and additional information CDC Development Review 2009 1 Development highlights
794 Underlying portfolio companies located in 71 countries 733,000 People employed in portfolio companies reporting employee data US$2.8bn Local taxes paid by portfolio companies reporting tax data in 2009 £359m New investments in developing countries, 61% in Africa
£742m1 Other capital mobilised Thought leadership Gender and climate change studies completed in 2009 for inclusion in revised toolkit for fund managers Fund evaluations 7 out of 20 development impact evaluations performed independently of CDC in 2009 CDC’s Investment Code Processes externally audited for the first time
1 See page 73 for an explanation of how mobilisation is measured. 2 CDC Development Review 2009 Statement from the Chief Executive Richard Laing
CDC exists to improve people’s lives a total of 65 different fund managers. in developing countries. We need to This represents an increase of six fund assess how effective we have been managers in 2009, all providing vital and I am therefore pleased to present capital during a year of challenging CDC’s second annual report on the financial conditions across CDC’s developmental effects of our investments. markets. With supplies of commercial CDC’s first development review Growth capital to developing countries falling for Development, published in 2009 back in 2009, capital from Development was well received. This report extends Finance Institutions (DFIs) has taken on and deepens the analysis of CDC’s even greater significance. Despite the development impact and reports difficult conditions, we invested £359m comprehensively on CDC’s work in 2009. in promising businesses in 2009. The number of CDC’s portfolio companies The role of economic growth in at the end of 2009 stands at 794, an “An investor who is doing reducing poverty increase of 113 on 2008. Across our good in society in emerging portfolio, CDC’s capital is invested in As a DFI, helping businesses to grow businesses that employ a total of 733,000 markets is also more likely sustainably is central to CDC’s mission. people in the 617 companies that to be doing well financially.” We have been supporting the reported employment data. development of the private sector in poor countries for more than 60 years. Challenges in 2009 It is through economic growth that opportunities are created for poor people For CDC’s investment team, the to establish a long-term route out of environment in 2009 was challenging. poverty for both themselves and With lower liquidity and fewer exits their families. across our portfolio, CDC was forced to scale back the level of its new fund CDC is an integral part of the Department commitments. A total of £207m was for International Development’s (DFID) committed by CDC in 2009, down by strategy to help support the private sector £390m on 2008’s figure. Despite this fall in in developing countries. Flourishing 2009, our total outstanding commitments businesses give individuals employment stand at around £1.6bn. This capital and training opportunities and, through is available to our fund managers for this, the prospect of a more secure future. investment in businesses over the For governments, successful businesses coming years. generate profits and taxes, which contribute to public services, By the end of 2009, a more optimistic infrastructure, innovation and a stronger outlook had returned to many of CDC’s link between state and taxpayer. key investment areas. While western economies shrunk, GDP growth in sub- Doing good and doing well Saharan Africa remained positive at 2.5% and was almost 7% in India over For the first time, CDC’s extensive data the course of 2009. More generally, collection in 2009 enabled us to run developing economies have lower debt regression analyses of non-financial burdens as well as higher growth rates factors on our portfolio. The most than most developed economies. Based interesting and not entirely surprising upon these fundamental strengths, CDC result was that there seems to be a is hopeful that market conditions and correlation between how well a fund investment opportunities will continue performs financially and how good the to improve in 2010. quality of its Environment, Social and Governance (ESG) management systems Pioneering investment in 2009 are. In other words an investor who is doing good in society in emerging Despite the tough financial backdrop, markets is also more likely to be doing CDC continued to invest in new, often well financially. While these are only initial pioneering, funds in 2009. Two funds findings and more rigorous analysis and in particular showed CDC’s dedication extensive data collection is needed it is to investing in previously underserved indeed encouraging. The analyses are regions and sectors. In June, CDC explained in further detail on pages 14 committed US$10m to Rabobank’s and 15. India Agribusiness Value Fund, a fund which focuses on enhancing all aspects CDC’s portfolio in 2009 of the agribusiness value chain – from farming to production and marketing. The At the end of 2009, we had capital fund is the first agribusiness-only private invested in 134 funds managed by equity venture in India. In Sierra Leone, Statement from the Chief Executive 3
CDC backed the first private equity fund presence to the investment process. groups. Being a UNPRI signatory enables to emerge since the end of the country’s All except two of CDC’s 65 private equity us to engage in closer dialogue with and civil war. The fund will provide backing fund managers have local offices, with bring our experience and insights to other to businesses, particularly SMEs, and country locations ranging from Nigeria to investors whilst also learning from them. will boost the private sector in this Zambia, Indonesia to Sri Lanka. The emerging economy. development of a sustainable, vibrant Evaluating CDC’s performance investment infrastructure is a key part of CDC’s Investment Code on ESG issues economic development and our backing A cornerstone of CDC’s system for for local managers means that we support measuring development impact is the 2009 was also the first full operational poor countries’ economic growth by evaluations of its funds. year of CDC’s new Investment Code doing more than just placing our capital which began on 1 January 2009. The in businesses. For the first time, in 2009 we decided to code acts as a comprehensive guide use independent assessors to carry out to ensure that CDC’s investments Early in 2010, we completed updates to some of our evaluations. Seven out of are continually improving towards our Toolkit for Fund Managers. The new 20 evaluations were completed by Triple best international practices on the publication will give fund managers and Value Strategy Consulting. This has environment, safe and fair working others an improved and more user- provided valuable external validation of conditions and good practices in friendly resource to demonstrate how CDC’s evaluation process and showed corporate governance. The code is good management on ESG can add value that CDC on average rates its funds’ designed to complement the role of to investments. The Toolkit provides tools performance at least as critically as the private equity as a long-term investment for integrating ESG analysis into third party. In addition, Triple Value has vehicle and recognises that fund investment decisions and explores the also contributed new ideas to CDC’s managers are well placed to implement business case for doing so. We will share thinking on how to measure development. best international practices on ESG in our new Toolkit with all our fund managers portfolio companies. as well as any other interested external Over the investment period of the 20 parties in the first half of 2010. The toolkit funds under evaluation, a total of 87,000 In 2009, 83% of companies covered is available on the CDC website: new jobs were created. Just 22 of the 265 by CDC’s evaluations made ESG www.cdcgroup.com companies reporting this data saw improvements following investment by employment decrease. A total of 68% of the fund manager. Whilst this is a International collaboration companies in the funds evaluated saw an considerable achievement, it is also a and initiatives increase in profitability following very necessary one. 73% of companies investment from CDC’s fund managers covered by the evaluations had, at the Through our work with international and 82% saw an increase in revenues. time of initial investment, ESG issues partners we are making a difference Over US$3bn was paid in taxes to or opportunities for improvement. We to thinking on issues key to enhancing domestic governments over the period of continue to work with our fund managers development impact. There is a investment by 179 companies reporting to promote and ensure that ESG disproportionate number of poor women this data to CDC. In this way, CDC’s improvements take place across in the world and in order to find ways to investment brings real economic benefits portfolio companies. address this we commissioned a study to those countries it reaches. on gender in collaboration with three other How CDC is adding value DFIs. The study provides best practice Final words as an investor guidelines and advice on how to implement gender equal standards in 2009 proved a challenging year for CDC, The role of development finance is to private sector companies in developing fund managers, portfolio companies and provide capital where there is a shortage countries. We also commissioned a emerging markets. Our portfolio was of commercial investors. DFIs can also climate change study to help our fund nevertheless able to respond well to these help reduce the perception of risk among managers better understand and manage challenges and we expect the outlook for commercial investors and thereby climate change risks across their portfolios. 2010 to be more favourable. Looking catalyse even greater levels of third party ahead, our 2009-13 Investment Policy capital. CDC agreed in 2009 a new Various collaboration and opportunities stipulates that at least half of the new methodology with DFID for assessing the for speaking engagements were also investment made will go to sub-Saharan third party capital that it has mobilised in undertaken during the year. CDC worked Africa and at least three quarters of our the funds in which it is an investor. The with Oxfam and the Church of England investments to low income countries1. methodology recognises that CDC’s to raise the profile of private equity CDC will thereby continue its efforts to influence is greatest in mobilising capital investment in developing countries; in reach markets where investment capital for first funds than subsequent ones. We Washington early in 2009 we met with is scarce and continue to offer them found that over the past three years CDC other DFIs to find innovative ways to help a sustainable route out of poverty. has mobilised 278% more capital to funds our markets meet the challenge of the than from its commitments alone. This recession; and in November 2009 we led beats the 200% target set for us by DFID. a fact-finding visit to help Bangladeshi Please refer to chapter 7 for more details policy makers make their country a better on our work in mobilising capital and the place to invest. We also became a methodology behind this. signatory to the United Nations Principles Richard Laing of Responsible Investment (UNPRI) and Chief Executive CDC chooses its fund managers carefully are actively involved as a Steering to ensure they bring a strong local Committee member in two of its working 4 CDC Development Review 2009 Statement from the Chair of CDC’s Best Practice and Development Committee Jonathan Kydd
Obligations of managing public money CDC Board visit to Bangladesh
One of CDC’s most significant In order to observe first hand the impact achievements over the past few years has that development capital can have, CDC’s been to establish a system to measure Board visited Bangladesh in November of development impact. This was a vital last year. Bangladesh might appear a risky step and one that took considerable time destination for foreign investment. and thought. As a consequence CDC’s Although its GDP has been growing at systems for monitoring and evaluation 6% per annum, developing businesses are as comprehensive as any in the in the country face severe challenges. development finance industry. CDC’s These include environmental problems, outsourcing of seven impact evaluations lax corporate governance standards to an independent third party marks a and a lack of power infrastructure. further stage in the development of a CDC’s role robust approach to analysing the benefit Preconceptions can be misleading and of CDC’s capital to local economies. it is CDC’s role to demonstrate to others As a long-standing member of CDC’s that responsible and successful investing Board I have been fortunate to be part of There is no room for complacency here. is possible. CDC and its Board co-hosted some of the most significant changes in The demand for even more thorough and two seminars attended by over 100 CDC’s history and thinking on economic nuanced understanding of the links participants from the investment and development. Whilst these changes have between commercial capital and poverty government communities to discuss the seen the organisation’s structure and reduction is growing. CDC must continue role of the private sector and private business model transform, CDC’s drive to be proactive in this area and work to equity in development. In Bangladesh, and effectiveness in supporting the private ensure that its evaluation work and a new entrepreneurial generation is sector in poor countries is as strong Environment, Social and Governance emerging which understands how private as ever. (ESG) systems remain at the forefront sector development can transform lives of the industry. This is further discussed as well as the value of developing The Chief Executive has mentioned in his in chapter 6. businesses sustainably and with introduction that the global economic adherence to the best international crisis which unfolded in 2009 presented Priorities in 2010 business and ESG standards. It is part of considerable challenges to CDC. CDC’s mission to help foster this talent by Fortunately, as a consequence of its In the upcoming year, CDC will continue backing the entrepreneurs and investors financial success in recent years, CDC to refine its systems that measure that will bring greatest benefit to was well-placed to continue investing development impact. As an intermediated Bangladesh. While our recent support for new capital in developing countries at investor, the intellectual and practical its nascent private equity industry is new, a time when it was most needed. challenges here are complex. It is vital that Bangladesh is not a new market for CDC. CDC’s Investment Code is implemented Indeed, it was to address Bangladesh’s As a Development Finance Institution (DFI), by its fund managers. The findings of the poor power capacity in the early 2000s CDC is ideally suited to providing capital audit into CDC’s ESG systems will play that CDC backed three gas-powered to markets where there are higher risks an important part in driving this process. plants, through its former Globeleq and where investment is in short supply. This is the first audit of its kind for CDC subsidiary, that provided 25% of the CDC’s investment targets for 2009-13 are and marks an important step towards country’s electricity. more ambitious than any European DFI assessing the effectiveness of the equivalent. At least 50% of new capital systems that CDC has worked hard Reflections committed by CDC is to be deployed in to establish. sub-Saharan Africa and at least 75% to In 2010, I shall be retiring from CDC’s low income countries. CDC will also focus on enhancing its Board after 13 years and as Chairman understanding of its portfolio in the of the Best Practice and Development As an investor in private equity funds, upcoming year. Internally, it will assess Committee. My association with CDC CDC’s capital is invested for the longer the climate change impact of its portfolio. is a source of great pride and proved a term and therefore assists companies to Externally, CDC will contribute to and valuable complement to my academic grow and develop over time. CDC’s role learn from other investors who are work as a development economist, with in supporting new fund managers to signatories to the UNPRI. CDC a focus on Africa. CDC stands, as it has establish vibrant private equity also hosted a working forum for ESG and always stood, at the pioneering edge of infrastructure in developing economies development impact issues between the the private sector’s ability to improve lives should not be underestimated. European DFIs in London in April. and reduce poverty. CDC can also help to address specific problems across emerging markets. One example of this is CDC’s commitment to the Global Trade Liquidity Programme, Prof. Jonathan Kydd a major global initiative coordinated by Chair of CDC’s Best Practice the IFC, designed to help overcome the and Development Committee shortage of short-term trade finance which stemmed from the financial crisis. About CDC
CDC is a development finance institution (DFI) owned by the Chapter UK government’s Department for International Development (DFID). CDC is a core part of DFID’s strategy to reduce poverty and create sustainable economic growth through private sector development in emerging markets. It has been profitable in all but four years since its foundation in 1948.
At the end of 2009, CDC was invested in 794 companies through 65 fund managers. These investments are spread across 71 developing countries. Further details of CDC’s intermediated investment model and the importance of this model are discussed in this chapter. 6 CDC Development Review 2009 Chapter 1: About CDC CDC is a development finance institution (DFI) owned by the UK government’s Department for International Development (DFID). CDC is a core part of DFID’s strategy to reduce poverty and create sustainable economic growth through private sector development in emerging markets. It has been profitable in all but four years since its foundation in 1948.
Background DFIs have a particular role to play in Current portfolio enabling investment in underserved project CDC was the first DFI. It was established in types and settings, investing in under- 1948 to strengthen the economies of the capitalised sectors and mobilising other Sub-Saharan Africa former British colonies by providing finance investors. DFIs can be particularly potent 45% of CDC’s portfolio for businesses by way of loans and equity. when they invest capital in regions suffering In 1970, CDC started investing outside the from market failure and where access to £640m, 28 countries Commonwealth. Since its inception over capital for businesses is in short supply. 60 years ago, CDC has been supporting promising businesses in Africa, Asia and DFIs can also have a catalytic role by Asia Latin America and kept reinvesting its facilitating additional investment flows profits to an ever larger number of into emerging markets. They fulfil this role 43% of CDC’s portfolio companies in these emerging markets. primarily through: £607m, 27 countries Why governments invest in • helping mobilise private capital and Development Finance Institutions expertise through their long experience of emerging markets. DFIs encourage Latin America There is a wide consensus among policy additional funding for promising 5% of CDC’s portfolio makers and economists that growth is business which might not be committed the most important factor in sustainable without the presence of the DFI; £73m, 12 countries poverty reduction. Unlike some other DFIs, • increasing the visibility of promising CDC focusses exclusively on private sector opportunities and offering tailored investments. Commercially successful financing solutions, thereby mitigating North Africa businesses provide employment risk to other parties; and opportunities which are critically needed • creating a multiplier effect in which 7% of CDC’s portfolio in poor countries that often suffer from their own capital is added to by private £91m, 4 countries chronically high unemployment rates. investors. By providing finance for promising DFIs provide added value by the way 1 businesses in developing countries, DFIs can in which their approach and types of Low income countries help to stimulate private sector development investments sometimes differ from those 54% of CDC’s portfolio in economies underserved by commercial of a more mainstream investor. The DFIs financial institutions. Companies which fulfil this by: £762m receive investment generate new employment and pay taxes, offering both • investing at an early stage in enterprises individuals and governments prospects in developing countries which are Middle income countries2 for forging their own route out of poverty. seeking finance; Profitable and growing businesses also • providing financial solutions that other 46% of CDC’s portfolio generate increasing tax revenues that private sector investors would generally £648m allow low income country governments to not be willing to use; fund their own development programmes • being cogniscent of and managing through investments in primary education, typically higher risks in emerging health services and infrastructure. markets;
CDC’s investments by year end 2009: 794 investments in 71 countries
More than 25 investments 15–25 investments 6–14 investments 1–5 investments Chapter 1 – About CDC 7
• developing and growing projects and businesses over the longer term as The Global Trade Liquidity to have declined by as much as 10% in opposed to shorter term approaches; Programme 2009, the largest decline since this measure and was introduced. • investing in small and medium sized enterprises (SMEs), with a particular One example of DFIs’ ‘additional’ value: The GTLP has a total size of US$5bn focus on Africa. provision of finance during the financial with commitments from a range of crisis. institutions. These include a combination of governments, DFIs and private sector Poverty remains a reality for large parts Background of the population in emerging markets. banks. The programme hopes to mobilise The financial crisis which began in late an estimated US$50bn of trade which Continued investment in locally based 2008 has had a mixed effect on CDC’s funds and companies to provide would not have happened without core markets and geographies. One way support from the GTLP. economic growth and poverty reduction of measuring this is to look at foreign therefore remains as important as ever. direct investment (FDI). The World President of the World Bank, Robert The first of the UN Millennium Investment Report for 2009 demonstrates Development Goals aims to reduce by Zoellick commented at the launch: the significant impact of the crisis on FDI. “As a result of the concerted efforts of half the number of people living beneath FDI inflows decreased 14% worldwide in the poverty threshold by 2015. This target the partner governments, development 2008 and 44% in the first quarter of 2009 finance institutions and banks, the GTLP is still some way short of being met for compared to first quarter 2008. sub-Saharan Africa in particular. South Asia has quickly moved from concept to reality by contrast has kept closer to matching and will start to provide significant support Impact on FDI inflows in emerging for trade in developing countries.” its target of less than 25% of people living markets beneath the poverty line by 2015. Although a greater share of overall FDI The GTLP fully reflects CDC’s desire was directed at developing markets in Where CDC invests to provide solutions to changing 2009, the report paints a gloomy picture for circumstances in the emerging markets. the year as a whole. Pledged investment It also reflects part of CDC’s new strategy CDC’s investments are focused on for developing countries has also fallen the poorest countries. When CDC’s to finance debt as well as equity which is back. This means less capital has been discussed further in chapter 7. investment policy for the 2009-13 period committed to emerging markets and, in this was formulated, DFID and CDC set sense, the financial crisis will continue to be out three policy targets to guide CDC’s felt in Africa and Asia for some time to come. new commitments: Although data is not yet available for the • 75% or more of new investments shall “While developed countries 1 emerging markets as a whole, it is possible be in low income countries ; to see the impact of the crisis on individual were initially those most • 50% or more of new investments shall countries. In India, FDI flows decreased by be in sub-Saharan Africa; and an estimated 16% in 2009. In South Africa, affected (by the decline • up to £125m may be committed to this decrease was approximately 13%. in 2008 of FDI flows), SME funds in middle income countries2. In such an environment of diminished the decline has now spread capital, the role of DFIs becomes even As a result of these policy targets a larger more important. to developing countries, with proportion of CDC’s new investments are directed towards low income countries inward investment in most One response: The Global Trade countries falling too. The than any other DFI. CDC also seeks to Liquidity Programme address issues such as the scarcity of In 2009, CDC committed US$75m to the decline poses challenges for debt capital for companies and Global Trade Liquidity Programme (GTLP), many developing countries, as infrastructure projects across emerging a fund initiated by the International Finance markets and in sub-Saharan Africa in Corporation (IFC). The GTLP is designed FDI has become their largest particular. Through investment in debt to address the scarcity of trade finance in source of external financing.” funds CDC intends to develop and emerging markets which resulted from strengthen African debt capital markets. the financial crisis. At the time of the Ban Ki-moon, World Investment Report programme’s launch, trade was estimated 2009, UNCTAD
Board visit to Bangladesh (2009) Board visit to Zambia (2008) 8 CDC Development Review 2009
About CDC continued
At the end of 2009, CDC had capital India contains the largest number of poor Top investment destinations invested in 134 funds which in turn people of any country in the world with invested in 794 companies which were approximately 450 million people living spread across 71 countries worldwide. on less than US$1.25 per day. 340 million India The largest share of CDC’s portfolio value of these, or more than 70%, live in rural 19% of CDC’s portfolio is located in sub-Saharan Africa which areas. Bangladesh is also extremely represents 45% of CDC’s portfolio value poor, with 50% of its 150 million people 167 companies and some £640m while 43% is invested in classified as poor under the World Bank Asia. 54% of CDC’s portfolio was at the poverty line. Parts of South East Asia are £268m end of 2009 committed to low income similarly poor – in Vietnam, 23% of people countries according to the World Bank’s live on less than US$1.25 a day. 2006 categorisation. China 14% of CDC’s portfolio Nature of the investment universe How CDC invests CDC’s investment universe is directed 112 companies towards low and middle income countries CDC’s operating model where a large proportion of people live in Since 2004, CDC has been constituted as £197m absolute poverty. A typical measure of a fund-of-funds. This business model was absolute poverty is the World Bank established following a major restructuring US$1.25 a day poverty line (US$38 per by CDC’s shareholder, DFID. As a fund-of- South Africa month), defined as consumption or funds, CDC is not a direct investor into income below this threshold. By investing companies in emerging markets. Instead 10% of CDC’s portfolio in under resourced markets and sectors it deploys its capital through private equity 42 companies where CDC’s investments are more funds which in turn invest in these needed, the financial, economic, ESG, companies. These funds thereby provide £134m and private sector development outcomes CDC with an indirect share in the are likely to be greater. businesses in which the fund manager invests. Through these investments the Nigeria Sub-Saharan Africa has the highest fund managers provide companies with proportion of the world’s poor with 51% access to capital that allows them to 9% of CDC’s portfolio of the population, nearly 400 million expand and improve their businesses. 41 companies people, living beneath the poverty line. Other investors, both public and private, Nigeria, sub-Saharan Africa’s most invest alongside CDC with these fund £121m populous country has the continent’s managers. This further expands the greatest number of poor with as many as access to capital for fund managers to 90 million people in that category. Kenya, invest in businesses in emerging markets. Kenya another country that is home to a substantial number of CDC portfolio 3% of CDC’s portfolio companies, has 20% of its population in 53 companies poverty. CDC also directs its capital to low-income countries in Asia, with a focus £44m on South Asia and the Mekong region of South East Asia. The largest of these investment destinations is India.
World’s poor by region* CDC portfolio value by region CDC portfolio value by sector
6 7 1 Sub-Saharan Africa 28% 1 Sub-Saharan Africa 45% 1 Financials 20% 5 6 10 4 2 China 15% 5 2 China 14% 9 2 Consumer 14% 3 India 33% 4 3 India 19% 8 3 Industrials 13% 4 Other Asia 18% 4 Other Asia 10% 1 4 Energy & utilities 10% 7 5 Latin America & 5 Latin America 5% 5 ICT* 10% Caribbean 4% 3 6 North Africa 7% 6 Healthcare 8% 3 1 6 6 Middle East & North 7 Infrastructure 8% Africa 1% 2 8 Mining 6% 5 7 Europe & Central Asia 1% 9 Agribusiness 5% 2 2 1 4 3 10 Others 6%
*Per World Bank regional divisions *Information and communications technologies Chapter 1 – About CDC 9
The importance of Environmental, Realisation of investments Actual 2009 investments Social and Governance factors Private equity is a long-term investment At the end of 2009 CDC had investments Environment, Social and Governance vehicle. Capital invested through CDC’s with 65 different fund managers in a (ESG) matters are key considerations for fund managers is realised only when total of 134 funds. During the year CDC’s CDC when it invests. This stems not only the fund manager’s shareholding is sold. fund managers made £359m of new from CDC’s commitment to responsible The majority of the commercial returns investments in developing economies with investing but also because good ESG occur towards the end of the investment CDC’s capital, a reduction of 18% on the standards can increase the value of period. However, the capital provided to record levels achieved in 2008. CDC also businesses. Good ESG standards can companies helps businesses realise their committed a total of £209m to new funds, constitute a source of competitive growth potential and thereby generate again a substantial reduction caused by advantage, for example by enhancing more immediate and sustainable benefits. the constraints of the financial crisis, but brand value or by qualifying a company These include taxes paid and jobs created still representing a major commitment to bid for certain contracts. in the local economies. to underdeveloped capital markets.
CDC therefore devotes considerable effort Exits and re-investments The Investment Code – CDC’s to assisting its fund managers in this area. Typically after four to seven years principles for sustainable and The fund managers in turn work closely (in which business improvements can responsible investments with their portfolio companies in the be made) CDC’s fund managers sell their pursuit of continuous improvements investments in portfolio companies. Key objectives in corporate governance and promoting This can happen through an initial public The Investment Code defines CDC’s high environmental and social standards. offering on the local stock market, a trade principles, objectives, policies and CDC’s ESG work is described in greater sale to another company in the same management systems for sustainable detail later in this report, particularly in sector, an investment by a new investor, and responsible investment from an ESG chapters 2 and 6. or, in some cases, an investment by the perspective. It is a key guiding document company’s own management. for all CDC’s investments. It was Supporting fund managers and developed in collaboration with DFID companies Profits from these sales are returned and became effective on 1 January 2009. As a fund-of-funds, CDC does not play by the fund manager to CDC and other It is set out in Appendix 1. a direct role in managing the investments investors. CDC reinvests the proceeds made by its fund managers. Instead, it from these long-term investments in new The Investment Code replaced CDC’s provides support to its fund managers funds, which in turn deploy CDC’s capital Business Principles and contains updates and by extension, also indirectly to the into new companies. Capital is thereby and revisions in light of the development portfolio companies. For portfolio redeployed in new companies in need of of international best practice. companies, with assistance from fund growth capital. managers, the period of investment which can be up to ten years, provides time to realise corporate growth opportunities and bring about improvements in business practices.
CDC’s business model: capital for investment in growing businesses in developing countries
CDC capital Mobilising CDC invests with fund managers. CDC4 other 1 capital people’s 1 money Fund managers CDC’s fund managers invest in Fund 2 We help mobilise companies in developing countries. managers private investment in poorer countries 1 by demonstrating Portfolio companies 3 a successful track Portfolio companies expand and record. 3 4 2 improve upon their businesses. Economic Economic growth growth 4 Fund managers sell portfolio 2 companies and return proceeds Portfolio to CDC and other investors. 3 companies Proceeds are reinvested by CDC. 10 CDC Development Review 2009
About CDC continued
The key objectives as stated in the Advisory Services (OHSAS) standards Governance of ESG Investment Code are to: on health and safety. In addition, CDC will ensure that its fund managers are made Legal agreements to ensure adherence • minimise adverse impacts and enhance aware of refinements to best practices to the Investment Code positive effects on the environment, as these develop across the development When CDC commits capital to a fund, it workers and all stakeholders of CDC finance industry. This is particularly the places the fund and the manager of the and the businesses in which CDC’s case with respect to the IFC Performance fund under a legal obligation to operate in capital is invested; and Standards and Environmental Health accordance with an investment code • promote improvements over time, and Safety (EHS) Guidelines. identical to or substantially similar to as relevant and appropriate, given the CDC’s Investment Code. These level of risks involved or opportunities Corporate governance is a particularly obligations may be included in the core to add value. important area of focus in many emerging legal documents for the fund or in a side markets. The Investment Code adheres letter agreement. The only exception to The Investment Code thus takes a to the Organisation for Economic this is where CDC is a late stage investor forward looking approach, recognising Co-operation and Development (OECD)3 in a fund which is already operating in that ESG standards may be poor at the Principles of Corporate Governance, accordance with the ESG principles of time of a fund manager’s investment. By the UN Anti-Corruption Convention4, other DFIs which are broadly similar to bringing about ESG improvements over the OECD Anti-Bribery Convention and CDC’s Investment Code. the course of the investment period, the Extractive Industries Transparency CDC’s capital can be used as a catalyst Initiative. The purpose is to promote When a fund invests in a portfolio for improvement. The funds to which CDC greater accountability and transparency, company where it has effective control or has committed capital from the start of to define management responsibilities significant influence, CDC requires the 2009 have signed this version of CDC’s at portfolio companies and to set up fund manager to procure an ‘investment Investment Code. Fund managers that effective risk control systems. undertaking’ from the portfolio company signed up to CDC’s previous ESG policies that it will operate in line with the fund will be encouraged, where possible, The exclusion list ensures CDC’s capital manager’s investment code. to adopt the Investment Code in future. is not invested in products or activities prohibited by local or national laws or This is to allow CDC to exercise a degree Alignment with international ESG regulations. It also incorporates certain of influence on ESG standards at portfolio reference standards products or activities banned by global companies. With this commitment, CDC The Investment Code is linked to and conventions and agreements. This expects its fund managers to build closely aligned with the most important of includes hazardous chemicals, pesticides awareness among portfolio companies on the international reference standards and wastes5; ozone depleting substances6; waste reduction, pollution control and related to ESG. and endangered or protected wildlife or energy consumption as well as adequate wildlife products7; and unbonded safeguards for the wellbeing of employees For labour and working standards the asbestos fibres. Conversely, the exclusion and local communities. It also allows CDC to Investment Code aligns with the list recognises the challenge of investing be positioned closer to portfolio companies International Labour Organization (ILO) in some African companies and thus than is typical for a fund-of-funds. core labour conventions, the International allows investment in tobacco production Standards Organisation (ISO) series and if there is a clear phase-out plan in place. the Occupational Health and Safety
CDC requires its fund managers to consider ESG matters in all of their investment activities
Fundraising – Investment Due diligence Investment Exit CDC investment > >>>management • Formal agreement with • Assess new • Where fund managers • Encourage managers of • Consider ESG matters CDC to commit to the investments on ESG have effective control portfolio companies to: at divestment: Investment Code – by matters: or significant influence, > adopt and implement > any ESG issues with CDC’s standard side > sector risks procure an investment sound ESG policies potential buyers? letter or equivalent > issues or opportunities undertaking from > work towards > will sound ESG • Investment strategy to add value portfolio companies continuous practices continue in line with CDC’s > quality of investee in line with CDC’s improvements under new owners? exclusion list company ESG Investment Code • Monitor portfolio • Awareness of ESG management • Assist portfolio companies risks and opportunities systems companies to develop performance on ESG and how portfolio • Give new investments action plans to address and progress towards companies should a risk rating on ESG any ESG issues action plans for address these, e.g. matters to determine identified during due improvements if investment strategy the appropriate level diligence, with • If ESG issues arise, includes high risk of management and appropriate targets assist portfolio sectors like oil and gas, monitoring and a timetable for companies to address mining, or large scale improvements them in a timely manner agribusiness • Report annually to CDC • Awareness of country/ • Monitor and record any regional ESG risks serious ESG incidents in portfolio companies and inform CDC Chapter 1 – About CDC 11
The procurement of a signed investment Industries that typically have high ESG ESG support for fund managers undertaking is a requirement only in cases risk include: CDC invests across a wide range of where a fund manager is considered to industry sectors and works closely with have ‘significant influence’ over a portfolio • industries with high risks of pollution; its fund managers to monitor companies’ company. Usually such influence stems • activities which affect the natural ESG performance, address issues when from one of the following factors: environment; they arise and to ensure support is sought • resource intensive industries; for industries with high ESG risk. • an ownership interest in the portfolio • businesses which use low skilled company in excess of 20%; or workers in countries with weak Building on this existing work, the ESG • board representation allowing for employment legislation; risk rating analysis can be used to target participation in financial and operating • businesses which involve workers portfolio companies for site visits and policies; or handling hazardous substances; fund managers for additional support. • rights to influence pursuant to a • businesses which can pose health This system will bring CDC’s expertise shareholders’ or similar agreement. and safety dangers for consumers; and support to where it is most needed and across the portfolio. CDC recognises that its fund managers • sectors that involve large contracts, invest in companies ranging from SMEs to particularly those involving governments. A specific resource for fund managers large enterprises with a significant regional is CDC’s Toolkit for fund managers to presence and across every industry In 2009, CDC obtained sufficient data address ESG risks. More details on the sector. Consequently, fund managers from fund managers and evaluation Toolkit can be found in chapter 5 of this do not always have effective control or reports to complete a comprehensive report, as well as on CDC’s website. significant influence and may not be in a ESG risk rating of the portfolio. In total, position to procure a written undertaking CDC obtained risk ratings from An additional resource is the large number from portfolio companies. This in no way 542 companies across CDC’s portfolio, of case studies available on CDC’s diminishes the responsibility of fund of which a total of 50 companies were website. These examples demonstrate managers to work to ensure that the rated high risk for environmental matters, success stories and lessons in addressing companies in which they invest CDC’s 26 for social matters and 29 for corporate ESG risks and opportunities. They also capital operate in line with CDC’s governance. A total of 85 companies in show how responsible business practices Investment Code. CDC’s portfolio were found to be high risk can attract international customers, on one or more ESG rating. reduce risks, build stronger brands and ESG risk rating of portfolio companies often also reduce costs. By promoting good business practices CDC also performed an analysis of in poor countries, CDC’s investments industry sectors with high ESG risks. An example of how good ESG practices contribute to development. Environmental Mining is the riskiest sector with 62% can contribute to a company’s success is and social risks are typically low for of investments categorised as high risk. illustrated by CDC’s investment in Truong investments in financial institutions, Energy and utilities follows at 45% and Thanh Furniture Corporation (TTFC). media, information and communications agribusiness at 38% of investments rated The case study on the following page technologies or retail. CDC recognises as high risk. This sector overview of risk describes this investment in more detail. however that some industry sectors are rating shows consistency across the inherently of greater ESG risk than others. various funds managers and individual funds. This consistency suggests fund managers have a good understanding of CDC’s risk rating guidance material and how to apply it to their portfolios.
CDC’s step-by-step risk rating process for portfolio companies
Step 1 Step 2 Step 3 Step 4 ESG risk High ESG Quality rating Low quality CDC is Data on Large rating exists? risk/inherent of ESG of ESG only DFI employees turnover/ ESG risk? Management management investor? and turnover number of system? systems? exists? employees? Yes Yes Yes No Yes Yes No Yes Yes No No No No Yes Yes Yes No Yes No No No No
High priority Increased monitoring Regular monitoring Follow-up • Reviewing portfolio company with fund manager • Reviewing portfolio company with • Collecting ESG reports actions: • Strengthening fund manager ESG investment team • Following up on ESG actions from ESG management system • Conducting site visits if appropriate reports; monitoring reports; investment • Conducting site visit in addition to: papers; evaluations; and incident reports in addition to:
*Catalytic effect is not considered for funds where CDC has entered in the final close, hence the number of funds rated on catalytic effect is fewer than for the other performance measures. 12 CDC Development Review 2009
About CDC continued
turbulence has affected the Company’s On the environmental side, TTFC has Truong Thanh Furniture profit margins. Despite the additional developed a system to allay concerns Corporation (TTFC), Vietnam strain resulting from the financial crisis, over the sourcing of wood used in its the Company recorded a robust rise in manufacturing process. The system is A successful furniture turnover in 2009 and remained profitable designed to ensure that all wood used manufacturer with a keen thanks to its effective change in strategy. in furniture manufacture is sustainably environmental awareness Employment at TTFC has also grown sourced. The plan was developed with significantly in 2009 with the full operation the World Wildlife Fund (WWF) and the of the new factory in Binh Duong Vietnam Forest and Trade Network. Vietnam is an emerging economy in South Province, and with it opportunities for Already the programme has seen East Asia and an increasingly popular previously unskilled labourers in Vietnam. significant results and in 2008, the destination for foreign investment. compliance manager reported no timber Nonetheless, over 23% of the 87 million TTFC has successfully developed its purchases from unapproved sources. population live below the US$1.25 a day brand in local and international markets poverty line. The main economic drivers during the past few years based on its As a critical input for its success, TTFC are primary industries such as rice, commitment to sustainable practices in has been extremely active in forestry coffee and fish as well as garments and sourcing the timber as well as managing management. In total, the company has petroleum. Furniture manufacturing is not its workforce. When in March 2008 the been approved to grow 100,000 hectares currently included on this list despite the Environmental Investigation Agency (EIA) of forest in Vietnam. This includes relative abundance of both local and published a report into Vietnam’s timber management of two-to-four year old trees imported timber. TTFC with its seven industry, the findings were that 500,000 on an existing forestry plantation and an factories and approximately 6,500 cubic metres of illegal logs were approved 40,000-hectare plantation employees at the end of 2009 marks a smuggled into Vietnam each year. Eight project in Phu Yen province. In an industry significant shift in utilising this valuable major furniture companies were cited in that has come under intense scrutiny, natural resource responsibly. this report, which was damaging to the TTFC’s projects are pioneering and point whole industry. TTFC, however, was not the way towards a more sustainable future CDC’s fund manager, Aureos invested included on this list. The company has for Vietnamese furniture manufacturing. US$3m in TTFC in 2006 in order to help also received various awards from the As these standards are necessary for the Company expand its operations. Vietnamese government attesting to its reaching new international export In particular, the funds financed the quality and success. TTFC is recognised markets, TTFC is well placed to continue construction of new modern factories in as an industry leader. its development and emerge stronger Daklak and Binh Duong. These factories from the recent global crisis that had have enabled the company to establish What has really set apart TTFC from its severely affected Vietnamese exports. a competitive advantage, offering competitors is the attention the company salaries that compete well with the rising pays to its social and environmental manufacturing salaries in Vietnam. impact. The company is ISO 9001 With the help of further private sector certified reflecting improvements in Key data investment, TTFC also completed the production knowledge and quality construction of a training centre in 2007. 2 management. The company has also Investment: US$3.0m This training centre has helped address gradually applied Social Accountability Investment period: 2006 - present the shortage of skilled labour that affects 8000 (SA 80001) in an attempt to provide Sector: Furniture manufacturing the furniture manufacturing market. decent working conditions for its Fund manager: Aureos employees. Following a recent review, 3 The Company’s expansion was achieved Employment: 6,500 TTFC has implemented all the health despite the Global financial crisis and safety recommendations suggested 1 The SA 8000 certification is a leading standard for managing affecting exports. TTFC currently exports human rights in the workplace. by Aureos. Further, the company has 2 US$3m was invested by Aureos. CDC’s investment in Aureos approximately 70% of products to introduced annual health checks for South East Asia Fund is US$20m; total fund size is US$70m. more than 30 countries worldwide. 3 2009. its workforce. Consequently, the recent market
Furniture manufacturing at TTFC CDC performance
Chapter
CDC assesses the development impact of its capital across a number of measures. These include financial performance, economic performance, ESG performance and the broader impact of capital on the development of the private sector in developing economies. Various examples of CDC’s impact on these measures are discussed in this chapter along with more in-depth analyses of the factors that help to drive performance.
Examples of the role CDC’s capital can play in developing promising businesses are also included for illustration. 14 CDC Development Review 2009 Chapter 2: CDC performance CDC assesses its development outcome across four dimensions – financial, economic and ESG performance and private sector development. 2009 showed a stronger financial performance, an increased number of jobs created and taxes paid, several achievements in improving ESG performance and continuous development of local capital markets. Initial analyses also suggest a correlation between ESG management systems and financial performance.
Financial performance • attracting third party capital: In most countries, exceeding the rolling five- emerging markets there is insufficient year target of 70%; and access to finance for local businesses. • new investments on a five-year rolling basis This section examines CDC’s financial More investors are needed to address stood at 64% in sub-Saharan Africa performance in 2009 in comparison with this gap including private investors. and South Asia in 2009, exceeding the previous years and comparable emerging They will only come in if there are rolling five-year target of 50%. markets indices. There is also an analysis opportunities to generate financial of potential explanatory factors behind returns through investments in MSCI index performance CDC’s financial performance. Additional commercially viable and successful Whilst CDC has traditionally used the MSCI information on financial performance can companies. CDC therefore needs to Emerging Markets US$ index to measure be found in CDC’s Financial Review and demonstrate returns from its portfolio to its performance, individual country Annual Report and Accounts. attract investors to a range of markets, weightings within the index are not really sectors and asset types; and representative of the geographical spread Why financial performance matters • investing increasing amounts of CDC of CDC’s actual investment universe. In Financial performance is essential to CDC capital in emerging markets: By particular, the index does not include for four principal reasons: generating returns from its investments many low income countries in Africa and and re-investing the proceeds CDC Asia. As a result, Morgan Stanley, in • building sustainable companies: provides ever larger amounts of capital to conjunction with CDC developed in 2009 CDC’s mission is to foster growth in emerging markets without any additional an index more appropriate to CDC’s sustainable businesses, helping to raise contributions from the UK government. geographical spread. In 2009, this new living standards in developing countries. MSCI CDC weighted index rose by 57% Portfolio companies therefore have to Portfolio financial overview in comparison to a fall of 51% by the be developmentally and financially 2009 began in the midst of the worst same measure in 2008. Whilst CDC’s successful to provide a lasting financial crisis in decades. In comparison portfolio performance was less than contribution to society. Only then will to 2008, CDC’s performance in 2009 its MSCI benchmarking in 2009, on a there be a sustainable and lasting represented a strong recovery. Key three year rolling basis it was 6% ahead source of income to raise living highlights were as follows: of the benchmark. standards in the emerging markets where CDC’s fund managers invest; • total return for 2009 was £207m Performance analysis • building lasting capital markets: As compared to a loss of £359m in 2008. An analysis of CDC’s portfolio companies a fund-of-funds, CDC supports the This represents an average annual suggests there is a correlation between growth of companies as well as the return of 16% over the past five years; companies with higher financial returns development of local and regional • new investments in 2009 totalled and companies with relatively better capital markets. It is therefore essential £359m. This represents a decrease of Environment, Social and Governance that the fund managers are able to 18% on 2008 levels but £35m above (ESG) management systems. This generate financial returns in responsible the average annual investment for the analysis is based solely upon the businesses to be sustainable and to period 2004 to 2008 of £324m; 345 companies in which CDC’s fund raise capital for local investments; • new investments on a five-year rolling managers invested during the period basis stood at 75% in low income 2003-07. This excludes companies in
CDC return over 5 years versus market index (MSCI) ESG management systems and portfolio company returns (mean IRR, %) 400 7.4 5.6 325
250
175
100 2004 2005 2006 2007 2008 2009 –7.7 CDC portfolio performance in US$ MSCI Emerging Markets benchmark Quality of ESG management systems (N=143) Poor Moderate Good Chapter 2 – CDC performance 15
which CDC was invested before the start It might seem as if the overall IRR is driven companies. The most apparent of the intermediated model. Excluded are by the year of investment. A control sample constraints include the following: also investments after 2007 as Internal of 396 companies without ratings for ESG Rate of Return (IRR) estimates are less management systems has therefore been • performance over time: It would be reliable for newer investments. included. The financial performance for this useful to track the IRRs of the same sample develops in the opposite direction. companies over time to reduce the The analysis shows that companies with This result therefore does not contradict impact of other influencing factors; good ESG management systems the initial assumption that any ESG • IRR estimates: These are estimates and outperform those with poor systems by management system and good ones in the realised IRR will only be known once 15.1% in IRR. When controlling for average particular, might contribute to better IRRs. an investment has been exited which income levels in different countries the trend Conversely it does not confirm the initial introduces uncertainty to the analysis; stays the same. There is still a correlation assumption either. There might be several • ESG management system ratings: This between companies with good and poor reasons why the IRR for this non-rated is not an exact science, nor perfectly ESG management systems respectively group of companies develops this way over consistent across the portfolio as it is and the financial returns they generate. time. One plausible explanation is that there done individually by each of CDC’s is less data available as a result of possibly 65 fund managers for their respective One possible explanation might be that non-existent management systems in portfolio companies. In addition, for the more financially successful companies are general. The initial IRR estimates might sample used in this analysis it has been better managed. These companies could therefore prove optimistic. As more assumed that the ratings have for example also have rigorous and information becomes available over time remained constant over time, which comprehensive management systems including actual performance data the IRR may not always be the case; for operational performance, customer estimates become more accurate. • sample size: The relatively small sample relations, staff training and other areas. size limits the statistical significance of The improved performance could thus stem Governance risk, ESG management any conclusions. This is even more the from generally better processes and systems and IRRs case once the analysis is further refined systems. The attribution to these various Governance risk relates typically to how by year of investment, industry sector management systems including ESG would well defined roles and responsibilities are and geography; and in such cases require a more comprehensive in a company, how well management • external factors: There is a multitude sample of data and further analysis. information systems and reporting works of external factors which influence the and the level of availability, transparency financial performance of any company Performance improvement over time and consistency of information. An initial including exchange rate changes, To help identify if there is a causal link analysis of portfolio data seems to suggest political developments, competition, between good ESG management systems there is a close co-variation between ESG regulatory environment and technological and financial performance it is useful to management systems and governance change to name the most obvious. introduce a time dimension. All else being risk as the graph below shows. Two equal, the cause should come before the preliminary conclusions are that ESG CDC will progress and improve the effect. In other words, if a good ESG management systems and the lowering of analysis of its financial performance over management system indeed explains governance risk both contribute to higher the next year. It would be beneficial to better financial performance, then the IRRs. What is not clear from the analysis expand the number of companies in the ESG management system (the cause) is the extent to which these two factors analysis, which would be most effectively would have come into place before influence each other. This analysis does achieved in collaboration with other financial returns (the effect) improve. however have several limitations and Development Finance Institutions (DFIs). alternative or complementary possible Other priorities include collecting more Analysis of portfolio data also reveals a explanations and will be subject for further data for each company; rating the ESG potential correlation between the length analysis in 2010. risks and management systems for the of time over which a company has had or entire portfolio; and strengthening the pursued good ESG management systems Conclusions and next steps consistency of this process. and financial returns. The graph below These analyses constitute a first attempt suggests that there is a correlation at building a better and more quantitative between improving financial performance understanding of our portfolio and of a company over time and the presence financial performance. There are limits to of any ESG management system – be it the insights that can be drawn from this of poor, moderate, or good quality. analysis of some of CDC’s portfolio
Governance risk, ESG management ESG management systems and portfolio company returns – performance systems and IRRs (mean IRR, %) improvements over time (mean IRR, %)
17.0 12.8 10.1 11.8 11.6 2.9 8.8 9.4 9.4 2.7 5.4 7.3 7.3 2.5 –1.3
–10.9 –10.6
–29.7 Low risk Medium risk Poor Moderate Good No rating
Governance risk level (N=107) Quality of ESG management systems (N=345) Poor ESG management systems 3–5 years (invested in 2005–07) Moderate ESG management systems 4–6 years (invested in 2004–06) Good ESG management systems 5–7 years (invested in 2003–05) 16 CDC Development Review 2009
CDC performance continued
CDC’s largest investments The following is a list of CDC’s ten largest investments in terms of portfolio value. CDC supports investments in a broad range of sectors and believes such an approach is beneficial from a commercial, a developmental and a risk management perspective. CDC’s fund managers make investments in companies of different sizes, investing in large companies as well as SMEs and microfinance institutions. Some sectors are relatively more capital intensive than others and include power plants, utilities companies, power distribution entities and some manufacturing and process industries, as evidenced in the table below.
Company Description
Paras Pharmaceuticals A leading Indian company producing over the counter healthcare and personal care Invested by Actis Emerging Markets products. Successes for Paras include the painkiller Moov which has taken market share Fund 3; Actis India Fund 2; from multi-national companies and further innovative products in new markets for hair and Actis India Fund 3; Actis South Asia skin care. Fund 2; Actis Umbrella Fund; Aureos South Asia Fund
Globeleq Generation Limited Globeleq develops, owns and operates power generation facilities across emerging Invested by Actis Infrastructure Fund II markets. Globeleq currently owns Songas (a 190MW gas-fired generation project located in Tanzania) and has interests in two other power projects: Tsavo (a 74MW heavy fuel oil-fired power station in Kenya); and Azito (a 288MW gas-fired power project in Côte d’Ivoire).
Alexander Forbes A diversified financial services company that operates as an intermediary in the Invested by Actis Africa Empowerment investment and insurance industries. Alexander Forbes is represented in 30 countries Fund; Actis Africa Fund 2; Actis with the majority of its operations in South Africa. Umbrella Fund; Canada Investment Fund for Africa; Ethos Fund V
DFCU DFCU was founded in 1964 by CDC and the Ugandan Government. It is a commercial Invested by Actis Africa Fund 1 bank operating in leasing, housing finance and term lending.
Diamond Bank Diamond Bank is the ninth largest bank in Nigeria (with a subsidiary in Benin Republic), Invested by Actis Africa Fund 2; with a strong focus on the SME and corporate sectors. The bank currently has Actis Umbrella Fund; Canada 120 branches, 1,800 staff and a 5% market share. Investment Fund for Africa
ACTOM (formerly A major South African electrical engineering, manufacturing, distributing and contracting Alstom Electrical Industries) company for the power sector. The business has 22 production facilities, 26 operating Invested by Actis Africa Fund 3; units and 21 distribution centres employing over 5,000 people. Actis Emerging Markets Fund 3
Seven Energy An upstream oil and gas company initially focused on Nigeria but with the ambition to Invested by Actis Africa Fund 2; expand in West Africa. The company has rights to a 40% interest in the undeveloped Canada Investment Fund for Africa; onshore Uquo Field to the east of the Niger Delta. Actis Umbrella Fund
Orascom The market leading mobile operator in Algeria with over 14m subscribers Invested by Actis Africa Fund 1 (as at November 2009). The company provides a range of prepaid and post paid voice, data and multimedia telecommunication services.
Commercial International Bank The largest private sector commercial bank in Egypt. It has over 150 branches, Invested by Actis Emerging Markets Fund 3; over 450 ATMs and over 4,000 employees serving 700 corporate customers, Actis Africa Fund 3 400 small and medium enterprise customers and 380,000 retail customers.
Regal Forest A leading retailer of white and brown goods, electronics and furniture (durable Invested by Actis Latin America consumer goods) in El Salvador, Honduras, Guatemala and Nicaragua, with a market Fund 1 share of around 30% in each country. Chapter 2 – CDC performance 17
Economic performance The first annual ESG report from a fund is Examples from evaluation reports due one year from the first investment of the fund into a portfolio company. Some From the evaluation work in 2009, Economic factors are crucial for growth. of our new fund managers had not yet The World Bank survey ‘Voices of the Poor’ CDC gained more information about the been invested in any of their portfolio economic effects of many of its portfolio suggests that 70% of the world’s poor companies for a full year and were thus believe the best way of escaping poverty companies. Three examples are given 8 not required to provide an ESG report. below: is to find employment . A Gallup survey of However, all fund managers who had more than 26,000 people in 26 countries been invested for more than a year in in sub-Saharan Africa identified jobs for China – a seafood processing company in any portfolio company duly provided the Dongshan province has seen employment the young as the fourth most important required ESG reports. Such reporting priority, after factors such as reducing increase 85% since investment by CDC’s 9 is a condition for receiving capital from fund manager in 2007. The company now poverty and hunger . Taxes are also vital CDC. Only nine fund managers did not for public services, infrastructure, employs over 1,200 people. Despite report any economic data on portfolio difficult global conditions affecting exports innovation and a stronger link between companies in 2009. All were recent fund state and taxpayer. to the US, Europe and Japan, the financial investments from which no reporting was performance of the company continues expected over the period and many had to be strong. The company was recently CDC assesses, where possible, the wider no current investments. benefits from the companies supported awarded with China’s ‘Famous Brands’ by its capital both to the economies and Fujian ‘Top 20 Golden Enterprise’ Taxes and employment awards in recognition of its efforts. where they operate and to the people CDC received employment data from 617 working for them. However, because CDC companies in 2009 as opposed to 514 in Brazil – a telecommunications company invests through an intermediated model 2008. The aggregated figures reveal that and does not wholly own the underlying saw employment rise by 400 between 733,000 people were employed across investment in 2007 and the end of 2008. portfolio companies, quantitively accurate CDC’s portfolio companies and US$2.8bn and reliable estimates of employment Employment conditions at the company was paid in taxes by the 463 companies have also improved. It has signed both maintained or created or tax revenues which reported data. generated by CDC’s investments is not a collective labour agreement and is possible. Nevertheless, as the providing an annual health check for its The 308 portfolio companies supported employees. Almost US$30m in taxes was employment and tax data reported to by CDC’s capital across India, China, CDC for 2008 comes from a large sample paid by the company to the Brazilian other Asian countries reported a government over this period. of portfolio companies, it is an important combined workforce of 562,000 people. indicator of the number of people that This equates to an average company East Africa Gold Mines, Tanzania – sustain a livelihood with financial backing workforce of 1,825. from CDC and the amount of tax revenues a gold mining company in which CDC invested in 1999 helped establish that benefit local governments from The average workforce in CDC’s portfolio companies where CDC’s capital is invested. Tanzania’s gold market. This market, companies in sub-Saharan Africa is practically non-existent in 1999, brought significantly smaller. Only 125,000 Collecting data across a portfolio of over as much as US$763m into Tanzania in employees were reported in the 255 794 companies, 134 funds and 65 fund 2007. The company’s North Mara mine is portfolio companies who provided data, managers is a challenge. Different estimated to have paid US$30m in taxes which corresponds to an average of companies across CDC’s portfolio have and royalties to the Tanzanian government. 490 employees. This can be partially different year ends, something that makes Between 1999 and 2003, employment at explained by the fact that CDC has it difficult to obtain data at a single point the site increased by 385. invested in three dedicated SME funds in time. CDC also gathers specific in sub-Saharan Africa. measurements for different sectors and asset classes, especially small and medium sized enterprises (SMEs), microfinance and mining companies. The data presented below was collected during 2009.
Employment by industry sector (000s) Taxes paid by industry sector (US$m) Employment by region Consumer goods & 94/121 Financial 71/206 services 184 services 736 5 6 1 Sub-Saharan Africa Industry & 108/129 ICT 50/73 125,000 (255/318) materials 133 512 1 2 North Africa 23,000 (25/28) Consumer 2 3 China 192,000 (93/112) Agribusiness 30/40 goods & 80/121 4 India 158,000 (125/167) 114 services 325 5 Other Asia 212,000 (90/112) Financial Agribusiness 6 Latin America 23,000 (29/57) services 96 150/206 315 25/40 4 (number of companies reporting 3 Mining 57 21/25 Mining 272 16/25 data/number of total CDC portfolio companies) Energy ICT 40 62/73 & utilities 269 35/50
Healthcare 28/38 Industry & 98/129 39 materials 147 Taxes paid by region (US$m) Microfinance Cleaner 36 41/55 technologies 76 11/18 Energy 6 1 Sub-Saharan Africa 44/50 Infrastructure 23/39 & utilities 15 70 5 832 (162/318) 2 North Africa 209 (22/28) Cleaner 12/18 Healthcare 23/38 3 China 591 (73/112) technologies 10 68 4 India 527 (101/167) 4 1 5 Other Asia 381 (78/112) Infrastructure 27/39 31/55 9 Microfinance 51 6 Latin America 301 (27/57) 2 Number of companies reporting data Number of companies reporting data (number of companies reporting 3 Number of total CDC portfolio companies Number of total CDC portfolio companies data/number of total CDC portfolio in sector in sector companies) 18 CDC Development Review 2009
CDC performance continued
CDC has many examples of case studies G.E.T Power is an Indian service provider development and management in its portfolio companies which are in electricity transmission and distribution. recruitment. Avigo’s investment was used designed to inspire and encourage It specialises in the design, engineering to assist G.E.T Power to strengthen its investors. Some are past investments and construction of electrical substations balance sheet and contributed to the that have had a meaningful impact on and transmission lines. It has installed company’s transformation from a sub- a national economy. G.E.T Power is one over 600 substations and 5,000 circuit contractor to a primary contractor. such case. kilometres of transmission line since beginning operations in 1987. G.E.T Power plans to expand further its operations over the coming years G.E.T Power Private Ltd, Three years ago, G.E.T Power entered to provide electricity to more Indian India the rural electrification sector with an households. investment from CDC’s fund manager Providing power to rural Avigo. Including the executed and Key data1 India, serving half a million ongoing projects, G.E.T Power has 21 projects involving an investment of poor households US$150m. This infrastructure will provide Investment:2 US$16m electricity to around half a million rural Investment period: 2007- present The lack of reliable and safe power in poor households below the poverty line. Rural Sector: Infrastructure – Power distribution countries is a major barrier to growth. electrification projects now account for and transmission Significantly increased investment in some 60% of G.E.T Power’s revenue. Fund manager: Avigo, SME Fund II power is particularly important for India’s Employment: 453 permanent development where over half the G.E.T Power also has substantial Employment growth:3 213 population does not have access to experience in the transmission of power Turnover: US$74m reliable and safe electricity. Electricity generated by wind farms to the Indian Turnover growth:3 US$53m is needed to power small industry and utility grid. Wind energy is an important Taxes paid: US$2.5m enterprise, run health clinics and light source of power generation in India accounting for 6% of total installed schools. Without access to reliable 1 2009 figures unless otherwise stated. electricity, rural poverty will not be power capacity. 2 US$16m invested by Avigo. CDC’s investment in Avigo eradicated. (SME Fund II) is US$20m; total fund size is US$125m. G.E.T Power has experienced substantial 3 2007-09. India has a population of over 1bn. growth over the past two years and staff An estimated 42% of the population lives numbers have increased 90% to 453 below the poverty line. In addition, more permanent employees and approximately than 400 million people, mainly in rural 2,000 contractors. G.E.T received their areas where the majority of India’s second Safety Excellence Gold Award population is based, lack access to from Leighton Contractors India for electricity. Even where access does exist, accomplishing 2,600,000 hours without it is often substandard and outages in lost time due to injury between May 2007 excess of 12 hours are commonplace. and February 2008. Indian government policy has a stated aim, under its ‘Power for All’ agenda, CDC’s fund manager, Avigo, has made of providing access to electricity for all significant contributions to the citizens by 2011. development of G.E.T Power, providing advice and assistance on matters of corporate governance, strategy, business
One of G.E.T Power’s 600 substations The majority of G.E.T Power’s electricity is provided to rural areas Chapter 2 – CDC performance 19
2009 evaluation results on economic ESG performance 2009 evaluation results on performance ESG performance To evaluate a fund’s economic Of the 20 funds assessed in 2009, one In 2009, CDC continued its work prior to performance, CDC assesses the extent fund was rated ‘excellent’ in terms of its making commitments to new funds to to which jobs have been created within ESG performance, seven funds were ensure that fund managers have well- portfolio companies, the amount of tax rated as ‘successful’ and four rated developed management systems to revenue generated and the increase in ‘below expectations’. Typical reasons for address ESG risks. CDC continues to help portfolio companies’ turnover and a ‘below expectations’ rating include the portfolio companies realise improvements profitability. A more detailed explanation fund manager performing beneath the for the duration of the investment as of CDC’s evaluation and performance high standards CDC expects on ESG stipulated by CDC’s Investment Code. ratings is provided on pages 23 and 24. issues. The remaining eight funds There was a significant increase in the evaluated were rated as ‘satisfactory’. Of the 20 funds evaluated in 2009, number of ESG reports submitted in 2009 compared to prior years. However, the two funds received the highest rating In terms of portfolio companies, 71 of quality of reporting varies across the ‘excellent’ and a further nine were rated the 238 companies for which there was portfolio. Whilst all fund managers from as ‘successful’. One of the two funds information available were rated as high whom a report was expected contributed rated ‘excellent’ was a specialist SME risk from one or more ESG perspectives. something, 11 fund managers did not fund which saw the creation of nearly Possible reasons for a high risk rating produce full ESG reports. In many cases, 2,000 jobs across East Africa, a include the potential for significant this means that ESG risk was reported considerable achievement in a difficult adverse environmental impact, potential but there were limited justifications or sector. The remaining nine funds were risk to the local community or to the discussion of actions for improvement. all rated ‘satisfactory’. Some aggregated workforce or issues related to corporate CDC will continue to work with its fund results from the evaluations are governance and business integrity. managers to promote better annual presented below: 120 companies were rated as medium reporting on ESG matters. risk and 47 as low risk. • 77% of portfolio companies showed The promotion of good ESG practices can employment growth with 87,000 new Of the 234 companies reporting relevant be a particular challenge for funds where jobs created; data, 73% of evaluated companies had CDC is a small investor amongst larger • only 8% of portfolio companies ESG issues at the time of investment: decreased their number of workers, commercial investors. This has not prevented CDC from attempting to raise with 4,300 jobs lost; • 44% had environmental issues; best practice. In 2010, CDC will further • 82% of the portfolio companies • 44% had social issues; and assist fund managers through a experienced growth in turnover – only • 36% had governance issues. comprehensive training programme backed 5% saw a decrease; by the new Toolkit for fund managers. • 68% of portfolio companies Of these companies, 83% had observed demonstrated growth in profitability and reported ESG improvements since In addition to educating fund managers as measured by EBITDA, while 25% investment: to assess an investment for ESG risk, saw a decrease; and the Toolkit will also advise about best • a total of US$122m in taxes was paid • 45% had reported environmental international practices as specified in by 15 companies that reported this data improvements since investment; CDC’s Investment Code. This will include in the past year. Over US$3bn in taxes • 61% reported social improvements; resources on international conventions was paid by 179 companies over the and such as those produced by the holding period of the fund manager. • 53% reported governance International Finance Corporation (IFC), improvements. the International Labour Organization (ILO) and core environmental standards which serve as benchmarks for investors in the emerging markets.
ESG risk rating of 794 portfolio Distribution of high risk assets by sector for companies reporting data (%) companies (%)
Mining 62 29 9 4 1 High 11% 1 2 Medium 36% Energy & 3 Low 19% utilities 45 8 47 4 No data* 34% Agribusiness 38 55 7
Cleaner 3 technologies 27 55 18 2 Industry & materials 24 63 13 *CDC assesses companies with no data by inherent risk. Many of these Healthcare 21 54 25 companies are in SME funds or are 2009 investments. Microfinance 76132
Financial services 334 63
ICT 348 49
Infrastructure 38017 Consumer goods & services 15940
High Medium Low 20 CDC Development Review 2009
CDC performance continued
Examples of insights related to ESG Social Governance matters included in the evaluation reports are given below. Kenya – a Kenyan agribusiness company Malaysia – during the fund manager’s in which CDC was invested developed a due diligence process it emerged that the Environment medical centre on site catering to both company held the passports of foreign employees and non-employees. The contract workers for the duration of their Kenya – over the course of the centre provides free testing, counselling employment. The company was a investment period at a leading Kenyan and assistance for HIV/AIDS and other provider of high precision aluminium dairy, considerable improvements were illnesses, in particular malaria and typhoid. products for international oil and gas made to the water treatment facilities. In The company has collaborated with an customers. CDC’s fund manager particular, attention was focused on the orthopaedic workshop which recognised this as a direct contravention biodegradation of wastewater before it manufactures prosthetic limbs and other of ILO standards. Upon investment, the was discharged to local ponds. Treated medical devices such as braces, boots fund manager set a 100 day plan to phase water can and is used for local irrigation, and crutches for victims of polio. The out the practice. It also introduced safety watering of gardens and for equipment site has also developed a programme storage lockers onsite to enable workers cleaning. Moreover, the dairy actively providing assistance and equipment to store valuable items. promotes environmental initiatives in the to disabled children in rural villages for local community. One example is the whom such assistance had previously Kenya – in order to grow a family run installation of recycling bins at shops to been inaccessible and often unaffordable. orchard into a profitable medium-sized encourage the recycling of milk bottles. business, a number of improvements Nigeria – a manufacturer of foam were required. These related particularly South Africa – a platinum mining project mattresses has appointed a health to the financial management and human was located near a major game park and and safety manager and two qualified resource management systems at the an animal migratory path. In order to environmental auditors. After a chemical company. With the assistance of the fund obtain a licence to develop a mine, the exposure incident with a staff member, manager, the company was able to create company had to undertake discussions safety procedures within the facilities were a professional management team and with multiple local stakeholders and more strictly enforced. The company is in develop the requisite skills to run a engage in an approval process which the process of renewing both its ISO 9000 professional business, including financial ensured that development of the (quality) and ISO 14000 (environmental) analysis and control, inventory mine adhered to strict environmental certification. The manufacturer firmly management and contract negotiation. regulations and did not negatively impact believes that ESG factors are a on the game park and the migration route. differentiator in the market and has China – at the time of investment by one developed a low-priced product to of CDC’s Chinese fund managers, an China – the manufacturing of galvanised anticipate market changes and to online retailer was a family run business steel sheets generates significant waste appeal to people on lower incomes. in which corporate governance controls products and requires careful monitoring. were weak. Since investment, A Chinese manufacturer in which CDC El Salvador – during a due diligence visit professional managers have been is invested has introduced an acid by CDC, concerns were raised over some brought into the company and the fund regeneration process to reduce its health and safety practices regarding the manager has also introduced institutional waste outputs. use of personal protective equipment and investors in a bid to further improve ventilation of spaces where potentially corporate governance. toxic chemicals were used and stored. A health and safety committee has been created to monitor issues and identify areas for improvement.
Workers at Equatoria Teak Manufacturing processes Microfinance in Bangladesh Chapter 2 – CDC performance 21
Serious incidents being trapped under heavy equipment, The overall fatality rate in CDC’s portfolio two deaths involving large machinery and is 3.14 workers per 100,000, which is conveyor belts and two deaths resulting 26% higher than the latest revised data A large portfolio distributed across from disregard for safety directives and for the EU 15 countries. While all fatalities several high risk environments10 training. Two fatalities occurred in are unacceptable, the reported level is connection with robberies when security close that of the EU 15 countries. CDC’s capital is invested in 794 guards employed by portfolio companies However, it is possible that some fatalities companies. 617 of these companies were shot and killed. Another six fatalities go unreported and that the actual level is reported employment data last year and arose from road related accidents. higher. CDC therefore frequently reminds we know that they employ more than its fund managers that all fatalities must 733,000 people. Given the large number Managing high ESG risks and be reported, including deaths of non- of employees, the large number of high improvements over time employees in connection with road risk sectors in the portfolio and the accidents and other incidents where a relatively higher levels of risk that When investing in emerging markets CDC portfolio company is not directly at fault characterise emerging markets, it is not believes it is important to add value by to allow corrective action to be taken. unexpected that a number of CDC’s fund reaching countries, regions and sectors A comparison of fatality rates below the managers have reported fatalities and where it can expand access to finance, overall portfolio level is difficult. A sector other serious incidents in their portfolio make it more affordable and also bring by sector comparison highlights sectors companies. CDC requires its fund other benefits to these markets. In such where there are relatively more managers to report without delay any environments it is difficult to avoid the risk challenges, but the small sample size instance involving portfolio companies of fatalities and also important not to shy limits the extent to which any additional which results in loss of life, material effect away from such cases. Rather, it is insights can be drawn. As an example, on the environment, or material breach of imperative to identify commercially viable the graph below to the left illustrates law and how such an instance was dealt businesses, with great potential to have how one single fatality in the energy and with by the fund manager. CDC takes significant development impact. It is also utilities sector brings CDC’s fatality rate each notification very seriously and essential that the management shows for the sector above the EU 15 rate of 4.2. follows up with the relevant fund manager a genuine willingness to improve its to ensure that complete reports are performance across ESG matters Umeme update written up (including police and other over time to ensure commercially, reports where applicable), that any environmentally and socially sustainable Umeme is Uganda’s principal power underlying systemic reasons are identified development. distribution company, featured in last and that corrective action plans are year’s report. It manages a network implemented to prevent reoccurrences. Benchmarking fatality rates against which had suffered from years of international data underinvestment prior to CDC’s investment Total number of incidents lower than in 2005. The resulting disrepair of the in 2008 It is relatively easy to benchmark health distribution network has resulted in high and safety performance across developed numbers of fatalities, often a consequence During 2009, four fund managers reported countries due to the rich data available. In of fallen power lines. Measures Umeme one or more serious incidents involving emerging markets on the other hand there has taken in response include: employees, sub-contractors and are no similarly comprehensive and members of the public to CDC. A total of reliable sources of data. IFC recommends • capital expenditure on replacing unsafe 30 fatalities were reported compared to using statistics from the US Bureau for poles (72,000 to date 2005-09 out of a 41 in 2008. In 2009 there was also one Labor Statistics and the UK Health and total of approximately 120,000 poles environmental incident and one case of Safety Executive. For the purpose of this requiring replacement); alleged fraud. Fourteen of the 30 fatalities benchmarking exercise CDC looked at the • working with the government to were accidents at work. Examples data used by HSE and in particular the discourage a dangerous culture of included three deaths caused by electric Eurostat data for the EU 15 countries stealing electricity; and shocks when dealing with faulty electrical referred to on its website. • a public education programme on the connections, three deaths from workers dangers connected with electricity and electricity supply.
Reported fatality rate per 100,000 Reported fatality rate per 100,000 workers: sector comparison workers: CDC portfolio versus EU 15 data Industrials 9.8 (13) 3.14 +26% Construction 9.5 Transport, storage & 2.50 communications 7.7 Manufacturing 2.6
Energy & utilities 12.6 (2)
Electricity, gas and water 4.2
Agribusiness 1.8 (2) CDC Agriculture 8.9 EU 15 (2006)
CDC EU 15 (2006) (xx) Actual fatalities in CDC’s portfolio 22 CDC Development Review 2009
CDC performance continued
Private sector development local investment capacities in countries where capital markets are traditionally Examples from evaluation reports weak and underdeveloped. Overview Kenya – a CDC-backed financial Successor funds institution in Kenya provides individual Across its investment portfolio, CDC and SME loans to new businesses which records information to assess whether Developing local capital markets takes would generally not qualify for banking its fund managers contribute to the time. An indication of success over the services with other Kenyan banks or strengthening of local capital markets. longer term is therefore the extent to would not be able to afford the charges These assessments are made on a which CDC’s fund managers have been and interest imposed. This is driving country level and for larger countries able to raise successor funds. A total of competition in the industry and providing the regional level is also considered. 12 successor funds were raised from the for a previously under-served sector of the Examples of countries where regional 20 funds evaluated in 2009 with 82% of data is analysed include India, China, population. The bank is presently adding fund managers proving successful in this approximately 5,000 new accounts daily South Africa and Nigeria. Further benefits regard. US$3.4bn was raised in these include the wide range of positive effects and by showing that this sector can be successor funds with non-DFI capital served profitably, the thinking of financial for consumers from expanded and accounting for 65% of this amount. In institutions across the region is being improved access to goods, services and terms of committed capital, the following infrastructure and better and cheaper is summary information for the 20 funds transformed. products and technologies. evaluated in 2009: Cameroon – a pharmaceuticals company Local capacity building • 70% of the US$3.5bn in committed which receives investment from one of capital to the fund was third party; CDC’s portfolio companies in Cameroon Economic growth in many emerging • 57% of this capital was non-DFI; and is having a strong impact in improving markets is hampered by underdeveloped • CDC committed a total of US$1.03bn. local regulatory standards. The company capital markets to invest in local start-ups supplies generic drugs, produced under and provide growth capital for local 19 of the 20 funds were assessed as companies. One of the contributions of high quality, safe manufacturing ‘satisfactory’ or better on private sector conditions. This is important in a country CDC’s intermediated model is to invest in development contributions. Two funds local first time fund managers to develop where as much as 50% of medicines received the highest rating, ‘excellent’ available are counterfeit. these capital markets. An indication of whilst a further eight were awarded success in this area is the number of first a ‘successful’ rating. time fund managers backed by CDC. Nigeria – a telecommunications 58% of CDC’s 65 fund managers are One of the funds rated ‘excellent’ has portfolio company in Nigeria promotes managing foreign institutional capital made a significant contribution to African- the co-location of tower sites with mobile for the first time. Of the six new fund led private sector development in Africa network operators (MNOs). Before entry managers backed by CDC in 2009, and has helped professionalise the into the market, there was no such service five were first time teams. telecommunications industry in Nigeria offered in Nigeria. The company benefits and Angola. The other excellent rated the MNOs by allowing them to focus on All but two of CDC’s private equity fund fund has made significant strides towards their core business of providing mobile managers operate from local offices in professionalising the SME sector in East telephony services and reduce the large emerging markets. They cover 37 Africa and helping management at SMEs developing countries, 14 of which are expenditure required to build towers. to formalise. The fund manager of this In addition, the portfolio company has in low income countries including Côte second ‘excellent’ rated fund has also d’Ivoire, Pakistan, Tanzania and Uganda. improved the operational efficiency of expanded its operations to build a larger the tower sites – they have consistently China, India and South Africa contain the successor fund focused more broadly achieved greater than 99% uptime on their largest number of local offices with over across SMEs in sub-Saharan Africa. ten in each country. The offices of CDC’s In 2008, this fund manager won a own towers compared with approximately fund managers, which are mainly staffed prestigious award for best initiative in 75% on owner-operated sites. with local investment professionals, make support of SME development in Africa. an important contribution to strengthening
CDC’s 65 fund managers have local offices in 37 countries
More than 10 offices 5-10 offices 2-4 offices One office Chapter 2 – CDC performance 23
Evaluations training tool for CDC’s investment staff. • economic performance – indicating the The evaluation process is designed to extent to which investments generate help formulate more detailed judgements benefits for the local economy, in terms CDC evaluates the impact of its funds about all aspects of the performance of a of commercially successful and growing to assess if investments have produced fund. This includes the fund’s strategy and businesses that provide employment positive developmental impacts. In 2009, regional focus as well as the impact of and generate tax revenues; evaluations were performed on 20 funds. investment upon portfolio companies. • ESG performance – indicating whether The methodology behind these evaluations fund managers and their portfolio and some outcomes from the 2009 How CDC performs evaluations companies adhere to responsible evaluations are discussed in this section. investment and business practices in CDC’s evaluation framework, line with CDC’s Investment Code and Purpose of CDC’s evaluations benchmarked against those of other DFIs, whether portfolio companies over time is similar but not identical to that used by improve upon their practices from the CDC invests in funds in order to provide the IFC for investments through financial ESG perspective; and capital available for businesses in poor intermediaries. The system is intended • private sector development – indicating countries. The rationale is to enable to be practical, simple and deliver the whether CDC’s investments have these businesses to realise their growth key information required by CDC for broader private sector development potential in a responsible manner and its investment management and effects including increased availability thereby contribute to economic growth communication purposes, as well as of capital for businesses in low income for the benefit of the poor. for CDC’s Board and shareholder the UK countries from the third party capital government’s Department for International invested alongside CDC; more efficient Development capital, however substantial, Development (DFID). capital markets; improvements to is only one contributing factor behind regulatory environments from economic growth and poverty alleviation. The monitoring and evaluation framework contributions by fund managers or CDC’s system of development impact used by CDC includes four key portfolio companies to new standards. evaluations aims to discover the extent to parameters to assess the overall which CDC’s capital is deployed in more development outcome for each fund CDC also evaluates its own effectiveness ways than the provision of capital alone. investment, based on the performance on two dimensions: of a fund as well as its underlying portfolio The purpose of these evaluations, companies: CDC operates a six-scale • added value – indicating whether CDC conducted either at the mid-point of the rating against each performance has provided assistance to its fund fund’s life or as a final evaluation at the parameter, ranging from excellent to poor. managers in shaping their investment end of the fund (typically after about 10 thesis, upgrading their skills, improving years), is to explore in more detail the • financial performance – indicating their ESG management and other complete developmental and financial whether investments are profitable improvements; and impact of CDC’s investment. thus returning capital to CDC for further • catalytic effects – indicating the extent investments and demonstrating to other to which CDC helps attract commercial From an internal perspective, CDC investors that profitable investments investors. considers the ability to perform an can indeed be made in emerging evaluation as a personal and institutional markets where they are traditionally learning experience and a valuable reluctant to invest;
CDC’s monitoring and evaluation framework and indicators Development outcome Concept Typical performance indicators Financial • Fund managers’ ability to attract commercial • Net IRR of funds versus investment targets performance capital to poor country markets • IRR for each exit > financial return to investors Economic • Contributions to economic growth • Employment performance > commercially viable and growing businesses • Taxes paid that generate employment and pay taxes • EBITDA and turnover (increase over time) • SMEs and low income reach (if relevant) ESG • Responsible investment and business • ESG issues and improvements over time performance practices with respect to the environment, • Development outlays (if available) social matters and governance (ESG) • Environmental products/services (if relevant) > fund managers’ ESG management systems and the ESG performance of portfolio companies Private sector • Broader private sector development effects: • Third party capital development > more efficient capital markets • Local capacity building > regulatory improvements • Enhancements to sectors and benefits > benefits to customers from increased for consumers e.g., increase in telecom availability of goods, services and infrastructure penetration, new infrastructure, increased access to power and financial services CDC effectiveness Concept Catalytic effects • CDC’s direct role in bringing in other investors > focus on commercial capital Added value • CDC’s direct contributions to improve the way fund managers invest CDC’s capital, for example: > to shape a fund’s investment thesis or terms > to improve fund managers’ ESG management systems > to recruit or contract key technical expertise for responsible and successful investment management 24 CDC Development Review 2009
CDC performance continued
Results from 2009 evaluations Of the 20 funds assessed in the 2009 evaluations, one fund was rated 2009 evaluations in summary A summary of the final rating results from ‘excellent’ in terms of its ESG the 20 development impact evaluations performance, seven funds were rated 20 funds completed on CDC’s funds in 2009 is as ‘successful’ and four rated ‘below presented below. Ratings specific to the expectations’. Typical reasons for a eight funds that invested in Asia and the ‘below expectations’ rating include the 11 fund managers ten funds that invested in sub-Saharan fund manager performing beneath the Africa are discussed in the relevant high standards CDC expects on ESG regional sections of the report. issues and shows the need for investors 313 companies to manage ESG risks as well as In terms of development outcome, 85% opportunities carefully. Nonetheless, of funds in total were rated ‘satisfactory’ the fact that 16 of 20 evaluations (80%) 15 mid-point evaluations or better. Seven funds were rated as performed satisfactorily or better on ESG 5 final evaluations ‘successful’ and ten as ‘satisfactory’. matters is reassuring. At the company Three were rated at ‘below expectations’. level, of the 234 companies reporting For these three funds, poor financial and data, 73% of evaluated companies had CDC’s evaluation work ESG performance were the key reasons ESG issues at the time of investment and in 2009 covered funds for generating the weak development 83% had observed and reported ESG investing in companies of outcome score. improvements. all sizes and in all sectors For the funds under evaluation, 14 of the In terms of private sector development, 20 funds were rated ‘satisfactory’ or 95% of the funds evaluated were 10 funds investing in Africa better in terms of financial performance. assessed as ‘satisfactory’ or better on To some extent, measuring financial private sector development contributions. 8 funds investing in Asia performance was complicated by the Two funds received the highest rating, financial crisis which saw large reductions ‘excellent’ whilst a further eight were rated in unrealised portfolio value. This has as ‘successful’. Only one fund was rated 13 evaluations conducted resulted in more funds, particularly those as ‘below expectations’ for the reason by CDC evaluated at mid-point, appearing that investments have focused too beneath CDC’s expectations. Two funds specifically on one country when this was were rated as ‘excellent’ for financial not initially expected of the fund. 7 conducted by external performance. consultants CDC also evaluates its own effectiveness Economic performance shows an overall on two dimensions – added value and stronger set of results. This is perhaps catalytic effect. This is discussed in more not surprising as all the evaluations detail in chapter 7. demonstrated how CDC’s investments bring about substantial increases in employment opportunities as well as tax receivables to governments. All 20 evaluations completed in 2009 were rated as satisfactory or better in terms of their economic performance.
Summary of the ratings from the 20 evaluations completed in 2009 Excellent Successful Satisfactory Below Unsatisfactory Poor Satisfactory expectations or better (%) Development outcome – 7 10 3 – – 85% Financial performance 3 5 6 4 2 – 70% Economic performance 2 9 9 – – – 100% ESG performance 1 7 8 4 – – 80% Private sector development 2 8 9 1 – – 95%
CDC effectiveness 4 9 7 – – – 100% Added value 3 11 6 – – – 100% Catalytic* 3 8 4 1 – – 94%
*Catalytic effect is not considered for funds where CDC has entered in the final close, hence the number of funds rated on catalytic effect is fewer than for the other performance measures. Regional reviews
Under its Investment Policy, 75% of CDC’s new investments Chapter will be invested in low income countries for the five year period from 2009 to 2013, with at least half in sub-Saharan Africa. CDC thereby increases its focus on the poorest regions and people where its investments can have the largest developmental impact. By this means, it can also demonstrate to others the long-term benefits that can be gained from investing in the emerging markets. Sub-Saharan Africa contains, as it did last year, the largest share of CDC’s portfolio value and also the region where the largest proportion of people live in poverty.
In this chapter, analysis is conducted into the impact of CDC’s capital as well as the risks and opportunities specific to different regions. Three of CDC’s fund managers also offer their perspective on the past year, particularly with respect to the challenges of emerging from the financial crisis. 3 26 CDC Development Review 2009 Chapter 3: Regional reviews – Asia Since its financial crisis in 1998, most of Asia has enjoyed ten years of rapid economic growth and declining poverty, driven by an expanding private sector. Whilst last year did impact upon CDC’s portfolio companies, CDC still made $75m of new commitments to Asian funds. A pioneering fund in which CDC invested in 2009 is Rabobank’s India Agribusiness Fund.
Review of the past year At the end of 2009, CDC had 391 portfolio £607m CDC portfolio value companies in Asia, representing an Although Asia was not immune to the increase of 43 on the previous year. With £121m invested in 2009 impact of the global financial crisis, most a total portfolio value of £607m, CDC’s Asian economies were less affected than investments in Asia account for 43% of European and US counterparts. Many CDC’s total portfolio value. India is the 391 companies have also rebounded strongly in the single largest investment destination for second half of 2009 due to government CDC’s capital, with £268m invested in stimulus programmes, pick up in global 167 companies. China also represents 4 new fund managers trade activity and continuing domestic a substantial proportion of CDC’s total demand. 2009 did see a slow down in portfolio with £197m invested in 562,000 people employed private equity activity in India, with 287 107 companies. private equity deals amounting to a total in 308 portfolio companies of $4.43bn. This is opposed to 502 deals As a result of CDC’s new Investment which reported data in 2009 amounting to US$11.9bn in 2008 and Policy which focuses more specifically demonstrates the impact of the financial upon the low-income countries in Asia, crisis.11 Some private equity funds took India will continue to be a major US$1.5bn domestic taxes advantage of the sharp rise in stock investment focus for CDC, as will paid by the 252 companies markets in the second half of the year Afghanistan, Bangladesh, Cambodia, to exit certain investments successfully. Laos, Nepal, Pakistan and Vietnam. which reported data There were 96 exits with a total value Further discussion of the opportunities of US$2.2bn compared to US$0.93bn CDC is currently pursuing is contained Total turnover of US$48bn in 2008. later in this section. While the last year impacted upon CDC’s CDC’s Asian portfolio includes companies Total profitability of US$7bn underlying portfolio companies, CDC has operating in all sectors of the economy. continued to make investments across The consumer sector, with a total of 82 Asia. One pioneering initiative backed by investments in 12 countries and a total CDC is Rabobank’s India Agribusiness investment value of £148m represents Fund, the first private equity fund to focus the largest share of CDC’s investment on the food and agribusiness sector in portfolio in Asia. Industrials is the second India. CDC also committed to India Value largest sector in CDC’s portfolio with Fund Adviser’s Fund IV and Ascent India’s £98m invested in 82 companies. Fund III over the course of the year.
CDC’s fund managers have investments in 27 countries in Asia
AFGHANISTAN PHILIPPINES AZERBAIJAN RUSSIA BANGLADESH SERBIA & MONTENEGRO BELARUS SOLOMON ISLANDS CAMBODIA SRI LANKA CHINA TAJIKISTAN FIJI THAILAND INDIA TONGA INDONESIA TURKEY KAZAKHSTAN UKRAINE KYRGYZSTAN VANUATU MALAYSIA VIETNAM PAKISTAN YEMEN PAPUA NEW GUINEA
More than 25 investments 15–25 investments 6–14 investments 1–5 investments Chapter 3 – Regional reviews 27
Development highlights Portfolio specific challenges and risks manager in China failing to disclose a personal conflict of interest arising out CDC has been an active investor in Asia Many of CDC’s fund managers have of his shareholding in a publicly traded over the past 60 years and has played a coped relatively well during the global company. This resulted in the Chief pioneering role in supporting promising downturn. Over the past year, fund Executive Officer (CEO) of the fund businesses operating in poor or managers across Asia have demonstrated stepping down as fund manager at the challenging countries in the region. investment discipline and have slowed insistence of investors. down their investment pace. Concentration As a consequence of its investments in has also focused on building up value in In another example, promoter commercially strong companies, CDC their existing portfolio companies. This mismanagement and questionable related has made a significant contribution to process has been helped by the quick party transactions led to a significant economic growth and poverty alleviation recovery in the Asian economies as well decline in one company’s performance. across the continent. About 562,000 as the strong growth element, low levels Intervention by the domestic government, people are employed in the 308 portfolio of capital leverage levels and less following ongoing concerns about the companies in Asia which reported sophisticated financial structuring at integrity of reported performance, resulted employment numbers to CDC in 2009. the company level. in a dilution of the fund manager’s stake This represents reporting from 79% of in the company. CDC’s total portfolio companies in the Many of the challenges faced by both region. China employs 192,000 people CDC and its fund managers in Asia are Both cases highlight the importance of in the 93 companies that reported data. typical of emerging market private equity adequate due diligence by fund managers investing in general. Fund managers likely on the leading shareholders at portfolio In addition, CDC’s portfolio companies to succeed best are those with the most companies as well as active portfolio are major contributors to government informative due diligence processes and monitoring to prevent governance issues revenues in Asia. About $1.5bn in taxes those who are most active in monitoring from occurring. When governance issues was paid to domestic governments their portfolio. Corporate governance and do occur, appropriate remedial actions are throughout Asia. 252 portfolio companies promoter integrity are further issues that most effective when adopted as quickly reported tax data to CDC in 2009, are often central to a fund manager’s as possible. Fund managers need to representing about 64% of CDC’s total prospects. exercise rigour in ensuring that strong portfolio companies in the region. China governance procedures, in forms such represents the largest share of taxes paid China as independent audit and remuneration in CDC’s Asian portfolio with nearly China has experienced exceptionally rapid committees, are implemented. US$600m paid across 73 companies economic expansion over the last decade. reporting this data. One consequence of this is that corporate Pakistan governance standards are only now The business environment in Pakistan In India, CDC has mapped which states starting to catch up with those generally remains challenging, with private 130 of its Indian portfolio companies are commonplace for businesses in Europe consumption and investment expected located in against the domestic product and the United States. This often remains to remain subdued on the back of the per capita of the Indian states. Although a major issue faced by investors when deteriorating security situation and states containing cities such as Mumbai, doing business in China. chronic energy shortages. Bangalore and Chennai represent a significant proportion of CDC’s portfolio, Over the course of 2008 and 2009, a few CDC has a presence in more than 22 of CDC’s fund managers faced issues Indian states, nine of which are below regarding poor governance at both fund the national average for domestic product level and in their underlying portfolio per capita. companies. One example involved a fund
CDC’s Indian portfolio companies – spanning 20 states with significant presence in mid and lower range states in terms of state domestic product per person12
2,200 20 20.9
16.2
13.7
10 9.5 1,100 9.3
CDC portfolio distribution (%) 4.6 3.6 (US$/capita) Net state domestic product 3.0 3.1 3.3 2.1 2.0 2.1 1.2 1.3 1.3 1.6 0.3 0.1 0.3 0.1 0.4 Goa Delhi Bihar Kerala Orissa Sikkim Tripura Assam Punjab Islands Gujarat Nicobar Kashmir Manipur Pradesh Pradesh Haryana Mizoram Pan India Himachal Jammu & Rajasthan Arunachal Karnataka Jharkhand Meghalaya Tamil Nadu Tamil Puducherry Chandigarh Andaman & Uttarakhand West Bengal West Maharashtra Chhattisgarh Uttar Pradesh Andhra Pradesh Madhya Pradesh
% of CDC portfolio (sample 130 companies) National average state domestic product: US$656 rupees per person 2006-7 net state domestic product (US$ per person) 28 CDC Development Review 2009
Asia continued
For example, more than two million protection and coverage under labour people were displaced by fighting legislation which we often take A fund manager’s between the army and Taliban militants for granted in developed economies. perspective in 2009.13 62% of workers in East Asia are similarly considered vulnerable. By developing Baring, India In 2007, CDC invested in JS Private the private sector, CDC’s fund managers Equity, a pioneer fund in Pakistan, which help develop employment opportunities The Indian economy showed remarkable has to date invested in companies in the region. resilience throughout the global slowdown. operating in the leasing, chemicals and However, the large stimulus packages in media sectors. During this period of Infrastructure deficit the developed economies have created a heightened security unrest, the manager Infrastructure development is integral in wall of liquidity, resulting in large capital continues to work actively with portfolio a country’s economic growth. Developing inflows into India. This has reduced the cost companies to maximise value extraction infrastructure increases productivity, of capital and caused short-term currency and minimise security-related disruption. allowing companies to become more appreciation. Currency strengthening is competitive which boosts regional likely to continue on the back of higher Broader regional challenges economies. Core infrastructure assets growth and the unveiling of key reforms such as roads, railways, airports, ports that will attract higher capital flows. Over Battle against poverty and power help drive the investment the long term though, there might be a risk Despite recording remarkable growth decisions of domestic companies and that India’s large fiscal deficit could affect over the past decade, the battle against can contribute to an area’s attractiveness growth prospects by causing inflation and poverty remains an ongoing task. 33% to commercial foreign investment. Much therefore resulting in rupee depreciation and of the people in South Asia still live below of South Asia suffers from inadequate increasing the cost of capital. the threshold for poverty, surviving on less urban and rural infrastructure and is than US$1.25 per day. The poor in India characterised by a weak transport and As a result of large capital inflows into alone make up over a third of the total communications network as well as India post March 2009, the economic number of poor people in the world. insufficient energy and water supplies. downturn did not last long enough to see a full private equity investment cycle in While the situation in China, along with the According to International Finance order to enable deal closures. As a rest of East Asia, paints a more reassuring Corporation (IFC) estimates, some 30% consequence, companies only in pursuit picture current poverty rates still exist at of India’s households still lack access to of capital preferred tapping the public levels of around 10% of the population in electricity and 20% have no sanitation markets rather than private equity since East Asia and the Pacific. There are still an facilities.15 India’s infrastructure deficit has it was cheaper, faster, valuations fetched estimated 200 million poor people in been summarised by India’s then Finance were higher and there were no private China, with the majority located in rural Minister, Palaniappan Chidambaram, who equity terms attached. Furthermore, due Western China, away from the developed commented in 2006 that infrastructure to higher cost of capital, we could not cities of Beijing, Shanghai and Hong Kong. was India’s most glaring deficit and offer aggressive valuations thereby announced that US$500bn in investment resulting in losing out on deal closure. Challenging labour conditions14 would be needed, a third of which needs According to the International Labour to come from the private sector.16 India’s Nonetheless, we believe industry sectors Organization (ILO), 77% of all employment infrastructure deficit was estimated to leveraged to the cycle of asset creation, in South Asia is considered to be be impeding economic growth by an outsourcing and domestic consumption vulnerable. For such workers, this entails estimated 2% per annum. will bulwark long term growth. Particular limited access to social security, income sectors will offer high return potential over the longer term. These include infrastructure where indicators suggest large capacity creation is possible for various activities, in particular, power and roads as well as domestic consumption and consumer goods, which will benefit from India’s strong demographic profile, higher disposable incomes, urbanisation and a regional retail revolution.
Warehousing project in China Construction in India Production of pharmaceuticals Chapter 3 – Regional reviews 29
Regional trends South East Asia Education in India Many South East Asian economies Better education leads to higher earning Although the global recession did take recovered strongly in the second half of potential for future generations, its toll on emerging market economies, 2009 and are expected to register positive contributing to economic development.19 the second half of 2009 saw many Asian growth for 2010 following the anticipated In low and lower-middle income countries countries rebounding strongly, largely as a recovery of key export markets. in Asia, governments’ education spending result of swift government responses to the ranges from 2-4% of GDP, behind that of crisis in the form of stimulus packages, a Opportunities developed countries whose average pick up in global trade activity and strong spend is around 6%.20 domestic demand. The Mekong region CDC is actively looking at fund managers Across CDC’s Asian portfolio, several China focusing on the Mekong region, fund managers have made investments Despite the economic downturn, China’s comprising Vietnam, Cambodia and Laos. in education sector companies and economy grew over 8.7% in 2009 and We believe that CDC can play a major many more are actively looking for the Chinese government is targeting part in developing the private sector in the opportunities. Actis has invested in a similar growth rate in 2010.17 At the region by being active in the formative Ambow, a personal education and close of 2009, the impact of the Chinese stages of the regional private equity training company in China. Navis has an government’s stimulus package was industry. This is a pioneer role for CDC, investment in The Institute for Technology evident, especially when measured by the similar to that played in the early & Management, a tertiary and executive stock markets: Hong Kong’s Hang Seng development of the private equity education service provider in India. Index gained 52%, whilst the Shanghai industry in Bangladesh and Pakistan. Composite Index rose 74%. Indian venture capital and distressed Healthcare in India assets Chinese private equity funds also raised Despite strong improvements in the Whilst private equity activity in India has US$8.7bn of fresh capital in 2009, Indian healthcare sector, there are still surged in the past few years, there representing 38.7% of such capital raised very large gaps in supply and demand. continues to be a gap between the capital in Asia. For the first time, China-focused On the supply side, healthcare delivery requirements for early stage companies funds surpassed those with a pan-Asia and pharmaceutical companies are still and traditional sources of funding. By focus. not providing enough coverage both in supporting successful venture capital fund terms of access and affordability. With low managers who have a proven track record South Asia capital available, the healthcare segments of helping start-ups transition into larger The Indian economy continued to expand need more capital to expand. enterprises, CDC can promote innovation in 2009, helped by the government and entrepreneurship in India. stimulus package and a revival in CDC’s fund managers are playing an domestic demand. Following July 2009 active role in addressing this deficit. The distressed asset class in India government elections, the capital markets Kotak Private Equity has invested in represents a further opportunity for CDC strengthened on the back of renewed Bharat Serums & Vaccines Limited, a bio- to contribute to the development of the government commitment and spending pharmaceutical company catering to private sector. India’s credit growth over on the agriculture and infrastructure India’s domestic market as well as global the past decade has led to increased sectors. The Indian equity market index markets. Aureos have backed Apollo non-performing assets (NPAs) on banks’ ended the year with an 81% increase.18 Hospital Dhaka, the first privately owned balance sheets – amounting to US$14bn international class tertiary medical facility according to the Reserve Bank of India There was limited private equity activity in in Bangladesh, via their South Asia fund. at the end of 2009. Distressed debt funds Pakistan in 2009 as the country continues allow banks to clean up their balance to suffer from internal civil unrest. sheets by offloading non performing loans Bangladesh, where CDC is looking to and thereby enable funding of future increase its portfolio continues to grow growth through new lending to steadily with GDP growth of about 6%. entrepreneurs and businesses. Listed markets saw a relatively large increase in liquidity in 2009.
Largest investment destinations by CDC’s presence in Asia number of companies Number of companies Portfolio value (£m) Consumer 167 goods & 82 services 148 Industry & 82 materials 98 42 ICT* 32 36 Microfinance 21 112 Financial 30 services 37 26 Healthcare 92
Energy & 25 utilities 45 24 Infrastructure 49 21 Agribusiness 36 17 14 Cleaner 9 9 8 16 technologies 35 7 Mining 14 India China Indonesia Thailand Pakistan Russia Malaysia * Information and communication technologies 30 CDC Development Review 2009
Asia continued
Evaluations – high level results CDC’s fund managers in Asia are Key statistics from 2009 and analysis competently handling ESG issues that Asian evaluations arose in the underlying portfolio In 2009, CDC conducted evaluations on companies. Examples include the eight of its fund investments in Asia. Five professionalisation of corporate Financial performance of these evaluations were conducted at governance in one fund in South East mid-point, halfway during the investment Asia. Governance is an important issue One of the best performing funds showed duration of the funds and the remaining for many Asian countries – of those a net IRR of 16% in its final evaluation. three were final evaluations conducted companies that provided ESG The least well performing fund showed at the end of the funds’ duration. governance risk ratings, 15% of a net IRR of 6.8% in its final evaluation. companies in Asia were rated as high risk. The evaluation work included reviews of 103 companies in which these funds had 24% of Asian portfolio companies Economic performance invested and also assessed the practices covered in the evaluations had of the four fund managers managing environmental issues and 30% social 77% of portfolio companies showed these eight funds across Asia. Two of issues at the time of the funds’ employment growth with 58,500 new these fund managers were rated as ‘low’ investment. In most of these cases, jobs created. in terms of their ESG management, inadequate health and safety standards, something that gives CDC cause for poor environmental management systems Only 5% of portfolio companies concern. and below-industry standard wages were decreased their number of workers, the most common issues uncovered by with 559 jobs lost. The results of the evaluations showed CDC. These issues have since been that two of the eight funds were rated acted upon. 84% of the portfolio companies as ‘successful’ in terms of development experienced growth in turnover. outcome, with five rated as ‘satisfactory’ All the Asian funds evaluated were rated Only 11% saw a decrease. and one rated as ‘below expectations’. at least as ‘satisfactory’ when scored for The fund rated as ‘below expectations’ private sector development impact. One 69% of portfolio companies was so assessed as a consequence of fund in particular was pioneering in its demonstrated growth in profitability poor financial and Environment, Social approach to buy-outs across South East as measured by EBITDA. 25% saw and Governance (ESG) performance. Asia and its assistance in helping its a decrease. portfolio companies expand further into In terms of economic performance, one Asia (into China in one case and Vietnam fund was rated as ‘excellent’ with the in another). ESG performance remainder rated ‘successful’ or ‘satisfactory’. The fund rated ‘excellent’ The evaluations reviewed CDC’s One fund manager was rated highly in was a South Asian regional fund nearing effectiveness in adding value as an their ESG management systems. Two the end of its term and therefore with few investor and the catalytic impact of CDC’s were rated as low and one as medium. remaining current investments. From commitment to the funds. One fund was evidence gathered by CDC, 13 of the 16 rated as ‘excellent’ with a further four For the 81 portfolio companies that were companies grew in terms of turnover and classified as ‘successful’. A total of rated in terms of their ESG management 14 showed an increase in profitability. US$950m in commercial capital was systems: invested alongside US$380m of CDC’s > 41% were rated high Three of the funds achieved a ‘successful’ capital to the funds under evaluation. > 32% were rated satisfactory ESG performance rating and four a > 27% were rated poor ‘satisfactory’ rating. This suggests that
Private sector development
US$948m in third party capital was raised by the 8 funds evaluated. CDC contributed a total of US$391m to these funds, 29% of the total capital.
68% of the third party capital invested in these 8 funds was from commercial investors as opposed to DFI’s.
Summary of CDC’s evaluation ratings of 8 Asian funds in 2009 Excellent Successful Satisfactory Below Unsatisfactory Poor Satisfactory expectations or better (%) Development outcome – 2 5 1 – – 88% Financial performance 2 1 4 1 – – 88% Economic performance 1 2 5 – – – 100% ESG performance – 3 4 1 – – 88% Private sector development – 2 6 – – – 100%
CDC effectiveness 1 4 3 – – – 100% Added value 1 4 3 – – – 100% Catalytic* 1 4 – 1 – – 83%
*Catalytic effect is not considered for funds where CDC has entered in the final close, hence the number of funds rated on catalytic effect is fewer than for the other performance measures. Chapter 3 – Regional reviews 31
Regional reviews – Sub-Saharan Africa There is a larger proportion of the world’s poor in sub-Saharan Africa than any other region with 50% of the population living on less than US$1.25 a day. Although the region has experienced average growth rates of 5% over the past decade, the recession has impacted more severely this year than last. The amount of uncalled capital among private equity investors has helped catalyse growth in promising companies across the region.
Review of the past year In 2009, CDC committed to two new fund £640m CDC portfolio value managers in Africa. These were managing Sub-Saharan Africa was late to feel the the Sierra Investment Fund, the first £194m invested in 2009 effects of the global financial crisis and, private equity venture of its kind in amongst developing economies, late to Sierra Leone and African Development emerge. This is due in particular to a Partners Fund 1. 318 companies decline in commodity prices, especially oil and mineral resources, which have In 2009, CDC maintained an active severely affected many African economies programme of new commitments with 2 new fund managers and marked the end of the biggest US$155m committed to a total of four commodity boom in decades.21 new funds. CDC’s fund managers made a total of £194m of new investments. 125,000 people employed Across sub-Saharan Africa, the impact of CDC currently has 318 portfolio companies in 255 portfolio companies the crisis has varied considerably between across sub-Saharan Africa, an increase of which reported data in 2009 different countries. South Africa for 57 over the past year. These companies instance has been severely affected, are spread across 28 countries. through a 1.8% contraction of its GDP US$820m domestic taxes and a cut-back in liquidity. Uganda by Despite this, 2009 has not been an easy paid by the 162 companies contrast appears to have fared better. year in this region. An example of the Despite receding export demands and challenges can be seen in the crisis in the which reported data slackening capital inflows, the country is Nigerian banking sector that received still expected to see growth of upwards of broad coverage in 2009. The crisis Total turnover of US$23bn 5% between 2008 and 2011. The news is resulted from easy liquidity from 2006 to not all positive; an ILO survey into the 2007, inadequate risk management and, country has concluded that despite only in some cases, poor governance. The Total profitability of US$6bn a moderate macroeconomic shock, low- rapid decline in the oil price at the start wage workers in Uganda will be those of 2009 and the extended slump in the most severely affected by the downturn.22 Nigerian Stock Exchange exposed poor credit decisions, although it took decisive Across Africa in 2009, CDC’s portfolio action by the Central Bank of Nigeria to companies have operated within an bring transparency to the sector. environment of greatly reduced liquidity. Nonetheless, private equity uncalled capital has helped companies access essential finance, both for capital expenditure and working capital.
CDC has investments in 28 countries in sub-Saharan Africa CDC’s investment universe in Africa
ANGOLA MAURITANIA BOTSWANA MAURITIUS BURKINA FASO MOZAMBIQUE CAMEROON NIGERIA CONGO (DEMOCRATIC RWANDA REPUBLIC) SENEGAL CÔTE D’IVOIRE SIERRA LEONE DJIBOUTI SOUTH AFRICA GABON SUDAN GAMBIA TANZANIA GHANA TOGO KENYA UGANDA LIBERIA ZAMBIA MADAGASCAR More than 25 investments ZIMBABWE MALAWI 15–25 investments 6–14 investments Low income 1–5 investments Middle income 32 CDC Development Review 2009
Sub-Saharan Africa continued
Portfolio overview – growth and CDC spans many industry sectors in challenge in managing financial development highlights sub-Saharan Africa, with a focus on institutions. CDC’s African portfolio has financial services, industry and materials not been immune. In Nigeria, an audit by CDC’s intermediated operating model and the information and communications Nigeria’s central bank revealed risk enables it to reach a broad range of technologies sectors. In terms of portfolio management and corporate governance investee companies across sub-Saharan value, CDC’s two largest sectors are again shortcomings in two Nigerian banks in Africa. At the end of 2009, CDC had financial services and industrials with a CDC’s portfolio. In order to stabilise the 39 funds managed by 20 fund managers portfolio value of £196m and £73m sector, the Nigerian central bank moved in the region. The number of African respectively. CDC also has a significant to support nine of the 25 banks operating companies in CDC’s sub-Saharan presence in energy and utilities, mining, in the country. portfolio increased from 261 to 318 over consumer goods and the infrastructure the course of 2009. This includes over sectors, providing a range of services Positive stories also emerged from the 120 SMEs, particularly in the East Africa across the region. financial sector in sub-Saharan Africa region managed by GroFin and Business in 2009. For example CDC invested Partners International. Site visits in DCFU in Uganda and Banque Commerciale du Rwanda (BCR), both of 213 or 67% of CDC’s companies in sub- In 2009, CDC’s Africa team visited which proved resilient in 2009 and remain Saharan Africa are based in low income portfolio companies across Africa. Site strongly placed for the future. BCR has countries. This represents a substantial visits are a means by which CDC can targeted small and medium sized proportion of CDC’s total portfolio in monitor its investments and understand enterprises (SMEs) and a retail client base which 54% are located in low income more about particular challenges faced and has developed a strong relationship countries. in specific countries. with the non-governmental organisation (NGO) sector. Three of the Nigerian banks CDC is invested in 28 countries across In 2009, CDC’s Africa team visited in which CDC is invested are also well- sub-Saharan Africa with Kenya, Nigeria investments in countries including the positioned for the future. and South Africa having the largest Democratic Republic of Congo (DRC), number of portfolio companies. CDC Kenya, Nigeria, Rwanda, Senegal and In South Africa, the contraction in GDP is also present in smaller regional Uganda. Visits of particular interest and the general shortage of liquidity in economies with portfolio companies in included trips to remote mining operations Africa made both the investment and exit Cameroon, Malawi, Mozambique and in the DRC and Senegal, financial services environment extremely challenging for Togo. Many of the companies in which in Rwanda and small entrepreneurial much of 2009. Declining earnings coupled CDC is invested also have a strong developments in both Kenya and Uganda. with high leverage resulted in a large interregional presence and offer services write-down of investments in a South in countries additional to their main Portfolio specific challenges African logistics company, although operational site. CDC’s portfolio in South Africa otherwise 2009 was a challenging year and fund remained satisfactory. CDC’s African fund managers have managers needed to re-set their priorities executives based in low income countries to ensure that they could devote the across Africa, spread across 14 countries. necessary time to support their investee These executives contribute to the spread companies. Some fund managers of entrepreneurship in sub-Saharan Africa struggled more than others to mobilise through their focus on particular the required levels of skill and experience investment strategies and businesses. to influence adequately those portfolio By allocating capital to the strongest companies with particular challenges. management teams, CDC’s fund managers are committed to pushing for continuous Some of the challenges faced by improvement and professionalism in the the portfolio in 2009 were unprecedented. businesses in which they operate. The global financial crisis highlighted the
Local offices in Africa CDC’s presence in sub-Saharan Africa Number of companies Portfolio value (£m) Financial 156 services 196
Industry & 35 materials 73 24 ICT* 73 Consumer 21 goods & 31 services Energy & 17 utilities 88 17 Microfinance 4 16 Mining 68 More than 10 offices 13 Agribusiness 25 5-10 offices 2-4 offices 12 Infrastructure 69 One office 5 Healthcare 5
Cleaner 2 Technologies 8 * Information and communication technologies Chapter 3 – Regional reviews 33
Regional trends Terms of trade have not been badly affected in West Africa in 2009. This is A fund manager’s Southern Africa thanks largely to a good harvest and perspective Economies across Southern Africa were better oil price budgeting in both Nigeria badly affected at the start of 2009 by and Côte d’Ivoire. Most countries in the Tuninvest/Africinvest the collapse in commodity prices. When region remain food and oil importers, these started to recover in the second and have benefited from stabilised prices There were many challenging aspects to half of the year growth re-emerged. compared to 2008. 2009. A particular challenge was to meet However, consumer demand remains the project financing needs of portfolio weak, particularly in the South African East Africa companies, access to which has become retail sector. As a region, East Africa has been hit quite more difficult and/or expensive in a severely by the global financial crisis. number of African countries over the past The main political challenge in Southern In the aftermath, the Ugandan, Tanzanian year. An additional problem has been that Africa remains tackling inequalities by and Kenyan Shilling were all significantly access to bank financing (even very short improving the delivery of public services, devalued against the US dollar. CDC has term) became scarcer in many countries. whilst retaining the confidence of a significant presence in East Africa with Large distribution companies in particular financial markets. 70 portfolio companies and 7.7% of its have been forced to reduce the size of overall portfolio value held in Kenya, their orders. In turn, this had a negative West Africa Tanzania and Uganda. impact on most industrial companies Politics has added this year to the delayed which have witnessed a contraction effects of the global crisis, with Nigeria The year was a challenging one from of demand. risking a constitutional crisis given the other perspectives as well. Political absence of its president. This risk has tension increased in Kenya in the first The capacity of private equity teams to been magnified by the devaluation of half of the year and the government of provide their investee companies with the the Naira over the course of last year. national unity is perceived as less effective needed strategic guidance and support is Guinea, Niger and Guinea-Bissau have by investors. Rioting also occurred in a key driver of success during these experienced recent coups. Uganda. A severe drought has impacted difficult times. Our view is that teams on business operating environments, operating with a patient ‘hands-on’ 2010 is a year of elections in Côte d’Ivoire, magnified by the effects of poor land approach, with an emphasis on true value and Togo. The results of these will be management. Land degradation is a creation, will prevail over those seeking important in shaping foreign investment particular problem in the highlands of quick returns based on financial flows into the area. Security in the Niger Kenya, Tanzania and Uganda. scheming. With banks still suffering from Delta will continue to be a core issue for liquidity squeezes, we view this period as Nigeria. This stems from poverty and an opportunity to tap new markets and politics in the region as more stakeholders sectors emerging from the crisis and push for a greater share of oil revenues. make investments at good entry prices.
On the environmental front, the challenge is to convince portfolio companies of the continued importance of addressing environmental issues in spite of scarcer resources. The danger is that such issues might be treated as secondary in light of the problems posed by the financial crisis.
Packing picked flowers Accra Mall, Ghana Logistics operation 34 CDC Development Review 2009
Sub-Saharan Africa continued
Opportunities and sectors in draws the analogy to China: “China’s Key risks and management issues sub-Saharan Africa success story in reducing poverty through rapid and sustained growth is remarkable. CDC’s objective is to reach underserved CDC continues to seek out investment Large investments in infrastructure was a markets across sub-Saharan Africa by opportunities across sub-Saharan Africa key factor.”23 working with fund managers who can and in 2010 will look to focus on the successfully manage the risks of investing sectors discussed below. Fund managers specialising in in these challenging markets. Chapter 7 infrastructure can bring the expertise describes in more detail the challenges Agribusiness needed to help to tackle Africa’s of investing in low income countries and Developing the agricultural sector is a infrastructure deficit. A market-led markets. One of CDC’s objectives is to crucial ingredient in fostering economic approach, accompanied by strong attract greater levels of private capital growth in developing countries. Moreover, regulation, will attract private capital to Africa, a goal strongly promoted by it is a Millennium Development Goal to to sub-Saharan Africa. developing a track record of positive halve the proportion of people suffering commercial returns. from hunger between 1990 and 2015. SMEs Since over 60% of the population of Promoting the financing of SMEs remains Standards of corporate governance can sub-Saharan Africa lives in rural areas, an important part of CDC’s business. present a particular difficulty for African promoting sustainable agribusiness is vital Specialist private equity teams have fund managers and are a common to the region’s economic development. become more skilled in engaging with reason for them to screen out the SME sector across Africa and unsatisfactory investment opportunities. Much of sub-Saharan Africa has ideal more proficient in promoting best One measure of corporate governance dynamics for agribusiness with good operational practices. is Transparency International’s corruption temperature and climate, decent soils perception survey.24 This is a ‘survey and sufficient labour and water to make CDC is currently invested in Business of surveys’ based on 13 expert analyses intensive production possible. As an Partners International’s Kenya fund which of corporate governance and business asset class, agribusiness is substantially provides finance to Kenyan companies integrity issues worldwide. underdeveloped in Africa. Farm efficiency underserved by traditional financial is just 25% of the global average. institutions. The fund is a US$14.1m risk For sub-Saharan Africa, the results are Moreover, recent regulatory improvements capital fund that seeks to invest between particularly illuminating and exemplifies have also made investment in African US$50,000 and US$500,000 in promising the difficulties investors face. Botswana agribusiness more attractive to investors. SME ventures. finishes in 37th place, an encouraging result but certainly not the norm. South Infrastructure Real Estate Africa, Africa’s largest economy, is placed Africa has a huge infrastructure deficit CDC also finances real estate, typically in 55th place in the 2009 survey with compared with countries outside the through specialist fund managers. There Ghana located in 69th place. Many small continent. One in four Africans have is a shortage of long-term finance of first- economies fair far worse with Somalia no access to electricity and it takes class facilities across Africa, facilities (180th), Sudan (176th) and Chad (175th) two to three times longer to travel the which can attract further local and foreign the lowest ranked African nations. In same distance in Africa than in Asia. capital inflows. Moreover, by addressing general, larger nations fair better although Constructing roads, bridges, the shortage of entry level housing and Nigeria, the regions second largest telecommunication and power drawing attention to planning and economy, is in 130th place. Governance infrastructure creates new opportunities infrastructure provision, real estate is still a major issue across most countries for both individuals and businesses. development can become a magnet within sub-Saharan Africa. Obiageli Katryn Ezekwesili, the vice- for accelerating the development president of the World Bank in Africa of a local area.
Largest investment destinations Rankings of CDC’s largest investment by number of companies destinations in sub-Saharan Africa in Transparency International’s 2009 53 survey (rank out of 180) Rank Country 42 41 162 Democratic Republic of Congo 154 Côte d’Ivoire 146 Kenya 12 8 7 5 130 Nigeria 126 Tanzania Kenya South Nigeria Tanzania Côte Ghana Democratic Africa d’Ivoire Republic of Congo 69 Ghana 55 South Africa Chapter 3 – Regional reviews 35
Evaluations – high level results and in general successful at bringing about Key statistics from 2009 sub-Saharan analysis improvements in their portfolio evaluations companies. 90% saw improvements In 2009, CDC conducted evaluations into post investment although the difficulties ten funds investing predominantly in sub- of investing in sub-Saharan Africa are Financial performance Saharan Africa. Two of these evaluations also made apparent by the 81% of were final with the remainder being companies that had ESG issues at the The best performing fund showed a conducted roughly halfway through the time of investment. The most common net IRR of 29% in its final evaluation. funds’ investment periods. The funds issues were environmental with 73 The least well performing fund showed contained a total of 145 companies. companies experiencing some difficulties. a net Internal Rule of Return (IRR) of These were managed from a variety of Typical issues included dealing with 5.7% in its final evaluation. local offices with investment staff located wastewater, pollution and recycling. in Cameroon, Côte d’Ivoire, Kenya, Madagascar, Nigeria and South Africa. Two funds were marked as ‘below Economic performance expectations’ on ESG performance. In terms of development outcome, five In both cases it was noted that the fund 72% of portfolio companies showed of the funds were rated as ‘successful’ manager had complied with all the employment growth with 16,500 new overall with four rated as ‘satisfactory’. requisite regulations and guidelines, but jobs created. One fund was rated as ‘excellent’ on it was felt that the overall commitment to Only 10% of portfolio companies financial performance whilst four funds were ESG was below the high standards that decreased their number of workers, disappointing, three ‘below expectations’ CDC expects. CDC is working closely with 2,900 jobs lost. and one ‘unsatisfactory’. The fund rated with the managers of these funds to help ‘unsatisfactory’ had suffered a complete improve their processes and to ensure 75% of the portfolio companies write-down of an investment in a logistics that by the time final evaluations are experienced growth in turnover. company which comprised 32% of the made the ESG performance will have Only 10% saw a decrease. fund’s invested capital. markedly improved. 56% of portfolio companies demonstrated On economic performance rating, seven Private sector development performance growth in profitability as measured by funds were rated as ‘successful’ and the was far more positive. Two funds were EBITDA. 33% saw a decrease. remainder as ‘satisfactory’. 72% of rated ‘excellent’ and only one fund was companies in which CDC capital was rated less than ‘satisfactory’. One of the invested had seen an employment funds rated ‘excellent’, was a fund ESG performance increase over the investment period. instrumental in professionalising the private Fourteen companies had seen job losses. equity market in Africa and managed by Three fund managers were rated highly 56% of companies with comparable data African nationals. Moreover, portfolio in their ESG management systems. One had seen an increase in profitability over companies have been able to raise further was rated as low and two as medium. the investment period. A total of US$1.2bn external financing on the strength of the in taxes had been paid over the investment fund manager’s own investment. For the 77 portfolio companies that holding period by 61 companies that were rated for their ESG management reported this data. In total US$1.1bn was raised in third systems: party capital by the ten sub-Saharan > 60% were rated high ESG performance across the funds was funds evaluated by CDC and six of the > 32% were rated satisfactory varied. One fund was rated as ‘excellent’ funds had or were in the process of > 8% were rated poor whilst two funds were rated as ‘below raising successors. expectations’. CDC’s fund managers were Private sector development
US$1.1bn in third party capital was raised by the 10 funds evaluated. CDC contributed a total of US$540m to these funds, 32% of the total capital.
47% of the third party capital invested in these 10 funds was from commercial investors as opposed to Development Finance Institutions (DFIs).
Summary of CDC’s evaluation ratings of 10 African funds in 2009 Excellent Successful Satisfactory Below Unsatisfactory Poor Satisfactory expectations or better (%) Development outcome – 5 4 1 – – 90% Financial performance 1 4 1 3 1 – 60% Economic performance – 7 3 – – – 100% ESG performance 1 4 3 2 – – 80% Private sector development 2 5 2 1 – – 90%
CDC effectiveness 3 4 3 – – – 100% Added value 2 7 1 – – – 100% Catalytic* 2 3 3 – – – 100%
*Catalytic effect is not considered for funds where CDC has entered in the final close, hence the number of funds rated on catalytic effect is fewer than for the other performance measures. 36 CDC Development Review 2009 Regional reviews – Other regions CDC’s target is to make 75% of new investments in low income countries and to invest a minimum of 50% of capital in sub-Saharan Africa. CDC still has previous commitments though to two funds specifically concentrated on North Africa and nine focused on Latin America. Although CDC is not making further commitments in either region, it closely monitors its existing portfolio in both regions.
Portfolio overview in Egypt. In terms of portfolio value, the North Africa largest concentration is in Egypt with Both Latin America and North Africa are a total value of £41m. £91m CDC portfolio value relatively more prosperous than sub- Saharan Africa and South Asia. North Companies in which CDC’s capital is Africa is exclusively ‘middle income’ on invested in both regions employ over £26m invested in 2009 the World Bank’s poverty definition as are 20,000 people. These people are all countries in Latin America except Haiti employed across a wide range of and Cuba. industry sectors. In North Africa, CDC 2 funds under management is invested in five healthcare providers Although both regions have been affected and a further four companies working in by the global economic crisis, equity the ICT sector. In Latin America, financial 28 companies investment has continued. In North Africa, services and consumer goods are the Actis, Tuninvest and SGAM are CDC’s two sectors with the largest number of 23,000 people employed in primary fund managers. In 2009, Actis CDC’s portfolio companies with 17 and invested US$244m in CIB, Egypt’s leading 12 companies respectively. 25 portfolio companies private sector bank in order to help the which reported data in 2009 bank expand into supplying the retail US$209m in taxes were paid by the sector. In Costa Rica, Aureos recently 22 companies that reported data in North invested US$6.5m in ITS, a remote Africa. The majority of this amount is paid US$209m domestic taxes infrastructure management company. by a large telecommunications provider paid by the 22 companies The investment will allow the company in Algeria. US$301m is paid in taxes in which reported data to invest further in new technology. Latin America. These taxes contribute significantly to government revenues, CDC’s largest investment destination enabling investment in education, 4 countries with investments in Latin America is El Salvador with healthcare and other basic services. four companies and a total portfolio value of £24m. CDC is invested in From the analysis into ESG risk conducted 12 companies in Mexico and nine by CDC’s fund managers in 2009, six Latin America in Brazil. investments in Latin America and one in North Africa have been identified as of CDC is evenly invested across potentially high risk. CDC will monitor £73m CDC portfolio value four countries in North Africa with these investments carefully to ensure 11 investments in Tunisia, seven dangers are controlled and adequate in Morocco, six in Algeria and four systems are in place to mitigate risk. £18m invested in 2009
9 funds under management
57 companies CDC’s fund managers have investments CDC’s fund managers have investments in four countries in North Africa in 12 countries in Latin America 23,000 people employed in 29 portfolio companies which reported data in 2009
ARGENTINA US$301m domestic taxes BRAZIL paid by the 27 companies COLOMBIA which reported data ALGERIA COSTA RICA EGYPT ECUADOR 12 countries with MOROCCO EL SALVADOR investments TUNISIA GUATEMALA HAITI MEXICO PANAMA PERU ST. LUCIA
1–5 investments 6–14 investments Chapter 3 – Regional reviews 37
Regional trends Latin America Prospects for growth remain mixed A fund manager’s North Africa across Latin America in 2010. Brazil is perspective The global financial crisis was slow to the region’s biggest success story – reach North Africa and despite a decrease government stimulus measures resulted Aureos, Latin America in export earnings, the region did record in the stock market returning to near positive GDP growth over the year. Across September 2008 levels by the second half The main effect of the 2009 financial crisis North Africa, 2010 should be dominated of 2009. The 2010 Brazilian election will was that it led to a more consciously by the return to growth of trade with the be crucial to determining the future defensive approach to pipeline selection. EU, especially for Morocco which is direction of the economy although from Aureos focused on deals in sectors that making much progress towards a free an investor’s perspective, it is of low risk. were expected to withstand a slow or trade agreement. zero growth environment. We therefore Mexico’s economy by contrast has discarded many investments in sectors Domestic consumption across the region contracted badly in 2009, affected by a such as retail or discretionary spending, has remained high as has inter-regional strong dependence on the US markets, which would be affected by an economic trade. This has enabled stimulus as well as depressed oil prices and the growth decline. Investment efforts were packages in Egypt and elsewhere which, outbreak of swine flu. With the refocused on businesses providing whilst increasing budget deficits, have government lacking a comprehensive outsourcing services and other financial allowed increased investment in vital reform agenda, full recovery seems likely solutions to local SMEs and multinationals. infrastructure and services to continue. to be protracted. Our investment strategy continues to be New regulations in Algeria concerning In Andean South America, prospects for very similar, focusing on sectors that are foreign ownership of companies have economic growth look very promising, expected to continue to grow, driven made the country less attractive to especially in Ecuador and Peru. Growth primarily by local demand. The variable investors. Sectors that have been could be slowed by the severity of of a weaker, slower growing global particularly hard hit in 2009 include potential social protest, especially in environment is an additional factor taken the manufacturing and hydrocarbon Bolivia where the President is seeking into account when investments are industries. By contrast, the Tunisian to implement a new constitution. screened. Selective opportunities in IT, economy has remained strong and by outsourcing, financial services, consumer October 2009, had seen stock market From the private equity perspective, goods, homebuilding, health and increases of 41% over the course of CDC helped to pioneer the Andean education continue to be of interest. the year. market which is the most underdeveloped Opportunities for regional growth and in the region. CDC has backed Altra consolidation add to the attraction of any In Egypt, the political debate is heavily Capital, a pioneering and local fund opportunities identified in these sectors. influenced by uncertainty over who will manager. The Andean region is well suited succeed President Mubarak, now aged 81. to the modernising role of the private equity ESG challenges in the year have been Parliamentary elections this year may lead industry which can increase competitiveness typical of any other year and were not to social discontent, particularly in large and facilitate the professionalisation of affected by the extraordinary financial communities with high levels of family-run businesses. and economic events of 2009. Aureos unemployment. It is possible that the is actively involved in strengthening government’s current liberal economic governance challenges faced by several outlook will be constrained by broader of our family-owned businesses seeking social considerations. to transition to professionally run companies. On the social side we are implementing CDC made £26m of new investment corporate culture changes in companies in the region in 2009. which are experiencing a combination of rapid, international growth, as well as a transition to professionally run firms. Our portfolio companies during this difficult period have continued with their outreach programs demonstrating their direct commitment to the community. Finally, on the environmental side, our Colombia Largest investment destinations in Largest investment destinations in investment in the oil and gas services Latin America by portfolio value (£m) North Africa by portfolio value (£m) sector, Petrotiger, has been recognised locally for its health, safety, environment 24 41 and quality management practices.
19 28 14
6 5 10 2 4
El Salvador Mexico Brazil Columbia Argentina Costa Rica Egypt Algeria Tunisia Morocco 38 CDC Development Review 2009
Other Regions continued
Actis supported MEF in implementing Key data El-Rashidi El-Mizan (REM), world-class ESG management systems, Egypt particularly in respect to product safety Investment:1 £5m and quality: From closed family business Investment period: 2002-2007 to market leader in the • Appointed a dedicated Actis expert Sector: Agribusiness – food processing Egyptian confectionery to oversee the development of ESG Fund manager at exit: Actis systems. Employment:2 700 industry • Assisted in the implementation of the Cash returned: US$336m ISO management system, the OHSAS Cash multiple: 4.4x El-Rashidi El-Mizan is Egypt’s leading 18001 Health and Safety Management Gross IRR: 35.6% producer of Halawa and Tahina – two system and a new Hazard Analysis and traditional staple food products made Critical Control Points (HACCP) system. 1 £5m was invested by Actis/CDC. CDC’s investment in from sesame seeds. The company was • Established mechanisms to monitor Africa 1 Fund is US$350.1m; total fund size is US$350.1m. 2 2006. established in 1889, whilst its holding ESG systems and report back to the company is Middle East Food and Trade Board. (MEF). In 2000, MEF was acquired by • Built a new water recycling system Best Foods (before Best Foods at the main El-Rashidi El-Mizan plant, “Actis has demonstrated subsequent sale to Unilever) to substantially reducing the quantity serve as its entry platform in Egypt. of water used. invaluable support as a In 2002, CDC’s fund manager Actis value-adding investor in our acquired 65% of the equity through MEF was sold to Citadel Capital, a Cairo business. They have worked ordinary shares and an interest free based private equity firm. The sale shareholder loan, in the first management generated a cost multiple of 4.4 times on alongside myself and the buy-out in Egyptian history. investment and an IRR of 35.6%. The high team to grow the business sales price of 410m Egyptian pounds was A key aim for Actis was to transform MEF attributed to MEF’s excellent market aggressively and to adopt from a family business to a corporation: position and the quality of the business. international best practice By the time of exit MEF was a market across all business functions. • Actis’s ESG team conducted an leader, exporting to 25 countries with assessment of governance standards double the production capacity and Thanks to this partnership, and proposed an action plan to help double the product portfolio. REM has now completed its the business introduce world class best transition from being a closed practice. At MEF, Actis was able to encourage • A strong Board of directors was core product growth and the successful family business to being a assembled, incorporating former introduction of new value-added products. developed corporation with Best Foods and Unilever Executives. Production processes were completely • Experienced independent directors automated and world-class ESG institutional shareholders.” were allocated to specific business management systems were introduced. functions to coach managers. The success of Actis’ investment was such Mohamed El-Rashidi, • Financial reporting capabilities were that when the Principles for Responsible Chairman of El-Rashidi El-Mizan strengthened including mandating the Investment (UNPRI) initiative released a preparation of monthly dashboards by set of nine examples of how sound ESG the finance department. Actis also processes could maximise a company's provided corporate finance support potential returns, MEF was amongst to the management team when those included. evaluating acquisitions.
Manufacturing at REM Example of REM products: Staple foods Sectors in focus
Chapter Businesses of all sizes that span every industry sector have their role to play in fostering sustainable development and economic growth. Successful businesses create employment, generate taxes for domestic governments and offer new services and production capacity where it has not previously existed.
In this chapter we will look at a selection of sectors and how they contribute to economic growth and development. 40 CDC Development Review 2009 Chapter 4: Sectors in focus This year, CDC focuses on the role played by its portfolio of alternative investments, a label that covers microfinance, debt and infrastructure funds as well as co-investments alongside CDC’s existing fund managers. The chapter also focuses on the agribusiness, financial services and consumer sectors and shows how each of these can contribute to development.
Alternative investment particularly important in times when returns from equity investments are more Microfinance volatile. Over the course of the next few In addition to regional funds, CDC is also years, CDC is looking to increase its £26m CDC portfolio value committed to seven microfinance funds, a exposure to debt funds. specialist debt fund and a fund focused on global infrastructure. The funds, overseen Infrastructure by CDC’s alternatives team, often reach 55 MFIs individuals at the ‘bottom of the pyramid’, Infrastructure spans a range of industries, those underserved by mainstream private ranging from electricity generation and 36,000 employed in MFIs in equity.25 CDC is seeking to increase its distribution to transport and water services. exposure to debt funds. 41 companies reporting data The case for developing the sector is Microfinance powerful. A recent report by the World Bank’s Africa Development Series Forum US$51m taxes paid by the Microfinance institutions (MFIs) provide has found that Africa needs around 31 companies reporting data access to credit to the rural and urban US$93bn a year to address its infrastructure unbanked in developing countries. CDC needs. Infrastructure services in Africa are typically commits capital to microfinance twice as expensive as elsewhere, reflecting 66% of microfinance 26 investment vehicles (MIVs) which a lack of competition across the sector. borrowers are female subsequently invest in MFIs. The effects of transforming the sector are Microfinance promotes micro equally significant. The key finding of the 45% of microfinance entrepreneurship and enables people World Bank report was that infrastructure borrowers are rural subsisting at the ‘bottom of the pyramid’ is responsible for half of Africa’s recent to develop sustainable businesses. growth and the sector can contribute Women in particular are traditionally significantly more in the future. served by the microfinance industry. Co-investments Debt CDC has committed approximately Debt funding is an essential part of the US$110m to six co-investments in investee capital base for promising private sector fund portfolio companies. These include a businesses. Moreover debt funds can cleaner technologies electricity generator expand the depth of the capital markets and an Indian telecommunications in areas typically avoided by the private infrastructure company. Co-investments equity industry. This is in part due to the are valuable from a developmental less risky nature of providing debt finance. perspective as they allow a fund manager to close transactions that would not For investors, debt funding provides otherwise be completed. returns with a steadier cash flow, which is
CDC’s fund managers have investments in microfinance in 28 countries
Investments Chapter 4 – Sectors in focus 41
Microfinance review Microfinance remains a commercially Under its Investment Policy for 2009- viable investment opportunity which is A fund manager’s 2013, CDC will continue to support strongly aligned with CDC’s goals of high perspective pioneering investment efforts in the development impact. CDC’s investments microfinance sector with a focus on low include 55 different underlying MFIs, with India Financial Inclusion Fund income countries in sub-Saharan Africa a total portfolio value of £26m. CDC is The financial crisis had an immediate and South Asia. It will also support, where invested in these 55 MFIs through six impact on the availability of debt to MFIs, appropriate, existing microfinance microfinance equity funds and one local slowing their growth rates. This forced managers with their efforts to raise currency debt fund. Fifteen of the MFIs MFIs to cut capacity, reduce costs and further funds in CDC’s key geographies. in which CDC’s capital is invested are focus inwardly on their operational located in sub-Saharan Africa; 36 are performances. Credit quality deteriorated, CDC’s strategy for microfinance has been in Asia, with 17 microfinance institutions but the impact was less severe than to invest in greenfield and early expansion supported by CDC’s capital in India. anticipated and non performing loans were equity for commercial MFIs, in so doing CDC also supports two microfinance still under 2% of the portfolio. This provides committing over US$90m to microfinance institutions in Latin America, with a further evidence that the poor and their equity funds. Over 60% of CDC’s combined portfolio value of nearly £1m. enterprises are somewhat insulated from microfinance portfolio is focused on India. New investments by CDC’s fund the mainstream economy. Despite the The remainder of the portfolio has a global managers in microfinance institutions slowing down of growth rates, MFIs were orientation although we are targeting an amounted to £7m in 2009. still able to access some debt and equity increasing proportion for sub-Saharan funding from commercial investors. Africa in the future. In India, CDC’s microfinance portfolio navigated the financial crisis relatively well. One of the positive outcomes of the crisis In 2009, CDC collected data on the MFIs Although liquidity for MFIs was initially has been an unintended impact on the low which have received its support. Lok, an tightened, public banks are now lending to income housing sector. As real estate MIV based in India, has seen a growth of MFIs – recognition of the value of the asset prices began to fall and housing credit was over 1.1 million in clientele served by its class. Despite rapid growth in recent years, becoming expensive, developers, with MFIs over the past year. Advans, a broad- the percentage of clients in India at risk of large stocks of land and slowing demand based greenfield MIV with a focus on defaulting on loans has fallen from 2.9% in from traditional buyers and speculators, Africa, has seen staff numbers in its MFIs 2005 to 2.2% in 2008. Microfinance in India started to focus on developing low increase by nearly 400 with almost 30,000 currently serves 20 million people. The income housing projects. This also got new clients receiving loans. ShoreCap, market remains vast though with a potential very active support from the government, a global MIV, has seen customers of its pool of 120 million further families eligible with increased focus on improving the MFIs rise by 560,000 in the past year. for funding from MFIs. supply of housing stock for low income These achievements reflect the growing groups. Supply of low-cost homes is one global impact of the microfinance industry. In sub-Saharan Africa, microfinance as an of the big bottlenecks in resolving the asset class lacks a comparable degree of housing problem for the poor in India, CDC has also committed U$30m to a commercial recognition and funding. whilst the availability of micro-mortgages microfinance local currency debt fund that The number of potential customers is is the other. directly addresses the currency risks MFIs huge: of 300 million economically active face in relation to foreign debt funding. people in Africa, only 20 million have Seizing this opportunity and based on a CDC’s goal is to continue to support the access to formal financial services.27 year-long analysis we made India’s first microfinance sector, with a target of Numbers of microfinance borrowers investment in a micro-mortgage lender, committing up to US$120m in total capital have increased significantly in Africa from Micro Housing Finance Corporation. We to MIVs by 2011. 2.7 million in 2003 to 7.9 million in 2008 expect this investment to catalyse this according to data on the Microfinance industry, leading to a virtuous cycle of Investment Exchange (MIX) market.28 supply of low cost homes and availability of micro-mortgages for such home owners.
Number of MIVs by region Marguerite Robinson, a microfinance specialist,
4 5 1 Sub-Saharan Africa 17 (31%) describes the asset class as 2 India 17 (31%) 3 China 1 (2%) “small-scale financial services 4 Other Asia 18 (33%) 5 Latin America 2 (3%) for both credits and deposits 1 that are provided to people who farm or fish or herd; 3 2 operate small or micro- enterprises where goods are produced, recycled, repaired, or traded; provide services; work for wages or commissions; gain income from renting out small amounts of land, vehicles, draft animals, or machinery and tools; and to other individuals and local groups in developing countries, in both rural and urban areas”.29 42 CDC Development Review 2009
Sectors in focus continued
New opportunities and challenges Spandana Sphoorty governance structure as well as assisting In both India and sub-Saharan Africa, in senior management recruitment. Lok new microfinance opportunities exist: Financial Services Limited, has also played a key role in developing India Spandana’s business model and defining India the company’s growth and financing In India MIVs are exploring the possibility A microfinance institution strategies. Through an active board seat, of financing low-cost housing. The target driving a microfinance Lok continues to add value to Spandana clientele for such housing would be revolution playing a pivotal role bridging investors customers earning approximately and management. Spandana has grown US$200-500 a month. Other options to be one of the largest MFIs in India include diversifying existing financial India, with a population of over one billion, operating with a very lean cost structure products into areas of current low has a greater number of people living and charging lower rates of interest than exposure. This includes micro-insurance, under the poverty line than any other many other MFIs. healthcare and education. country in the world. Almost 40% of the rural population and 20% of the urban Over the course of 2009, Spandana Some challenges ahead including population lives in poverty. These continued to grow its loan book at a rate regulatory changes to Indian MFIs, individuals have limited access to finance of 90% year-on-year and its active particularly with respect to the level of from traditional financial institutions and borrower base which grew at 70%. foreign control, will impact on both the remain largely unbanked. Microfinance, The MFI is a profitable institution and in capital mix and investor mix going through its provision of micro-loans and 2009 had over 9,000 employees, paid forward. Also, the recent growth in India’s its emphasis on micro entrepreneurship, US$14m in tax and disbursed over three microfinance industry has been rapid and offers a potential way out of poverty. million micro-loans. this growth may prove unsustainable. Spandana Sphoorty is an Indian MFI Spandana Sphoorty is driving the Sub-Saharan Africa that operates 1,353 branches spanning revolution across India to broaden access Microfinance is currently centred in two 12 provinces in India. The target clientele to finance to those underserved by areas; in East and West Africa, particularly is the population segment known as the traditional banks. By financing local in Ghana. Microfinance in sub-Saharan ‘bottom of the pyramid’ – individuals entrepreneurship, Spandana provides Africa does not receive as much earning up to US$4,000 per annum. a sustainable route out of poverty. commercial investment as other regions. Spandana’s client profile of 94% female This is largely due to the fact that the and 55% rural borrowers is evidence of majority of MFIs operate as non- a reach beyond that of more traditional Key data governmental organisations (NGOs) and national and regional banks. are not commercial. It remains to be seen Investment:1 US$2.25m whether these can evolve a mentality that The micro-loans Spandana offers average Investment period: August 2007- present recognises the advantages of commercial US$237. The MFI offers a range of loan Sector: Microfinance sustainability as seen in Latin America and products – from the basic ‘general loan’ Fund manager: Lok Capital South Asia. targeting daily wage labourers and traders Employment:2 9,643 to more specific loans targeting micro Employment growth:3 78% businesses or specific sectors (such as Other challenges include attracting Number of borrowers:2 2.4 million commercial banks and foreign investors agriculture and dairy). Spandana is also 2 pioneering new products and services to Number of branches: 1,353 who to date have mostly provided finance Portfolio at risk – 30 days:2 0.51% to larger MFIs in Africa. Governance is its clients, recently launching a maternity hospital providing pre and post-natal care Taxes: 2 US$14.3m also weak across many sub-Saharan 2 MFIs. This is exacerbated by weak for low-income women. Female borrowers: 94% 2 regulation and a poor understanding Rural borrowers: 55% of the commercial microfinance market. Lok Capital, as an equity investor in Spandana, has had added operational 1 US$2.25m was invested by Lok I in 2007. CDC’s commitment Finally, there is often a shortage of to Lok I is US$4m; total fund size is US$22m. capable local and expatriate management value since its investment. The team has 2 As on December 2009. talent on the ground. helped develop the organisational and 3 December 2008 to December 2009.
Microfinance in Africa Clients of Spandana Sphoorty Chapter 4 – Sectors in focus 43
Debt funds CDC’s role Infrastructure CDC has already invested in several The financial crisis has contributed further debt funds, including Cordiant Capital’s CDC has committed US$500m to Actis to the scarcity of debt capital for companies International Finance Participation Trust Infrastructure Fund 2 and contributed and infrastructure projects in sub-Saharan (IFPT), that supplies syndicated ‘B’ loans US$130m of previously owned assets. Africa. CDC aims to address this market shared between the DFI community. The The fund, which has an experienced team failure by investing in debt funds. fund allows DFIs to attract commercial based in Singapore, Mumbai and London, capital to participate in co-financing seeks to develop transport and power One advantage of debt funds for CDC is projects through the sale of loan generation assets in emerging markets. the prospect of stable, long-term returns. participations. Over the next few years, CDC will look to CDC also hopes that investment in debt the Actis Infrastructure Fund to be at the funds will help to strengthen and deepen IFPT has a total fund size of US$370m forefront of its commitment to narrowing the debt capital markets in Africa resulting and investments spread over a broad the infrastructure gap between developed in the development of a yield curve. geography and range of industry sectors. and developing nations. This diversity allows risk to be minimised The provision of debt can play a and offers the broadest possible scope Songas, one of the assets transferred by significant role in developing the private for further investors to participate in CDC to Actis Infrastructure Fund 2, is one sector in emerging markets. Debt finance structured, market-priced loans to of the largest single investments in CDC’s can be directed more easily towards emerging markets. portfolio. Songas is the principal electricity underfunded areas of the economy or supplier to Dar es Salaam in Tanzania. assisting banks to expand into new Another investment in a debt vehicle It generates electricity from natural gas, geographies and markets. Moreover, is CDC’s US$75m commitment to the sourced through a 225km pipe from a gas finance in the form of guarantees allows Global Trade Liquidity Programme (GTLP). processing plant on Songo-Songo island. capital to be directed into riskier markets The GTLP is designed to help address Electricity produced by Songas is cost- where private equity is reluctant to invest. the shortage of trade finance across effective, clean and reliable. Catalysing underdeveloped markets developing countries. It stands as an of this sort is a primary reason why example of how CDC and the broader DFI A second power company within the development finance institutions (DFIs) community has responded to the credit portfolio is Umeme. Umeme is Uganda’s play an important part in private sector crisis in a manner that will enable trade principal power distribution company. development. to keep flowing. A large part of the power Umeme distributes is now generated from There are, however, obstacles to debt In developing economies as a whole, hydroelectricity. funds that require careful management. private sector lending is under-developed In sub-Saharan Africa in particular, there running at just 20% of total banking CDC has also invested in cleaner is currently neither a culture of using debt assets as opposed to 34% in India and technology infrastructure with a funds nor broad awareness of the role over 83% in the United Kingdom. If the commitment of €10m to Berkeley debt funds could play in providing capital right opportunity arises, CDC will seek Energy’s Renewable Energy Asia Fund for businesses and especially small and to invest in debt funds particularly in (REAF). REAF will support private sector medium sized enterprises (SMEs). sub-Saharan Africa where market liquidity companies aiming to supply the growing is low. demand for clean energy infrastructure in Asia. It will seek to make equity investments in renewable projects with a focus on wind, hydro, biomass and solar power.
Songas in Tanzania Infrastructure development project 44 CDC Development Review 2009
Sectors in focus continued
Agribusiness and forestry As an industry sector, agribusiness and £65m CDC portfolio value forestry have been important for CDC The majority of the population of the historically although the financial returns poorest countries in CDC’s investment have been mixed. universe live in areas where the £28m invested in 2009 agribusiness and forestry sectors assume CDC has observed that investment in an important role. Consequently the high-value agricultural goods in areas 40 portfolio companies sectors have significant developmental of fecund natural environments and the and environmental potential, in addition production and processing of staple to the prospective generation of attractive goods for local markets have been 114,000 employed in commercial returns. CDC is exploring successful in the past. Whilst CDC’s opportunities to increase its investments 30 companies which investments typically focus on commercial reported data in these sectors and decided to commit agribusiness, subsistence farmers can to a new sub-Saharan Africa forestry fund also benefit by tapping into the at the end of 2009. infrastructure and transportation US$315m taxes paid by improvements necessary for commercial Development case for CDC agribusiness to achieve financial success. the 25 companies which involvement in agribusiness reported data CDC is currently invested in two funds In developing countries, agribusiness and specific to the agribusiness sector; one estry is a vitally important source of for is focused on Africa, the other on India. income and employment. Indeed, in the In 2009, CDC decided to commit to a poorest countries, the sector creates up sub-Saharan forestry fund in order to to 34% of GDP and maintains as much target this specific asset class. as 64% of the working population in employment.30 Agribusiness covers CDC’s current portfolio in agribusiness opportunities ranging from crop and spans 40 companies and accounts for livestock production through to 4.6% of CDC’s portfolio value. The main processing, storage, distribution investment destinations include sub- and marketing. Saharan Africa where CDC is invested in a total of 13 agribusiness ventures, Developing agribusiness provides China with eight investments, India with investors with the opportunity to foster six investments, and Indonesia and sustainable growth in developing Tunisia with three investments countries. In sub-Saharan Africa for respectively. CDC’s portfolio companies instance, over 60% of the population live are involved in all parts of the agribusiness in rural areas and most are dependent on food chain from crop production through agriculture for their livelihoods, often to processing and marketing. through subsistence means. Moreover, with the global population predicted to There are currently 114,000 people reach nine billion by 2050, demands employed across CDC’s investments on the sector are certain to increase. in agribusiness. The large number of In Africa, this provides a considerable employees is evidence of the high opportunity – a young population, labour intensity typical of the sector. underdeveloped infrastructure, fertile soils Nonetheless, large scale ventures can and scope for improving the efficiency of be successful, something evident from production means agribusiness has vast the US$315m paid in local taxes by potential within the region. the 25 companies reporting such data in 2009.
CDC’s fund managers have investments in agribusiness in 18 countries
Investments Chapter 4 – Sectors in focus 45
Challenges and risks The GEF Africa Sustainable therefore represented an opportunity to Forestry Fund reach low-income, rural populations with Agribusiness and forestry face specific few other opportunities for sustainable challenges that impact the potential In early 2010, CDC approved US$50m economic growth. returns expected from investment across to a sustainable forestry fund focused on the sector. Challenges specific to sub-Saharan Africa (‘GASF’). GASF was Managing forestry projects is challenging agribusiness include inclement and severe the outcome of a request for proposals in Africa. According to the African Forestry weather, vulnerability to crop diseases issued by CDC in December 2008. CDC and Wildlife Commission, Africa had the and changes in market and dietary trends. identifies forestry as a sector which was highest frequency in 2006 of forest fires. Long term climate change will likely have short of capital, but with significant There is also a shortage of managerial an impact on growing conditions in many development impact. Financial prospects skills. Lastly, many local communities regions and the sector will be forced to look sound as evidenced by the findings directly depend on the land for consider new products and innovations. of a consultancy report which had posited subsistence livelihoods. To the that lower income countries in Africa had a experienced fund manager though, such The international commodity markets comparative advantage in the production issues provide opportunities to add to the in primary products are also currently of timber. Forestry as an asset-class offers value chain for forestry projects and help relatively volatile and many observers the prospect of consistent long-term assist the development of local transport expect this to persist. returns. The timber produced can be used infrastructure and processing, harvesting as both an export commodity and for and marketing potential. Moreover, investments in agribusiness local manufacturing and housing and forestry often assume a political infrastructure. Research produced by Forum for the dimension due to the sensitivity of the Future has indicated that forestry funds question of land ownership in many Ecological benefits potentially arise are able to achieve internal rates of return developing countries. In Africa for as a side-effect of sustainable forest in the region of 10-13% across the sector. instance, up to 95% of forest land is management. Benefits include the With the necessary commercial state-owned under government prospect of reducing carbon emissions, background therefore, CDC expects a concessions, an added complexity protection against soil erosion and the specialist fund manager to achieve when undertaking business in the sector. preservation of bio-diversity. The potential returns at this level and by so doing, to harness additional capital from carbon attempt to foster the potential of what A consequence of the recent financial sequestration and trading has recently is a relatively undermanaged resource crisis is a worrying trend of protectionist made the sector more attractive in many African countries. policies being levied by high-income to investors. countries against developing countries. Despite this, CDC recognises that the Although the forestry sector has sector remains of immense developed significantly in Asia and the developmental value. Americas in recent years, Africa remained underrepresented. This is in spite of considerable natural advantages offered by certain areas of the continent for sustainable forestry. These include high average temperatures, decent rainfall, favourable growing conditions and amongst the lowest plantation establishment and harvesting costs of any region in the world. With CDC’s investment policy directed specifically at sub-Saharan Africa, a forestry fund
Number of companies by region Portfolio value by region
6 5 6 1 Sub-Saharan Africa 13 (32%) 1 Sub-Saharan Africa £25m 2 North Africa 5 (13%) 5 2 North Africa £3m 3 India 6 (15%) 3 India £4m 4 China 8 (20%) 4 China £21m 4 5 Other Asia 7 (17%) 4 5 Other Asia £11m 6 Latin America 1 (3%) 6 Latin America £1m 1
3 1 2 2 3 46 CDC Development Review 2009
Sectors in focus continued
Forestry investments require long term financing from Finnfund. Since 1992, for local businesses and by financing support and input. An example of such an a total of US$25.4m has been invested in infrastructure developments for the investment in CDC’s portfolio is Kilombero KVTC by CDC. Some sections of the surrounding community. Villages in Valley Teak Company (KVTC), described 7,800ha of planted teak are now the Kilombero and Ulanga districts in detail below. sufficiently mature for clear-fell harvesting are encouraged to participate in the to be undertaken, supported by company’s operations through a village commercial thinning from younger contract scheme. KVTC has also made KVTC, Tanzania plantation compartments, which are significant donations to local institutions, A sustainable teak processed in KVTC’s on-site sawmill. recently giving TZS28m (US$21,000) to a scheme promoting the establishment of plantation and forestry KVTC has been developed and operates local classrooms. business in rural Tanzania to the highest environmental standards and industry best practice. The company KVTC completed a state-of-the-art The establishment of a sustainable conducts extensive biodiversity and sawmill in 2009 as part of its longstanding forestry business is a challenging task topography surveys prior to undertaking aim to process the trees in the same under any circumstances, but especially any planting activity. To date less than region in which they were grown. 150 so when it is a greenfield project. This 30% of the land has been planted with local people were employed during the was precisely the task undertaken at the remainder having been set aside for nine month construction period and the Kilombero Valley Teak Company (KVTC), conservation and environmental completed facility now employs 120 which first received funding from CDC protection. KVTC has used a ‘mosaic’ people, 70% of whom are local. These in 1992 to finance the establishment of style plantation scheme across its four individuals have the chance to gain a world-class sustainable teak plantation sites, so as to ensure that animal valuable new forestry processing skills in the Kilombero region of Tanzania. The migratory pathways are undisturbed. including planing, finger jointing and business has only recently begun to In addition, the layout maintains buffer moulding; this will provide benefits for produce revenues; its sawmill began zones to protect local waterways and the the community in the future. processing in 2009. indigenous evergreen forests. As a result of its efforts, KVTC attained ISO 14001 KVTC’s new mill will also process teak KVTC is located inland in Southern accreditation in 2004. logs bought from local smallholders Tanzania. The region is one of Tanzania’s and outgrowers and some sustainably poorest with few established industries KVTC has brought substantial benefits harvested natural forest logs. KVTC and a chronic lack of employment to the local community. It is the largest has made significant progress in fulfilling opportunities for the local population. employer in the local area with around its aim of becoming a sustainable KVTC’s objective of developing a profitable 250 permanent employees. In addition to forestry operation. forestry business including primary and direct employment, the company provides processing operations has created an additional 700 jobs through local Key data considerable employment in the area. contractors and the company’s outgrower scheme. Through this scheme, KVTC Investment:1 US$25.4m CDC invested in KVTC as sole supports the plantings of small scale teak Investment period: December 1992- shareholder following a joint feasibility growers and provides technical present assistance and advice until the trees are study with the Tanzanian government. Sector: Agribusiness – Forestry fully established. The aim is to reach a Following the feasibility study, KVTC was Fund manager: Actis first harvest after 15 years and generate granted title to over 28,000 hectares (ha) Employment: 250 of land in the Kilombero and Ulanga valley additional revenues for the local population. districts. Actis took over management of 1 Total of US$25.4m was invested by CDC and managed CDC’s investment in 2004 and has by Actis. CDC’s investment in Actis Agribusiness Fund completed subsequent rounds of funding The company furthers its community US$92.7m; total fund size is US$92.7m (100% CDC). in the company, including debt and equity impact through the support it provides
Managing teak trees The tree nursery at KVTC Chapter 4 – Sectors in focus 47
Financial services CDC’s portfolio in banking is typified by its portfolio in India where many of the banks £278m CDC portfolio value Financial institutions represent 19.7% in which CDC’s capital is invested are of CDC’s portfolio and span CDC’s entire regional or even sub-regional. One investment universe. The global financial £132m invested in 2009 example is the Catholic Syrian bank in crisis has impacted financial service which CDC is invested through AIF companies world-wide. Despite the Capital. Having received equity 206 portfolio companies challenges faced by the financial services investment, this bank has expanded its sector, it is worth remembering why number of branches within South India. the sector is important in generating The overall ethos of the bank, focused 96,000 employed in economic growth and building a route on maintaining traditional relationships out of poverty. 151 companies which between bank and client, has remained very much the same. This benefits the reported data Why develop the financial services bank’s local, often rural, clientele who sector? wish to save and use a bank which they US$736m taxes paid by feel they know personally and trust. Banks The global financial services sector has of this type are also more likely to target the 71 companies which been under severe pressure in 2009 as clients of the so-called ‘missing middle’ reported data a consequence of the financial crisis and underserved by larger banks and the resulting scrutiny of capital structures microfinance institutions. and lending practices. The crisis has not affected all banks equally. Many emerging A second benefit offered by private equity market banks followed a more traditional investment lies in the field of corporate banking philosophy and were relatively governance. Whilst barriers to unexposed to the ‘toxic assets’ and establishing a bank are relatively low capital leverage behind the crisis in in much of South Asia, expertise in American and European banking. negotiating and managing the business in an industry dominated by larger national CDC’s fund managers typically invest banks is often lacking. Private equity in regional banks with a local, lower-middle offers a solution to this problem, income customer base. Such institutions typically through the fund manager’s fuel local economic growth by allocating representatives serving on the Board capital to people underserved by of directors of the banks, helping instil international or, more typically, national governance best practices and banks. Although it is microfinance that appropriate checks and balances. tends to focus on the very poorest in These practices can also help the society, studies suggest that the bank’s expansion plans as well. deepening of the whole financial services sector leads to higher rates of capital Financial services is the single largest accumulation and higher levels of per sector by value in CDC’s portfolio. Sub- capita income. Saharan Africa represents 71% of CDC’s portfolio value in financial services with It is envisaged that CDC’s investments 13% in North Africa and 13% in Asia. in the sector will enable more people to CDC’s investment in the sector spans benefit from access to credit where it was therefore its entire investment universe previously unavailable. By providing credit and although the sector has been for productive local enterprises and pressurised in 2009, CDC expects that secure savings and insurance facilities, it will continue to prove successful. the financial services industry in emerging markets can stimulate poverty reduction.
CDC’s fund managers have investments in financial services in 30 countries
Investments 48 CDC Development Review 2009
Sectors in focus continued
The impact of the financial crisis in the are opening up to the financial sector. A second example of a challenge posed emerging markets An example of this is Vietnam, where by the financial crisis to the financial the financial sector now welcomes foreign sector is exemplified by Nigeria in 2009. A significant consequence of the financial investment. Although foreign investors are Prior to the crisis, many leading Nigerian crisis was a broad loss of confidence in not permitted to obtain majority positions, banks lent heavily to their national oil and how financial institutions function, the they are able to acquire significant gas sector. When the market turned and effects of which will continue to be felt minority stakes in a manner that is seen share prices in these companies fell, for some time. Insight can be drawn elsewhere in Asia. many Nigerian banks concealed the risk from Foreign Direct Investment (FDI) of defaults on these, often large, loans. flows directed into emerging markets.31 Current challenges and risks These flows increased to both Africa and The findings of an audit by Nigeria’s Asia throughout 2008 and even increased Globally, the effects of the financial crisis central bank revealed the scale of the in the quarterly comparison in the first will continue to be felt at all levels of the problem and in addition, a trend of quarter of 2009. Since then pledged FDI financial services industry which will be favourable loans being offered to to emerging markets has fallen significantly. more heavily scrutinised. Two nations will associates of many of the banks’ be used as cases to illustrate the point. executives. Nine CEOs have been Another consequence of the crisis is implicated and a scandal has cast a an increasing reluctance on the part of The first is India which saw high credit shadow over the entire sector of the many international banks to follow the growth in the period up to 2008 due to Nigerian economy. models of HSBC and Standard Chartered lenient lending standards. As an industry in building their market presence. This portfolio, loans books from Indian banks Nigeria’s crisis may have a positive lack of capital for banks will make the role are comprised roughly as follows; 56% outcome. Nigeria recognises the of private equity increasingly important in are corporate, 23% retail, 12% agricultural necessity of a more transparent and stimulating growth at financial institutions and 9% small scale industry.32 In the future, better managed financial sector. DFIs, by providing capital for growth and there is an increased risk that these assets through their fund managers, with their expansion of smaller banks. Maintaining face a far greater likelihood of becoming experience of improving corporate this capital will be vital for the sector’s non-performing. governance practices will have an future development. important role to play in engendering It is the loans to companies of all sizes such a change. Fortunately, there is optimism that fund that are likely to suffer most. This is due managers will continue to invest in to the cyclical decline in some Indian financial services. The main reason is that business, especially export businesses local and sub-regional banks value the which are affected by protectionism and strengthened governance that private decreasing demand overseas. This equity brings, which in turn serves to includes auto-components, jewellery attract and instil confidence amongst its and the textiles sector. local clients and grows its customer base. Coupled with an unusually severe Improving governance can also attract monsoon in India, a particularly vulnerable further investment in a bank. An example category of income group served by the of this is provided by Centurion Bank in Indian financials sector has been placed India which received investment from under increasing pressure. CDC’s fund manager, IDFC, in 2006. After building its distribution reach, the bank Over the short to medium term, India’s was merged with HDFC which wanted regional banks will also face increasing to strengthen its own retail distribution pressure as the risk of non-performing network, particularly well served by or delinquent assets increases. Private Centurion Bank. equity can help such banks fulfil their growth objectives in the case of A further reason for optimism across alternative funding not being available. the financial sector is that new markets
Number of companies by region Portfolio value by region “African banks are amongst the healthier financial companies anywhere in the 6 1 Sub-Saharan Africa 156 (76%) 3 4 1 Sub-Saharan Africa £196m 5 2 North Africa 3 (1%) 2 North Africa £35m 4 3 India 12 (6%) 3 Asia £37m world, having been relatively 3 4 China 3 (2%) 2 4 Latin America £10m shielded from the toxic assets 2 5 Other Asia 15 (7%) 1 6 Latin America 17 (8%) that are now laying waste to 1 U.S. and European financial institutions.”
E.B. Kapstein, Foreign Affairs, July/August 2009 Chapter 4 – Sectors in focus 49
Consumer Investment from fund managers can help local companies realise opportunities £220m CDC portfolio value Income levels and expenditure in available in the consumer sector. Means developing countries have been rising of doing this include financing a company £43m invested in 2009 over the past decade. 16% of CDC’s to expand its share of the domestic portfolio is invested in businesses market, extending distribution networks managed by entrepreneurs seeking to and by helping management to become 121 portfolio companies meet rising consumer demand. The more professional. This in turn increases projects in which CDC is invested are local production and reduces dependence varied, ranging from SMEs to fast moving on imported commodities. Building up the 184,000 employed in consumer good companies (FMCG) to consumer sector in this way therefore retail developments. 94 companies which creates the conditions for economic reported data growth, which in turn reduces poverty. The development case Moreover, the informal sector can also US$325m taxes paid by The consumer sector spans a variety of benefit from the impact of developing different sub-sectors that fall under the the formal consumer sector. A retail the 80 companies which generic label ‘consumer’. These include development for instance can attract local reported data retail businesses (from SMEs to FMCGs retailers and SMEs to the vicinity where to large retail developments) but also they know consumers will be. Jobs are hotels, tourism, restaurants, media created not just as retail staff within the and travel. development itself but also in the fields of maintenance, security and logistics. Income levels and consumer demand have been increasing in developing CDC’s portfolio in consumer nations. Indeed, the number of households with a nominal disposable The consumer sector is an important one income of over US$5,000 has doubled for CDC with a total portfolio value of from 217 million in 2003 to 500 million in £220m and new investments totalling 2008.33 Even consumers with low incomes £43m in 2009. The number of companies often have discretionary income, as indicates that CDC is invested in many witnessed by the mobile phone revolution small-scale consumer businesses as well in Africa where subscribers across the as larger projects. An example of a fund continent rose from 36 million in 2003 manager specialising in such investments to 224 million in 2008. Supplying this is GroFin, discussed on page 50. demand presents many interesting opportunities for investors. CDC’s investments in the consumer sector are spread across 28 countries. Growth in the consumer sector benefits CDC backs 31 consumer projects in in part from the rapidly rising number of China, 27 in India and eight in South middle class households and youth in Africa through its fund managers. developing nations. ‘Middle class’ here should not be equated though with the 184,000 people are employed in the image of the consumer sector in high 94 companies reporting employment income countries. Much consumer numbers in the consumer goods and expenditure in emerging markets centres services industry. There is a heavy on access to very basic products – soap, informal side to work in this sector and textiles, stationery and food. so one would expect broader economic impact beyond what can be measured here. This is illustrated by CDC’s investment in the Accra Mall, also discussed on page 50.
CDC’s fund managers have investments in consumer goods and services in 28 countries
Investments 50 CDC Development Review 2009
Sectors in focus continued
Below are two examples of investment in Kampala. GroFin provided guidance Businesses in Accra Mall generated an opportunities in the consumer sector. on starting and sustaining this business. estimated US$4.3m in sales tax for the It also provided finance to enable both Ghanaian government in 2008. It is the completion of the initial project and projected that taxes, rates and fees GroFin East Africa an additional loan for a further three floors. of US$60m will be accrued from retail Developing the SME sector The project has created jobs for 150 tenants over a ten year period. construction workers and will provide in East Africa 16 full time jobs within the building upon Actis managed the entire development completion. Upon exit, GroFin realised of the Mall from concept to completion. CDC’s capital is used to provide growth an internal rate of return of 18% upon Actis has developed sustainability capital to SME funds which invest heavily the first loan and 22% on the second. guidelines for real estate funds and in the consumer sector. One such fund provided these guidelines to the Mall’s is GroFin East Africa, which has provided designers and builders. The guidelines a combination of finance and business follow international best practice and support to a total of 48 companies, nearly Accra Mall, Ghana include measures to increase the energy 30% of which are in the wholesale and efficiency of the building. Actis has also retail sectors. Other companies which Increasing access to goods, developed comprehensive health and received support include hostels and providing jobs and safety guidelines, specifically designed restaurants. GroFin’s approach is to work generating taxes for real estate investments in emerging closely with African entrepreneurs to markets. formalise their businesses and assist them Accra Mall was officially opened in July to increase their share of the domestic Following the initial success of the 2008 by the Actis Africa Real Estate Fund market. This translates into social benefits Accra Mall expansion, there are plans and is Ghana’s first and only Grade-A such as job creation, attesting to the belief to increase the space within the retail development. It consists of 19,000 that SMEs can serve as a powerful engine development, introducing new companies square metres of lettable space, over an of economic growth. to Ghana’s formal retail sector and 11 acre site and has parking for 800 cars. generating further tax revenues for Construction of the development took two Two examples of GroFin’s investment in the Ghanaian government. years. At the peak of construction over the consumer sector are the Join Hands 700 people were employed. Association in Rwanda and the Nana Key data1 Hostel in Uganda. The development is 99% let with 2 69 retailers, including major banks, Investment: US$16.2m The Join Hands Association is a bakery pharmacies, department stores and a Investment period: 2006-present with 13 staff located in Kigali. The company cinema. Investment in shopping centres Sector: Real Estate Management and supplies good quality bread to retail can have significant positive social and Development resellers. GroFin’s investment of US$50,000 economic impacts, both direct and indirect. Fund manager: Actis, Africa Real Estate in 2008 was matched by a further investment of the same amount by Banque Employment: 900 (direct); 300 (indirect) Business activity is increasing and Commerciale du Rwanda. In addition to its Turnover: US$4.7m stimulating further growth for the local 3 provision of finance, GroFin has worked Turnover growth: 1003% community through additional job creation with the company’s management to EBITDA: US$2.2m and contracts and increased knowledge implement training on hygiene, safe use Taxes paid: Tax exempt for 5 years. passed onto local suppliers. Some of equipment and efficient waste disposal. US$4.3m in sales tax from businesses in the Mall are new to Ghana By the end of 2008, the company had retail tenants3 and provide access to products which been admitted into the association of previously were either unavailable locally Kigali bakers, an achievement likely to 1 From year-end 2008, except for when stated otherwise. or prohibitively expensive. Contracts for add to its success. 2 US$16.2m has been invested by Actis to date. CDC’s cleaning, security and maintenance have investment in Actis Africa Real Estate Fund is US$154m. been awarded to local suppliers, thereby Total fund size is US$154m (100% CDC). Nana Hostel provides safe, clean and 3 2007-08. providing the local community with modern accommodation to 1,000 students further employment and income. attending Makerere University, the largest
Join Hands Association Bakery Nana Hostel in Kampala Initiatives taken in 2009
Chapter
CDC aims to be a leader in promoting responsible and sustainable investment in emerging markets. As part of this, CDC has commissioned guidance material to help its fund managers on issues that have significant bearing. Two such initiatives in 2009 included a climate change study and a study of issues relating to gender and gender inequality.
CDC has also updated its Toolkit for fund managers in order to demonstrate how successful management of ESG issues can add value to growing 5 businesses. 52 CDC Development Review 2009 Chapter 5: Initiatives taken in 2009 CDC aims to be a leader in promoting responsible and sustainable initiatives in the businesses backed by its fund managers. In 2009, CDC commissioned guidance material to help its fund managers on both climate change and issues relating to gender. The updated toolkit will provide fund managers with an improved set of tools and frameworks to address challenges at all stages of the investment process. Climate change The types of risk that climate change Opportunities arising out of climate presents to businesses vary between change CDC’s response industry sectors and locations. Certain Climate change is not just a risk to Recognising that climate change is themes can be highlighted to suggest businesses. Proactive management can a pressing and immediate issue in all how climate change can impact less also exploit opportunities for corporate markets, CDC decided to produce economically developed countries. growth arising from the new circumstances. guidance to help educate both its fund managers and their portfolio companies Physical risks – The most frequently Innovative product design – Opportunities about climate change. The guidance sets stated example is the increased risk of may arise for new product lines that can out the opportunities presented by climate extreme weather. The World Bank has take advantage of a changed competitive change as well as the risks. produced a list of countries most at risk environment. Consumer preference may of climate disaster: switch to low carbon products. To produce its guidance, CDC turned to Forum for the Future for assistance. • Drought – Malawi, Ethiopia, Bangladesh New markets – New markets can open Forum for the Future is a sustainable • Flood – Bangladesh, China, India up as a result of climate change. One development charity that works with both • Storm – Philippines, Bangladesh, example is the clean energy market which business and public sector bodies to Madagascar is expected to grow from US$77bn in devise sustainable strategies and new • Coastal flooding – low-lying islands, 2007 to over US$254bn in 2017.34 products and services. Vietnam, Egypt • Agriculture – Sudan, Senegal, Zimbabwe The result was CDC’s new climate change “In order to increase adaptive guidance for fund managers. Some of the All the countries listed here except China, tools resulting from this survey are Egypt and the Philippines are low income capacity to meet these explored overleaf. countries, which makes them especially challenges, development vulnerable due to a lack of a budgetary agencies need to continue to Climate change risks capacity to respond. Climate change is already starting to change support developing countries the competitive environment in which Operating costs – These will rise. in the principles of good companies operate. A Carbon Disclosure Businesses might experience effects such economic policy. This will Project report surveying 500 leading firms as disruption to their supply chain and across a range of industries has found that issues relating to water availability. require processes to over 80% believe that climate change will integrate climate issues into present some sort of commercial risk. This Regulatory risks – New regulation will economic planning and the risk will in turn transform the competitive have impact on businesses. This will environment in which companies operate. be influenced by consumer and political budget process.” pressure, as well as demands for innovation and new products. Source: DFID (2004).35
Decision tree to assess climate change risk
Does the organisation have significant emissions? No
Could climate change Is there an immediate significantly impact Yes threat based upon current business value for this climate change Yes organisation/project? conventions?
Yes No No Are the organisation’s Will mitigating activities Is high value at stake if the operations,markets or supply require substantial wrong decision is made? chains based in a location investment (financial or particularly vulnerable to managerial), upfront or climate change? over a long period of time?
No Yes No Yes High regulatory risk Low climate risk Medium climate risk High climate risk Additional reporting Climate change impacts Ensure appropriate risk Detailed assessment to requirements in line with are low risk for this monitoring in place, with understand mitigating actions IFC recommendations investment interim assessment and management risk Chapter 5 – Initiatives taken in 2009 53
Carbon credits Tool Three: Sector risks and opportunities Carbon markets may provide potential – Whilst all sectors are at risk from Dalmia Cement, India savings for companies whose products climate change, some sectors are more can result in greenhouse gas reductions. vulnerable than others. Moreover, different Energy efficiency delivers Under the Clean Development opportunities for business development emissions and cost savings Mechanism (CDM), countries can meet exist in different industry sectors. This tool emissions reductions targets by trading discusses and categorises each industry for Dalmia Cement, India credits. These credits are called Certified sector by the type of dangers and Emissions Reductions (CERs). opportunities arising in each. India is the second largest producer of cement in the world (after China). The guidance material Tool 4: Assessing location risk and Cement production is an energy intensive The material produced for CDC by Forum opportunity – Similarly to industry groups, process, contributing 5% to total global for the Future provides five tools to enable different regions and countries will also greenhouse gas emissions. The cement the risks of greenhouse gas emissions be affected by climate change in different sector in China and India is growing (GHG) to be determined, monitored and ways. This tool guides a fund manager in rapidly and greenhouse gas emissions effectively reported. By following analyses thinking through the potential impacts of from the sector are predicted to rise. of this type, fund managers will be able geography on both the company as well to assess and implement suitable as its supply chain. Dalmia Cement is a leading cement reduction targets. producer in South India, with a current Tool 5: Creating opportunities through capacity of 6.5 million tonnes of cement Tool One: Questions for fund managers to the carbon market – This tool attempts per year. In order to drive down emissions ask of investee companies – This is to demystify the carbon market and from its operations Dalmia has worked to designed to help fund managers consider present fund managers with an idea of improve the energy efficiency of its the risks and opportunities that may how the carbon market works and how production processes: impact on a particular company as a to seek funding. result of climate change. It also considers • In 2009, their Dalmiapuram unit has whether a company should report to The guidance document produced for become self reliant in power, with 25% investors on the nature of applicable CDC aims to raise relevant issues related of the energy (16.5 MW) supplied by a climate change risks. to climate change and advise on how the wind farm; investment industry should react. The full • Across their operations Dalmia has Tool Two: Monitoring and reporting – text is available on CDC’s website. reduced power consumption per tonne This provides an illustration of how a fund of cement; manager can report the risks of climate Next steps • Increasing the percentage of fly ash change to CDC. It also suggests further In 2010, CDC will work with its fund used in manufacturing decreases tools a fund manager can use to calculate managers and assess which portfolio limestone calcinations, so reducing a company’s emissions in tonnes of companies are likely to be those producing process emissions. carbon per year. Above 100,000 tonnes more than 100,000 tonnes in carbon carbon dioxide equivalent is to be equivalent emissions per annum. Having These initiatives have led to lower costs, regarded as high and should be closely identified high risk investments, CDC will whilst making Dalmia one of the cleanest monitored. CDC recognises the value of help fund managers begin to reduce cement producers in India, when the Carbon Disclosure Project (CDP) carbon emissions in portfolio companies. measured by emissions per tonne of reporting standards in conjunction with production. Dalmia was the recipient of International Standards Organisation (ISO) CDC will also increase awareness of new the Greentech Environmental Excellence 14064/5 series for assessing tonnes of business opportunities that might result Award in 2008 in recognition of these carbon produced per year. from climate change and assist fund achievements. managers where possible with opportunities presented by the carbon market.
Coal mining is a heavy carbon emitter Songas – a CDC-backed gas power Electricity transmission station in Tanzania 54 CDC Development Review 2009
Initiatives taken in 2009 continued
“We take another step fund of a major bank in South Africa were Gender study key findings women. In Uganda, women control only No one gender equality policy blueprint towards globalising social 9% of the available credit, declining to will fit all companies and projects. The progress when we champion 1% in rural areas. In Bangladesh, women size of the company and the sector in gender equality as a matter remain marginalised in the formal banking which it operates will determine to a large sector – their share of the formal credit extent what kinds of gender equality of rights and social justice, market is a meagre 1.8%. considerations would be applicable. as well as efficiency and good business sense.” DFI collaboration in commissioning Local cultural contexts and practices and of gender study national legislative frameworks show It is recognised that best practice significant differences. For example, Juan Somavía, International Labour guidelines on gender issues in the in Indonesia, women have traditionally Organization (ILO) Director-General emerging markets are underdeveloped. dominated the small informal business This presented CDC with an opportunity sector. In Tanzania, clerical or to gain a clearer understanding of gender administrative positions are more typical. Gender equality issues across CDC’s portfolio and also to This shapes what gender equality act as an industry leader in providing best considerations can be easily supported The need for change practice guidelines to direct investors and and promoted and what issues will be CDC recognises that most of the poorest fund managers. CDC therefore decided to harder to tackle. While women are people in the world are women, in part conduct a gender study jointly with other employed across a wide range of because of the gender discrimination they Development Finance Institutions (DFIs) companies and sectors only very few face. Women in developing countries are to establish practical guidelines to inform of these have an explicit gender policy disproportionately under-presented in investors in the emerging markets. and do not gather any gender related formal employment. When employed, A parallel objective was to establish data or information beyond the number women often get paid less for the same a practical tool to inform portfolio of women and men employed. jobs compared to men. Frequently, companies of measures that could be women’s wages go directly to a husband taken to improve their gender as well The business case for gender equality or father. as business performance. Empirical studies have demonstrated that gender equality and equal opportunity Available data shows an increasing FMO (the Dutch DFI), the International make sound economic sense. The recent feminisation of poverty.36 Women earn Finance Corporation (IFC), Norfund (the Global Reporting Initiative/IFC report one third less than men with the average Norwegian DFI) and CDC jointly shows that many investors believe that wage gap in 2008 being 17%. Eight out of commissioned the study and awarded women’s empowerment is a key ten women workers are considered to be the contract to a gender specialist characteristic of well-managed, forward- in vulnerable employment in sub-Saharan consultancy firm, Gender at Work. thinking companies that are capable of Africa and South Asia.37 The study involved a large number of creating sustainable shareholder value interviews with fund managers in the over the long term.38 A few country specific examples can DFIs’ respective portfolios as well as with further illustrate some of the difficulties portfolio companies in which the DFIs In addition, a positive correlation appears women face. In South Africa, women face were invested. The end result comprised to exist between gender equality practices major barriers in accessing finance – after a set of best practice guidelines and and company performance. There is two years of operation, only 5% of clients policies that portfolio companies can evidence that having women in executive of a black economic empowerment equity implement in the workplace and in their positions and on the board can indeed supply chains.
Gender equality considerations in projects and portfolio companies (condensed example)
Governance Workplace Supply chain Social and Environmental Impact Assessment
Gender equality is Recruitment of women Company outsources to Company hires outside Maximum company Key for non-traditional jobs women’s enterprises gender risk assessment Performance Indicator (>30% women owned) specialist
Appointed gender Recruitment panels Procurement policies and Company identifies, Medium equality representative include men and women procedures are gender- avoids, reduces and sensitive mitigates gender risks
Company obeys relevant Company obeys relevant Company obeys relevant Company obeys relevant Minimum national laws national laws national laws national laws No company position on Violation of national Violation of national No identification of Unsatisfactory gender equality policies legislation or the ILO core legislation or the ILO core gender related risks and procedures labour standards labour standards Company violates Forced overtime, sexual Forced overtime, sexual Encouragement of sex national legislation, with coercion, physical abuse coercion, physical abuse workers by Detrimental impact on female of women of women staff/contractors workforce Repressive political, Forced female labour; Forced female labour; Encouragement of trade To be excluded social or cultural norms widespread sexual widespread sexual in sex workers by staff/ towards women coercion coercion contractors Chapter 5 – Initiatives taken in 2009 55
contribute to stronger financial Fund manager training sessions will build “Gender equality exists when performance and that the better on the Toolkit and include modules on a company is at promoting women, gender positive outcomes and ways in both women and men are the better it tends to rank in terms which such opportunities and challenges able to share equally in the of profitability.39 can be addressed. The training will distribution of power and thereby complement and build a more Complete gender equality in the practical understanding of ways in which influence; have equal workplace is an ideal that is difficult fund managers can capture gender opportunities, rights and to attain in most industries in emerging related opportunities in their companies. obligations in the public and markets. Microfinance, for instance, specifically targets female run small Lastly, CDC maintains dialogue with its private spheres, including in businesses. Heavy industry by contrast fund managers to identify where ESG terms of work or income- typically employs a largely male workforce training sessions would be valuable. and it is unrealistic to imagine that this Gender risks and opportunities will now generation; have equal situation can or should change. However, be included in this assessment including access to quality education it remains possible to reach gender reputational risks, risks related to and capacity-building positive outcomes in which women can attracting and retaining talent, risks obtain greater opportunities on corporate related to innovation and the impact of opportunities; have equal boards and across a company’s supply their investments in communities. This possibility to develop their full chain and operations. will inform and direct CDC’s training potential; have equal access efforts toward those fund managers and Implications for CDC and next steps portfolio companies where it can make to resources and services As a result of the study and its findings the greatest difference. within families, communities CDC identified several opportunities to improve gender positive outcomes in its and society at large; and are portfolio. CDC’s revised Toolkit for Fund treated equally in laws and Managers will contain a section with policies. It does not mean gender policy guidelines for portfolio companies across their supply chains, that women and men are workplace environments and corporate the same, but that their governance structures. rights, responsibilities and This comprehensive set of sound and opportunities do not depend easily implementable principles and tools on their sex.” covers matters such as board diversity and gender equality in the workplace, UNDP Gender Guidance for National gender-responsive social and Aids Responses40 environmental sustainability policies. It also illustrates how to ensure broad gender inclusive supply chains thereby raising competition and ultimately rewarding female entrepreneurs and portfolio companies alike.
Female and male workers in a textile manufacturing business Female workers in a Ghanaian SME 56 CDC Development Review 2009
Initiatives taken in 2009 continued
Updated CDC Toolkit for fund managers The new Toolkit makes a number of • brief guidance on ESG matters for updates and improvements to its different types of fund including debt In 2009, CDC commissioned the predecessor. In particular these include: funds, small and medium sized consulting firm Rosencrantz & Co to enterprises (SMEs) funds and update its Toolkit for fund managers. • the business case for ESG including microfinance; The document builds upon CDC’s cost savings, effective brand • guidance on relevant international ESG previous Toolkit and advises fund management and gaining access to standards and conventions and maps managers of how sound ESG policies can new markets in more detail and showing where they do not apply. add value to their investments. These illustrating this with case studies This is intended to increase awareness improvements can be realised in a from CDC’s portfolio; of the risks in such countries; and number of forms, not least cost savings, • the business case for ESG including • sections with guidance on climate product innovation, effective brand risk management, cost savings, brand change related matters and gender. management, new market access as enhancement and access to new This material builds upon the results well as how best to manage ESG risks. markets; of CDC’s Climate Change and Gender • elements of good corporate Studies, previously discussed in The Toolkit takes fund managers through governance; this chapter. how ESG is best addressed at all stages • more extensive guidance on good of the investment process. It discusses corporate governance and ESG The document also gives guidance to how to assess an investment for management systems for fund the international conventions of most environmental risk, dangers relating to managers as well as for portfolio relevance to fund managers, including labour rights and health and safety as well companies; the IFC performance standards, ILO as governance risks. The Toolkit goes on • more detailed due diligence questions conventions and corporate governance to examine how to produce an action plan that can be asked for each ESG area; standards. for ESG improvements and illustrates how • more detailed definitions of risk ratings best to report for investors such as CDC. for each area of ESG and how these The full Toolkit will be placed on CDC’s should be awarded; website and CDC will be following a • guidance on appropriate monitoring programme of educating fund managers and reporting; in 2010. This is a good example of the • sector specific due diligence check-lists value CDC can add to the investment for fund managers that invest in high process and to its fund managers. risk sectors including agribusiness, energy and utilities, infrastructure, industrials and mining;
CDC’s updated Toolkit for fund managers: ESG management systems for private equity fund managers Tools Initial Due Investment Investment Investment Exit screening diligence decision agreement monitoring
> Investment proposition in line with ESG policies, guidelines and exclusions? > ESG policies Initial screening > See CDC’s Investment Code on ESG > International standards
> Assess new investment from ESG perspectives > Risk ratings Due diligence > ESG risk ratings and quality of management systems > Management systems
> Investment paper to address key ESG matters > Investment paper Investment decision > Action plan for improvements with timeline and cost estimates > Action plan
> Agree on ESG action plan with investee management > Clauses for Investment agreement > Include ESG clauses in legal agreements investment agreement
> Check compliance and monitor progress > Monitoring Investment monitoring > Report to Board and investors > Reporting > Publicise sound ESG management through annual reports and website
> Consider ESG developments under new ownership > Exit guidance Exit > Review investment strategy in light of changing regulations, markets, technology
Appendices with specific guidance
> Industry sectors – Guidance for high ESG risks > Standards – International reference standards > SMEs – For smaller companies, costly ESG improvements and conventions on ESG have to be carefully prioritised > Templates – Reporting templates and examples > Debt – Lenders can screen borrowers on ESG criteria. Equator > Business case – the business case for ESG Principles reference standard > Climate Change – Risks and opportunities (carbon finance, > Microfinance – Apply relevant exclusion list and monitor etc.) should be carefully considered women borrowers, repayments, etc. > Gender – Non-discrimination and sound maternity policies are a win-win for businesses and women External perspectives Chapter
External perspectives on CDC’s systems, processes and performance are of great importance to CDC. Independent parties are a source of objectivity, validation and constructive criticism. In 2009, CDC committed itself for the first time to an external audit of its processes for implementing the Investment Code. Furthermore, seven out of the 20 fund evaluations in 2009 were undertaken by an external third party.
This chapter presents independently written statements from these two external parties and also discusses a complementary approach to measuring the development impact of CDC’s investments. 6 58 CDC Development Review 2009 Chapter 6: External perspectives In 2009, CDC employed a specialist consultancy firm to perform seven of the 20 fund development impact evaluations and to provide an external perspective on CDC’s evaluation process. The value added by external consultants and how this has complemented CDC’s own monitoring and evaluation work is discussed in the pages that follow.
Independent evaluations evaluator applied CDC’s own methodology Fund evaluations, however, capture and template to the evaluations which the development effects of CDC’s they performed. They applied their own investments over a longer period The added value of an external econometric input/output model on four of time. Since CDC’s prime role is to perspective of CDC’s funds to understand better the drive development, measurement wider and less direct effects of CDC’s of longer term development impact is In 2009, seven of the 20 development investments. An analysis of this process crucial. Moreover, evaluations of this sort impact evaluations were outsourced to and the light it throws on the development are better able to allow comparisons into external consultants in order to enhance impact of CDC’s investments is discussed the impact of CDC’s capital across the evaluation process. Following a later in this section. a spectrum of sectors and regions. competitive tender process, CDC chose Evaluations can also impact upon how Triple Value Strategy Consulting (Triple Triple Value has also contributed to this CDC thinks about its strategy and future Value) for this process. The firm is report by suggesting enhancements to in terms of markets, risks, returns and experienced in performing evaluations in CDC’s monitoring and evaluation process. development impact. developing markets and works closely Their perspective is presented later in with Professor Ethan Kapstein of INSEAD. this chapter. Evaluations therefore serve as the link between the monitoring data that is The rationale for using independent The challenge of measuring collected annually and more qualitative external evaluators was to lend greater development impact judgements about the longer term objectivity and transparency to the impact of CDC’s investment. evaluation process. This is an approach As an intermediated investor, CDC has to in line with international best practice be realistic about what data it can gather Moreover, the understanding which CDC amongst companies seeking to annually from underlying portfolio seeks from its evaluations includes the understand the development effects companies. Each year, CDC requests its extent to which CDC’s capital contributed of investment in developing economies. fund managers to provide economic data to poverty alleviation and macro-economic The IFC’s Independent Evaluation Group for each portfolio company and an ESG growth. An understanding of this sort suggests that approximately half of the report that explores the environmental, requires clearer focus upon the nature total number of evaluations of social and governance risks particular to of the fund than is possible from the development impact should be that company. In addition, CDC expects data provided by typical annual outsourced to an external evaluator. serious incidents such as a fatality at monitoring reports. Following this precedent, from 2010, a portfolio company, major fraud or approximately half of CDC’s evaluations an event with severe environmental will be outsourced. consequences to be reported to CDC as soon as they are discovered. This is In order that the evaluations were part of CDC’s monitoring as illustrated by performed in a manner consistent with the diagram below. CDC’s own evaluations, the external
CDC’s monitoring and evaluation system captures development effects over time
Key objectives for CDC
• Appraise whether CDC’s investments are good for development • Use information collected as a management tool to improve Impact investment and business practices over time Outcomes • Poverty alleviation • Economic growth Outputs • Profitable and growing • Efficient capital markets businesses in poor countries Inputs • CDC’s fund managers • Jobs and tax revenues invest in commercially • Increased availability • CDC invests capital viable and responsibly of products and services with fund managers managed companies • Increased availability in poor countries of commercial finance • Third party capital in poor countries
Assessments: Prior to investment
Monitoring: Quarterly, biannual and/or annual reviews of key performance indicators: quantitative and qualitative Evaluations: Verification of existing performance information and contextual considerations by CDC and external consultants Chapter 6 – External perspectives 59
An external perspective on almost all Asian investments had been Conclusion exited a long time ago, no visits were We think that external evaluations measurement of CDC’s made in Asia. These evaluations were contribute to a transparent and development impact completed based on desk research accountable fund evaluation process. and in-depth interviews with fund By producing external evaluations side management and CDC staff. by side with those produced internally, a strong combination is built based on The value add of an external view in-depth knowledge of the fund’s details The purpose of an external evaluation and an outside perspective on fund exercise is threefold. performance and CDC investment decisions. The assessment of the wider An external party, Triple Value has Firstly, it provides an external judgement of socio-economic impact of a fund provides evaluated the performance of seven funds a fund’s performance and thus enhances information on the development impact of and also added a new component: an the independence of the evaluation. supply chains that was not previously assessment of the socio-economic impact Secondly, it tests the effectiveness and available, although it does not include all of a fund. robustness of CDC’s evaluation aspects of development. methodology. And thirdly, external Triple Value: Our insights into CDC’s evaluations enable CDC to compare the Compared to CDC staff who live with the evaluation process results with those of internally performed funds every day, for external evaluators it evaluations and judges whether these can be a challenge to acquire sufficient Triple Value’s work for CDC suffer from internal bias. knowledge of a fund’s details in order to In 2009, Triple Value evaluated the form a robust opinion on its performance. performance of seven funds on behalf of Main findings However, by working closely with CDC CDC. Four evaluations concerned mid- Out of the seven funds evaluated by Triple staff and fund managers this issue is term evaluations of African funds while Value, six were considered to have a substantially alleviated. Moreover, starting three evaluations were final evaluations of satisfactory or better development outcome. with a completely fresh mind has the Asian funds. As described earlier in this And CDC’s effectiveness was rated at advantage that new insights can be report, our evaluation approach consisted least satisfactory for all seven funds. identified. Evaluating CDC’s own of a combination of CDC’s evaluation effectiveness is naturally more objectively methodology and Triple Value’s Socio- As the ratings of the 13 internal done by an outsider. Economic Impact Assessment (SEIA) model. evaluations show very similar ratios (85% of funds have a satisfactory or better Given the different character and Each fund evaluation was based on an development outcome and 100% rate dynamics of internal and external analysis of relevant information and CDC’s effectiveness as more than evaluations and the strong combination documents and a judgement of a fund’s satisfactory), this suggests that CDC’s they make towards an overall evaluation performance. Subsequently, interviews evaluation methodology serves as a approach, we agree with CDC that were conducted with people involved in framework to assess a fund’s outsourcing approximately half of its fund the fund (including CDC staff, fund performance in an objective way. evaluations contributes to a strong managers and representatives of portfolio approach. companies). In addition, site visits to local While working with CDC’s methodology, fund management offices and portfolio we found that it is a thorough approach to companies were organised. perform an evaluation. Naturally, we also came across some aspects where we In total, Triple Value visited eight fund think that the methodology needs to be management offices and 14 portfolio modified or sharpened and CDC is companies in six African countries. As currently working on this.
Comparison of evaluation ratings: CDC compared to Triple Value (Development outcome – % distribution)
80 62% 57% 60 29% 40 15% 20 23%
0 Excellent Successful Satisfactory Below Unsatisfactory Poor expectations
Triple Value (7 evaluations) CDC (13 evaluations) 60 CDC Development Review 2009
External perspectives continued
Other approaches to Direct, indirect and induced impact Finally, the turnover re-spending, tax Direct impact refers to the profits, taxes revenue figures and number of jobs assessing and quantifying and jobs created directly in the portfolio created are aggregated from the different development impact companies. Indirect impact is the regions to estimate the overall impact of The measurement of development impact backward link to profits, taxes and jobs the investment on the larger economy. is an evolving science. CDC strives to be generated by the portfolio companies’ an early adopter of new techniques. One suppliers. It is important to note that this CDC funds and the SEIA model approach that was tried for the first time is only backward linking. Forward linkages in 2009 is the Socio-Economic Impact to wholesale and retail trade sectors are Fund One illustrated in the below table is Assessment (SEIA) model. not captured by this approach, but may a large pan-African fund managed by an be significant. Induced impact includes experienced fund manager. The SEIA CDC’s assessment of development the profits, taxes and jobs created model indicates that for each US$1 in impact when employees go out and spend their salaries, profits and taxes the economy increased incomes on consumer goods derives an additional US$2.6 (the total CDC’s evaluation methodology tends to and services. value added multiplier). Also, for each give rather qualitative outputs particularly employee in this fund’s portfolio in relation to the ‘private sector The four steps of applying the SEIA model companies an additional 5.3 jobs are development’ and ‘added value’ The SEIA model builds on input-output supported in the economy as a whole. dimensions of the assessment. tables (I/O tables). These tables CDC is therefore keen to explore more summarise financial transfers of an entire The SEIA model has been applied to three quantitative approaches. Even more country’s economy between stakeholders other CDC fund evaluations in 2009. This important is to get a better understanding through which inputs (consumption) are provides an opportunity for comparison of the indirect impact of CDC’s converted into outputs (incomes). The I/O of development impact and multipliers investments and trickle down effects tables are constructed for each country across different types of funds, into the rest of the economy. or region and are based on data in the geographies and sectors: international Global Trade Analysis An overview of the SEIA model Project (GTAP) database that covers Fund Two is another relatively large 57 economic sectors. pan-African fund with an experienced The SEIA model is designed to estimate fund manager. It concentrates on larger the full development impact of investment The second step after the I/O tables have companies in low-income countries in a particular company on the entire been constructed is to map the turnover through which broad-based economic economy. The model does this by of all the portfolio companies onto the development has been achieved. estimating the effects outside the appropriate economic sector. Doing so company itself in terms of number of jobs illustrates how the company turnover is Fund Three is a smaller South Asian fund created, salaries paid and amount of re-spent throughout the economy. Each with a very experienced fund manager. taxes paid elsewhere in the economy as round of re-spending delivers incomes It is almost entirely focused on low a result of the investment in the investee to households (in the form of salaries), income countries and close to half the company. The main outputs of the model companies (in the form of profits) and portfolio companies are small and are estimates of: government (in the form of taxes). medium sized enterprises (SMEs).
• direct, indirect and (household) induced The third step is to translate these Fund Four is a very small African SME economic activity (economic multipliers); economic outputs into number of jobs fund with a very large number of • direct, indirect and induced incomes or created in the economy by using companies managed by an experienced value added generated (taxes, salaries); employment data from the various fund manager. and countries or regions. For reasons of • direct, indirect and induced jobs comparison, all employment results are created (job multipliers). finally scaled back to represent only formal employment. This is a very conservative approach, given that most employment in developing countries is in the informal sector.
Example: Development impact measures of a fund using the SEIA model Type of impact Household income Profits and savings Tax revenues Total value added Formal employment Direct US$70m US$21m US$49m US$140m 2,971 Indirect US$58m US$19m US$34m US$111m 7,823 Induced US$57m US$20m US$33m US$110m 5,507 Total US$185m US$60m US$116m US$361m 15,851 Multiplier 2.6 2.9 2.4 2.6 5.3 Chapter 6 – External perspectives 61
Comparison of results Profits and savings Overall conclusions
It is important to bear in mind that a small While Fund Three comes out with the The results in the table below are only sample of funds like the one used in this lowest multiplier also on this dimension indicative and involve many assumptions example can give only indicative results. Fund Two exhibits the highest multiplier. as discussed on the previous page. They Nevertheless a discussion and comparison Similar to Fund One it is an African fund, do, however, provide an insight into the of the results can be useful to generate but it differs in that it is heavily invested in less visible economic effects of the fund hypotheses and questions for further the financial services, metals and energy on the wider economy. investigation. sectors. A partial explanation for this difference might stem from how the model Although the results cannot be The graph below shows the multipliers for treats forward linkages. The telecoms and comprehensively benchmarked against each of the four funds under four impact capital goods sectors in Fund Three have other funds, this may be possible in future measures – household income, profits a stronger forward linkage to wholesale years as this approach is further and savings, tax revenues and formal and retail trades than the sectors developed and applied to more funds employment. Immediately apparent are represented by Fund One. The model, in CDC’s portfolio. It might at that point the differences in multipliers for the four however, does not capture these effects be possible to draw more general funds across household income, profits which may result in a lower multiplier in conclusions to inform CDC’s thinking and jobs. The tax revenue multipliers this example. on how it can best support development display more consistency across the in emerging markets. four funds. Formal employment and comparisons with informal jobs Lastly, the SEIA model is but one Household income approach to measuring development Fund One stands out from the rest on this impact. There are other approaches that Fund Three has the lowest multiplier effect dimension. The three other funds are could be equally or more insightful. CDC and is concentrated in the telecoms and comparable in performance. However, remains open to learning about and capital goods sectors in South Asia. Fund there is no significant difference between exploring any such options. One has the highest multiplier of the four Fund One and the other funds In terms funds and contrasts greatly with Fund of sector focus, company size or size Three in that it is mostly invested in the of funds. mining, financial and energy sectors in Africa. One explanation for this The key difference between Fund One difference could be the rural versus urban and the other funds is in its stronger setting of the various sectors. Mining and presence in middle-income countries. energy investments are generally located This might be an important explanatory in more rural settings where other job factor as the multiplier effects might be opportunities are scarce and most of the higher in these environments because income generated will be spent locally. of stronger linkages between markets This is likely to give rise to a strong and sectors. multiplier while the telecoms and capital goods sectors are mostly located in urban areas where there might be more job options available and possibly also a lower multiplier.
Development impact of four CDC funds using the SEIA model, illustrating multiplier effect
5.3
2.9 3.1 2.6 2.6 2.6 2.6 2.2 2.2 2.4 2.3 2.3 1.9 2.0 1.5 1.5
Household income Profits and savings Tax revenues Formal employment
Fund One Fund Two Fund Three Fund Four 62 CDC Development Review 2009
External perspectives continued
hours of milking. As a result, up to maintenance of local roads. Through such Brookside Dairy, Kenya 150,000 Kenyans are now included initiatives the company seeks to maintain Integration of poor in Brookside’s value chain as farmers, its image and increase awareness of its communities through an suppliers, transporters, retailers products. or distributors. innovative sourcing and Brookside’s management systems have distribution network Secondly, Brookside’s distribution gained the internationally-recognised ISO network shows similar innovation. The 9000 certification and the company has Kenya is a low income East African nation company includes local kiosks to sell milk worked broadly with Kenyan authorities whose GDP per capita was around in addition to traditional retail outlets such to establish new environmental standards US$810 in 2008. 20% of Kenya’s as supermarkets, mini markets and for the national dairy industry. It has also population live below the US$1.25 a day general stores. Kiosks are mostly located enabled an international expansion. poverty line and in areas with little access in remote regions or areas previously Brookside now has fully-fledged to basic services and supplies, something underserved by traditional retailers. operations in Tanzania and Uganda and often taken for granted in more developed For example, many of the 18,000 kiosks exports as far afield as the Middle East. economies. The majority of Kenyans live throughout Nairobi are located within in rural areas that are often isolated and the city’s slums. Brookside’s success and proven ability to have little chance to sell their produce to expand has prompted Aureos to make a national suppliers. Brookside Dairy, Thirdly, Brookside has been able to train further investment of more than US$18m through its sourcing and distribution farmers in dairy methodology and through its current Africa Fund. This network, has made a substantial increase their ability to support additional capital has helped Brookside contribution to addressing both of these themselves. The company has put to acquire Spinknit dairy and thus create problems in Kenya’s dairy industry. farmers in touch with local and Kenya’s largest dairy company in terms international dairy experts to facilitate the of milk intake volume and profitability. Aureos first invested US$1.2m in diffusion of new practices and techniques Aureos’ continuing belief in Brookside Brookside in 1998 through the Acacia into their supply base, allowing for greater is testament to how the company has Fund to expand Brookside’s capacity efficiency and larger milk yields. In continued to grow and also implement and help the business diversify into the addition, Brookside has provided access ever more sophisticated ESG policies. production of dairy products such as to credit facilities that have enabled yoghurt and butter. The investment was farmers to buy new equipment as well successful and yielded a 21% Internal as semen to improve the genetic base Key data Rate of Return (IRR) to the fund manager. of their livestock. To complement this, Brookside has sponsored a breeders Investment:1 US$1.2m Amongst Brookside’s various show and sale which is now one of the Investment period: 1998-2006 contributions to the Kenyan dairy sector, major dates on Kenya’s agricultural Sector: Agribusiness – Agroprocessing calendar. three factors in particular stand out. First Fund manager: Aureos and most impressive has been Brookside’s Employment:2 2,500 Brookside Dairy has also demonstrated ability to integrate rural economies into its IRR: 21% sourcing and supply network. In 2004, considerable leadership through its Brookside’s milk was sourced from Environment, Social and Governance (ESG) initiatives. The company has 1 US$1.2m was invested by Aureos. CDC’s investment in approximately 65,000 farmers, most of Aureos Acacia Fund was US$5.1m; total fund size was successfully initiated local tree-planting US$19.1m. whom were neither commercial farmers 2 2009. nor members of farming co-operatives. programmes and improved wastewater The company’s catchment area in Kenya management within local communities. now ranges across the country from the It has also invested in an educational Eastern Province to the Central Province campaign focused on nutrition and the and the Rift Valley. Company policy benefits of milk for a balanced diet. ensures that all milk collected is tested for In addition, Brookside has funded the quality and reaches the dairy within three construction of schools and the
Part of the manufacturing process Livestock parade at Brookside Dairy Chapter 6 – External perspectives 63
construction of local schools, hospitals Key data East Africa Gold Mines and infrastructure. Stewart also took the (EAGM), Tanzania lead role in managing a resettlement Investment:1 US$5.3m programme which was necessary for the Investment period: 1999-2003 Establishing the Tanzanian site’s future development. Stewart’s Sector: Gold mining handling of the social impact of EAGM’s gold industry Fund manager: African Lion operations was universally considered to 2 be of a high standard. In recognition of his Employment: 400 Today, Tanzania is Africa’s third largest 3 efforts, Stewart was made an honorary Employment growth: 385 gold producer. This represents 2 local chieftain by the community. Turnover growth: >US$200m spectacular growth since 1999 when Amount of proven resource: 4 million Tanzania had only a minimal amount of The future of the mining site remains ounces gold gold production. In 2007 gold exports positive, with gold resources being as Capital raised: US$110m totalled US$763m and the gold mining great as four million ounces. If production industry has become recognised as of Taxes to present: US$29m at the site increases, the mining activity immense value to the Tanzanian will generate further income for the 1 US$5.3m was invested by African Lion, CDC’s investment government and to local regions. EAGM Tanzanian government. Furthermore, in African Lion is US$9m; total fund size is US$33.8m. was a pioneering mine in the North Mara 2 2003. with its strong record of successful ESG region of the country which contributed 3 1999-2003. management, EAGM has set a significantly to the development of the benchmark for responsible foreign- Tanzanian mining industry. backed investment in Tanzanian natural resources. African Lion, CDC’s fund manager, invested in EAGM in 1999, just as the country was opening up to foreign miners. The Lion team was instrumental in establishing EAGM’s operations. The North Mara mine was developed substantially between 1999 and 2003 with discoveries made of as much as 2.1 million ounces of gold reserves. The number employed at the mine increased by 385 over the period. To date, the mine has generated an estimated US$29m in taxes and royalties for the Tanzanian government.
To complement the mine’s economic successes, EAGM’s Managing Director Geoff Stewart was rigorous in implementing best practice in all areas of ESG at the company. In addition to resolving a tenure dispute with local artisanal miners, EAGM assisted with the
Site overview of EAGM The crushing facilities 64 CDC Development Review 2009
External perspectives continued
Audit of CDC’s processes For the purpose of establishing processes CDC aims to have a seat on the advisory to implement its Investment to implement the Investment Code with or governance boards of the funds in fund managers and portfolio companies, which it invests and be an active Code on ESG the intermediated model poses certain participant, ensuring ESG receives senior significant challenges: support as appropriate. CDC also carries Background out monitoring and evaluation procedures • we require our fund managers to to gather information on the Through its Investment Code, CDC promotes operate in line with an investment code, implementation of the Investment Code. responsible business practices with respect which is identical or is substantially This can be fed into dialogue with fund to the environment, social matters and similar to CDC’s Investment Code. managers on necessary improvements as governance (ESG) in its investments through The fund managers are in turn generally well as future funding decision making. financial intermediaries in poor countries. responsible for ensuring that their The fund managers’ role is to adopt the CDC uses the Investment Code at all portfolio companies adhere to Investment Code and implement it in their stages of its investment process to work responsible business principles and own investment activities. They have a with fund managers in the application of practices. Through the intermediated responsibility to educate the management responsible investment practices on ESG. investment model, CDC is one step of portfolio companies about the removed from portfolio companies and Investment Code and encourage them in CDC uses an intermediated investment has limited ability to control what turn to implement it. The fund managers model, investing in funds, primarily private happens on an ongoing basis. CDC also commit to reporting procedures to equity funds managed by third parties. accordingly is not in a position to check CDC. Finally, where the fund manager has The fund managers typically have local compliance with all standards at significant influence, the management of offices in emerging markets, where portfolio companies but relies on its portfolio companies themselves adopt investments in local portfolio companies fund managers to do so; and either the Investment Code or an are made. This approach to development • CDC’s fund managers in turn may not alternative but substantially similar code finance has a number of advantages: always be in a position to exercise and are responsible for implementing ESG control or significant influence over their improvements and managing ESG risks. • CDC’s investments in funds encourages portfolio companies. CDC’s processes for implementing the investment from third parties, often Investment Code have been put in place commercial institutional investors; It therefore follows that CDC’s process in this context to create effective • CDC supports the emergence of new to implement the Investment Code must communication and management of roles fund managers in emerging markets take into account the different roles that and responsibilities in this intermediated and in this way promotes more effective each agent plays in the intermediated investment model. capital markets and local capacity model. CDC’s role is to establish the building for responsible investment Investment Code and perform thorough The process to implement the and responsible business practices; due diligence checks to assess whether Investment Code • CDC benefits from local knowledge potential fund managers are committed and experience in the identification to implementing the Investment Code. CDC’s process for implementation and management of investment CDC also provides training and support of the Investment Code is embedded opportunities; and to fund managers on how to implement in the investment cycle. • CDC’s limited resources are leveraged sound ESG management systems and and can impact a much higher number encourages them to work towards • Due diligence on the ESG of people than would be possible using continuous improvements as set out management capability of fund a direct investment model. in the Investment Code. managers in the context of the inherent ESG risks of their investment strategies;
Exhibit 1: Implementation process for CDC’s investment code Investment Due diligence Investment monitoring and mid- Final evaluations point evaluations Key information • Quality of fund manager’s • Investment • Annual ESG reports • Final evaluation ESG management systems agreement with • Mid-point evaluations report • Risk level of sectors covered fund manager: • Case studies by fund manager’s investment CDC’s standard • Any serious issues involving strategy side letter or other portfolio companies: loss of • If follow-up fund, ESG equivalent life, material effect on the performance of existing satisfactory legal environment or material portfolio companies agreement breach of law Responsible Portfolio director Support Investment team, ESG manager, ESG & Monitoring and Evaluation (M&E) advisor, legal counsel, finance team Sign-off • Post due diligence report: • If fund manager • Monitoring reports: • Same procedure ESG manager proposes a different > ESG manager as for mid-point • Investment paper: investment > IC evaluation reports Investment Committee (IC) agreement from • Serious issues: followed by Board, if CDC’s standard > ESG manager and legal appropriate Side Letter: ESG counsel manager and > Chief Operating Officer legal counsel to > Board agree it is of • Case studies: equivalent standard > ESG manager > Communications director Chapter 6 – External perspectives 65
• Investment, whereby CDC’s Investment Stage 2: Investment CDC provides a reporting template for Committee and/or Board sign off that annual ESG reports to fund managers, the investment is appropriate from an As part of the investment agreement or which requires inherent ESG risk ratings ESG perspective, and the fund side letter with CDC, fund managers are and a quality assessment of ESG managers commit to applying the required to commit to an investment code management systems to be provided Investment Code; identical or substantially similar to CDC’s for each portfolio company in the fund, • Investment monitoring and mid-point Investment Code (see Appendix 1). This as well as any ESG issues, realised evaluations which create a cycle of includes a commitment to employ improvements and future targets. reporting, investigation and review management systems which effectively The portfolio director is responsible for throughout CDC’s period of investment identify and address ESG risks in portfolio reviewing and acting upon annual ESG to improve performance and encourage companies and to work with portfolio reports, escalating issues if necessary. For compliance and corrective actions, as companies to manage such risks and high risk investments, on-site verifications well as inform new funding decisions bring about improvements in business by CDC will sometimes be necessary. to existing fund managers; and practices. Fund managers are also • Final evaluations which allow all required to commit to reporting annually If there is an instance involving a portfolio lessons to be captured and used to to CDC on ESG matters. company that results in loss of life, inform future funding decisions and to material effect on the environment, or improve performance and encourage CDC may occasionally commit to a fund material breach of law, CDC expects compliance and corrective actions. at a later stage than other Development to learn about this immediately from the Finance Institutions (DFIs) by which time relevant fund manager. This is a new Stage 1: Due diligence the fund may have developed its own requirement in the Investment Code with ESG practices in accordance with the effect from 1 January 2009. CDC is As part of the due diligence work for all requirements of those DFIs. This may working with fund managers to ensure new investments, CDC assesses the be acceptable provided that the that all serious incidents are reported. The ability and willingness of fund managers requirements make explicit reference to: CDC portfolio director responsible for that to implement responsible business fund follows-up with the fund manager as practices in their portfolio companies. • responsible investment practices of the corrective actions are undertaken to To demonstrate this, fund managers are fund managers and portfolio companies ensure that adequate measures are being expected to have or to institute ESG (in line with the Investment Code); implemented in a timely manner. The ESG management systems as described • improvements over time with targets Manager is consulted, legal counsel is in section 4 of the Investment Code and time frames, with the IFC’s sought and the COO, Chief Executive (see Appendix 1). Performance Standards and EHS Officer (CEO) and the Board are informed. Guidelines as benchmarks for such CDC follows-up with the fund manager CDC has an ESG Toolkit for Fund improvements for portfolio companies until there are sufficient assurances that Managers which is used by CDC’s in high-risk sectors; the situation has been dealt with in a investment teams during due diligence. satisfactory manner to minimise risks This includes, for example questions to and include: of recurrence. assess the ESG management systems of fund managers. If other DFIs are also • an exclusion list which covers the areas CDC has the most influence with a fund investing with a fund manager, CDC where CDC will not invest; manager when raising a successor fund. coordinates its due diligence on ESG • an annual ESG reporting requirement This is typically just before the end of the matters with them. in a format satisfactory to CDC; and investment period for their current fund, • a requirement to inform CDC as soon which is usually five years after first Where CDC already has an investment as possible about any instance involving closing and approximately the halfway relationship with a fund manager, CDC’s portfolio companies which result in point of the duration of a fund. due diligence for investments in a loss of life, material effect on the successor fund is informed by how well environment or material breach of law. This is when CDC conducts a mid-point the fund manager has implemented evaluation. Some evaluations are carried CDC’s Investment Code for existing If necessary, CDC’s investment team helps out by CDC staff and some are investments. If the fund manager already fund managers establish and maintain ESG outsourced to a third party consultant. For has portfolio companies in high-risk management systems in line with the evaluations conducted by CDC staff, the sectors, CDC’s due diligence includes sectors that fund managers plan to invest Board’s Best Practice and Development a visit to a sample of these companies in. CDC pays special attention to support Committee (BPDC) oversees the to assess how the fund manager’s ESG fund managers planning to invest in independence of evaluation conclusions management systems have worked in sectors with significant risks from an ESG and performance ratings. The BPDC also practice. CDC’s ESG Manager supports perspective, particularly fund managers reviews and challenges evaluations the investment team on due diligence of that have not yet developed robust ESG conducted by the third party consultant. fund managers that plan to invest in high management systems. However, evaluation ratings remain the risk sectors. responsibility of the third party consultant Stage 3: Investment monitoring and for reporting purposes. CDC produces a post-due diligence mid-point evaluations report which identifies any shortcomings ESG performance is one of the in the fund manager’s ESG management Monitoring of fund managers’ dimensions in CDC’s evaluation systems and recommends improvements. implementation of the Investment Code framework. The objective is to take stock during the investment period is principally of how well a fund has performed on ESG The ESG Manager signs off the relevant through participation in fund advisory or matters, identify any shortcomings and sections of the post-due diligence report governance boards and the annual ESG work with the fund manager to bring before this report is included in the Board reports that fund managers prepare for about improvements as appropriate for investment paper in the cases where CDC. Portfolio directors at CDC are the remainder of the duration of the fund Board approval is required. The required to compile and present bi-annual as well as for successor funds. Investment Committee signs-off on the monitoring reports on the fund managers Board investment paper before this paper for whom they are responsible, which The mid-point evaluation includes a is transmitted for approval by the Board. include a section on ESG matters. These review of the ESG management systems reports are discussed by the CDC of the fund manager, its internal investment team and ESG manager in responsibilities, processes and controls CDC’s bi-annual monitoring meeting. 66 CDC Development Review 2009
External perspectives continued and any specialised external technical The findings from final evaluations, like Reports to BPDC, the Board and DFID support used by the fund manager to the findings from mid-point evaluations, identify and mitigate ESG risks and bring inform CDC’s due diligence and Finally the implementation process about improvements. investment decision for follow-up funds. includes reporting mechanisms.
Through site visits to a selection of ESG knowledge management Throughout the year CDC management portfolio companies, the mid-point provides the Board with ESG updates. evaluation also reviews how well fund To support the Investment Code Aggregated ESG findings from the managers’ ESG management systems implementation processes and for previous year are also provided in the first have worked in practice. Their due reporting processes, CDC has established quarter each year. The Department for diligence and monitoring processes a knowledge management system. International Development (DFID) receives should assess and if necessary improve The key ESG information generated at the same aggregated information on a the ESG performance of portfolio each stage of CDC’s process is entered quarterly basis, with any commercially companies. Site visits focus on high-risk into this system, including: sensitive or confidential information sectors and portfolio companies where extracted. The reporting to the Board and issues and/or significant improvements • annual ESG reports from fund DFID together with the Development have been identified. managers; Review provides the following information: • bi-annual monitoring reports prepared The evaluation report requires a by CDC portfolio directors; • a summary of the annual ESG reports description of ESG performance as seen • case studies; received from fund managers and by the evaluation team and a performance • evaluation reports; and findings from the evaluation reports rating for ESG. This rating is based on a • instances involving portfolio companies completed over the previous year; six-point scale ranging from ‘poor’ to which result in loss of life, material effect • summary information about fund ‘excellent’ and takes into account the on the environment, or material breach managers with portfolio companies ESG management systems of the fund of law. in sectors with significant ESG risks manager and the ESG performance of the and their performance; underlying portfolio companies. Reports From these sources, aggregate • summary information on any serious to CDC are reviewed by the investment information is compiled for CDC’s ESG issues during the previous year and ESG teams, interviews are carried Development Review. This information is and how they were addressed to CDC’s out and site visits are undertaken. compiled for the portfolio as a whole, as satisfaction; well as by region and major industry sector. • observed trends on ESG performance The mid-point evaluation feeds into among fund managers and portfolio CDC’s due diligence work and informs Lessons learned from the ESG companies; and investment decisions for investments performance of CDC’s investments are • new developments in international best in successor funds with these fund also used as inputs into CDC’s investment practice standards and any proposed managers. It is also used in dialogue with strategy. In setting investment strategy updates to CDC’s Investment Code. fund managers about any issues identified CDC considers the cumulative effects or opportunities for improvements. of its investments to minimise adverse Each quarter, CDC reviews the evaluation effects, maximise development reports that have been completed during CDC’s monitoring work continues as impact and promote synergies across that quarter, approving ratings for described after the mid-point evaluation. CDC’s portfolio. evaluations conducted by CDC staff The monitoring for the remainder of the and external consultants. The full Board investment duration is informed by the Climate change receives summaries of completed mid-point evaluation report as to what and approved evaluation reports. improvements may need to be The Investment Code specifically commits Management provides a summary of undertaken during the remainder of the CDC to supporting the reduction of completed evaluations and aggregate fund’s duration. Any follow-up actions greenhouse gas (GHG) emissions41 in outcome ratings each quarter to DFID should be noted in fund managers’ annual its investments. CDC’s role should be with any commercially sensitive or ESG reports and in CDC’s bi-annual understood within the context of the 1994 confidential information extracted. internal monitoring reports. UN Convention on Climate Change and the associated 2005 Kyoto Protocol. The Any instance involving portfolio Stage 4: Final evaluations UN Framework Convention excludes the companies which result in loss of life, developing countries where CDC invests material effect on the environment, or At the end of a fund’s life, typically from mandatory GHG reduction targets, material breach of law and how these 10 years after first closing, a final but requires them to monitor and report instances were dealt with is reported to evaluation is undertaken as to how the on GHG emissions and allows them CDC’s Board at each meeting. At the fund has performed as compared to to participate in international carbon quarterly meetings with DFID, the Chair expectations and targets at the time of trading schemes. of CDC’s Board and CDC management CDC’s investment. provide an assurance that the Investment CDC is in the process of identifying major Code is being implemented appropriately The findings from the mid-term evaluation risks and opportunities associated with and any serious issues have been dealt and ESG matters reported through annual climate change across different sectors with adequately. ESG reports are followed-up in the final and geographies where its fund managers evaluation. Improvements on ESG over invest. High risk companies will be the investment period are noted in the identified as CDC’s fund managers make final evaluation report, as well as any investments, as will companies in sectors issues that occurred and how the fund with positive climate change contributions. manager and portfolio company addressed such issues, with particular attention to high-risk sectors. The fund as a whole is given a final evaluation rating for ESG performance, using the same criteria and ratings scale as that used in the mid-point evaluation. Chapter 6 – External perspectives 67
Transition Improvement actions planned and Training under way CDC’s Investment Code came into effect All professional staff at CDC have on 1 January 2009 and any new funds The implementation of the Investment received ESG training. Over the course invested in from this date have been Code is a process of continuous of 2010 the programme of training will required to sign up to it. An effort to improvement. As CDC works with fund be increased including the introduction transition funds signed up to the previous managers through the investment cycle, of assessments to establish the Business Principles to the Investment responding to questions and changes to effectiveness of training. Training will Code has been carried out throughout the operating environment and carrying also be provided to fund managers with 2009. This has occasionally been out evaluations a number of new the roll-out of the revised Toolkit on challenging as fund managers cannot initiatives and improvements will be ESG for Fund Managers. be required to change the terms of their introduced. Many are already under way investment agreements with CDC. as detailed here. Process improvements However, some managers of existing funds have agreed to sign up to the new Guidance CDC is planning a number of Investment Code and most others have improvements to the process for given goodwill commitments to CDC to CDC has undertaken a comprehensive implementing the Investment Code, comply with the most significant new overhaul of the ESG Toolkit for Fund including: requirements: to inform CDC as soon Managers, based on the new Investment as possible of any incidents at portfolio Code, which will be published and sent • establishing a system to track ESG companies which result in loss of life, to fund managers in the first half of 2010. risk ratings for each investment made material effect on the environment, Improvements include: by fund managers, to allow CDC to or material breach of law. monitor high risk assets more closely. • the business case for ESG; This will include special consideration CDC continues to encourage fund • more guidance on good corporate for assets with significant GHG managers to comply with the requirement governance and ESG management emissions42; to report annually on ESG matters. systems for fund managers and • a requirement for fund managers to Another significant change with the portfolio companies; confirm to CDC that they have obtained Investment Code is an explicit • more detailed due diligence questions portfolio companies’ sign up to the requirement that high risk portfolio for each ESG area; Investment Code, where they have companies work over time to implement • more detailed definitions of risk ratings control or significant influence; the IFC’s Performance Standards on for each area of ESG ; • improving retention of evidence during Social and Environmental Sustainability • guidance on appropriate monitoring monitoring site visits and evaluations; and the associated general and industry and reporting; • fostering a more systematic approach specific Environmental, Health and Safety • sector specific due diligence check-lists to the follow up of issues and corrective (EHS) Guidelines. CDC’s previous policies for fund managers that invest in high actions in the documentation produced implicitly had the same requirement: that risk sectors; by CDC and fund managers; portfolio companies implement all relevant • brief guidance on ESG matters for debt • tailoring the implementation approach World Bank standards. funds, SME funds and microfinance; for microfinance institutions, banks and • guidance on relevant international debt funds, recognising that certain Furthermore, the Investment Code has ESG standards and conventions; and requirements may not be feasible due a greater focus on good corporate • sections with guidance on climate to the high number of transactions and governance and makes some changes change related matters and gender. the further distance from the final to which businesses and activities are recipient of financing; excluded from investments with Additionally, in 2010, CDC will publish • rolling out a programme to train fund CDC’s capital. guidance documents for fund managers managers on ESG matters, assisted on how to manage risks and opportunities by the new Toolkit on ESG for Fund There are a number of older assets, associated with climate change and on Managers, the Climate Change so-called legacy assets. The oldest what we expect in terms of management Guidance document and the Gender investment in these assets was made of gender issues. CDC will also seek Study; and as early as 1957. These legacy assets to promote strategies for portfolio • reporting to the Board and DFID comprise in total 16 companies and companies to participate in international includes fund managers with portfolio constitute 3.9% of CDC’s committed carbon trading schemes, as an incentive companies in sectors with significant capital (defined as outstanding legal for them to reduce their GHG emissions ESG risks and their performance. Going commitments plus portfolio value). or to expand operations that offset such forward this will also include portfolio These assets signed up to the ESG emissions, e.g. reforestation or use of companies with high GHG emissions. standards applicable at the time. While renewable energy. fulfilling those obligations, they are not CDC will continue to identify process signed up to the Investment Code nor CDC will also provide further guidance improvements as part of its ongoing are they legally obliged to do so. There on how to rate ESG performance for activities. Areas for future consideration is therefore only a marginal benefit in evaluations and for ratings of quality include assessing the benefit of guidelines attempting to implement change in of the ESG management systems of that CDC investment teams can use relation to the Investment Code for portfolio companies, to facilitate during site visits to assess the reliability these assets. evaluations and assessment and promote of data provided to CDC and the quality further consistency. of ESG management systems in further detail, to complement the information Additional guidance will also be given to received from fund managers. The CDC investment teams on how to approach to final evaluations will also interpret and assess fund managers’ ESG be revised to maximise ESG information reports and ratings. available for portfolio companies from which the fund has exited. 68 CDC Development Review 2009
External perspectives continued
Independent assurance Section five of CDC’s Investment Code, Emphasis of matter report to CDC Group plc as set out in Appendix 1 (pages 80 to 84) Our work covered the design of the of the Development Review, describes processes for implementation of the CDC’s responsibilities and management Investment Code and the extent to which system for implementing the Investment those processes have been implemented Code, and we have used that description in relation to a selection of funds. Our as the basis of our evaluation. work did not include an assessment or test of adherence of individual funds and What did we do to reach our portfolio companies to all the principles conclusions? of the Investment Code. We planned and performed our work Scope to obtain all the evidence, information In the course of our work we noted that KPMG LLP was engaged by CDC Group and explanations that we considered CDC’s processes have been evolving over plc (‘CDC’) to provide limited assurance necessary to understand and review time. Therefore whilst CDC has made over CDC’s description of its processes to CDC’s processes to implement its efforts to apply additional reporting implement its Investment Code in pages Investment Code. Our work included requirements to older funds this has 64 to 67 of the CDC Development Review the following procedures and not always been possible or appropriate, 2009 (‘the Development Review’). evidence-gathering activities: for example, in the case of legacy assets as described on page 67. Responsibilities • interviews with the CEO, Board The preparation, maintenance and members, senior management, and All of our work was carried out at CDC, integrity of CDC’s Development Review, relevant staff at CDC to assess the not at fund managers or portfolio including the pages over which we approach to handling material issues, companies, and included examination provide this opinion, are the sole controls in place, incentives and of evaluation reports carried out by CDC responsibility of the directors of CDC. penalties, and escalation procedures; and Triple Value. • interviews with 12 out of 16 investment Our responsibility is to express our professionals to discuss their roles in We also draw your attention to the conclusions in relation to the above implementing the Investment Code and process improvements planned by CDC scope and in accordance with the the activities they carried out as part of in their description of the implementation terms of our engagement letter dated screening, due diligence, monitoring of the Investment Code. 26 January 2010. and evaluation procedures of selected funds and portfolio companies; Our conclusion This report is made solely to CDC • interviews with the ESG team to Based on the scope of our engagement in accordance with the terms of our discuss work plans, training, internal and the work described above, nothing engagement. Our work has been controls and guidance documents; has come to our attention to suggest that undertaken so that we might state to • examination of the documentation CDC’s description on pages 64 to 67 CDC those matters we have been engaged produced at different points in the of the processes to implement the to state in this report and for no other investment lifecycle, for a risk-based Investment Code is not fairly stated. purpose. To the fullest extent permitted selection of funds (21 funds out of 134 by law, we do not accept or assume funds); Vincent Neate responsibility to anyone other than CDC • examination of internal and external Partner for our work, for this report, or for the documentation including conclusions we have reached. correspondence, minutes of meetings, For and on behalf of KPMG LLP reports and presentations relating Chartered Accountants Which assurance standards and to the implementation of the Registered Auditors criteria did we use? Investment Code; 8 Salisbury Square We conducted our work in accordance • examination of training and guidance London with International Standard on Assurance documentation, including the Toolkit EC4Y 8BB Engagements 3000 (ISAE 3000): for fund managers, and attended an 23 April 2010 Assurance engagements other than Audits internal training session for CDC staff; or reviews of Historical information, issued and by the International Auditing and • examination of other relevant sections Accounting Standards Board. of the Development Review to evaluate whether any disclosures are We conducted our engagement in inconsistent with our findings. compliance with the requirements of the IFAC Code of Ethics for Professional Inherent limitations Accountants, which requires, among other As outlined on page 8 and 9 of the requirements, that the members of the Development Review, CDC operates assurance team (practitioners) as well as as a fund of funds in the Private Equity the assurance firm (assurance provider) industry, in which relationships are be independent of the assurance client. generally trust-based and therefore the The IFAC Code also includes detailed nature and number of checks between requirements for practitioners regarding parties may vary significantly. As CDC integrity, objectivity, professional is one step removed from the companies competence and due care, confidentiality which ultimately receive its funds, CDC and professional behaviour. KPMG LLP is inherently limited in its ability to perform has systems and processes in place to compliance checks of these companies’ monitor compliance with the IFAC Code performance against minimum and to prevent conflicts regarding requirements of the Investment Code. independence. Adding value in Chapter emerging markets
CDC adds value to its fund managers, portfolio companies and markets in several ways. Through its investments, CDC can reach markets and sectors with poor access to finance. CDC can, in this way, help to build local capital markets and also act as a stimulus to encourage third parties to invest alongside it. Using the knowledge CDC gains, it can also provide support and training for its fund managers and contribute to broader international debate.
It is the additional effects that CDC can bring to the marketplace that differentiates its capital from that of commercial investors. 70 CDC Development Review 2009
Chapter 7: Adding value in emerging markets CDC adds value to its fund managers, portfolio companies and markets in several ways. We reach markets and sectors which have poor access to finance, help build local capital markets, provide support and training, share knowledge, pursue alignment on standards in international forums and mobilise third party capital.
Reaching markets and sectors with intermediaries and is especially targeted Locally based managers poor access to finance at SMEs, infrastructure projects and lines Almost all CDC’s fund managers are locally of credit to banks. based. All except four have local offices As part of its mandate, CDC has pursued within the environment in which they are investments in certain funds with higher This approach will allow CDC to invest investing.43 This provides CDC with insights risk profiles in return for longer-term further in countries where equity markets from across the entirety of its investment market building potential. These funds are not well established. In low income universe. Examples of office locations for specialise in start-up, early-stage and countries, in Africa in particular, local CDC’s fund managers include Accra, small and medium-sized enterprises longer-term debt financing is largely Colombo, Lagos, Nairobi, Johannesburg (SMEs) businesses, which are areas often absent. By risk sharing with local banking and Karachi as well as regional offices underserved by poorly developed local institutions CDC can assist in the located throughout India and China. capital markets. development of the credit market. Debt funds are discussed in more depth in In total, CDC’s fund managers have As an illustration, 74% of third party chapter 4. offices in 37 developing countries. Among capital invested at the end of 2008 in CDC’s 65 fund managers there are local Aureos’ funds (an SME-specialist fund Building local capital markets and local offices in 14 countries in sub-Saharan manager) was supplied by Development investment capacity Africa and 14 in Asia. There are local Finance Institutions (DFIs) other than offices in four countries in North Africa CDC. CDC has historically played a CDC’s success depends on selecting and seven countries in Latin America. pioneering role in establishing SME funds. fund managers with adequate experience In terms of countries, 18 fund managers It established a series of single country and a compelling investment strategy. In have offices in India, 11 fund managers funds in Africa in the 1990s which, in part, particular, CDC seeks fund managers who: have offices in South Africa and another paved the way for the establishment of 11 fund managers have offices in China the private equity industry in Africa. • act in line with CDC’s focus on the and South Africa respectively. Some Moreover, Aureos, CDC’s second largest poorest countries; countries are covered by just one local fund manager, was spun out of CDC and • have a record of successful office. An example of this is ManoCap has continued its commitment to the SME investments in commercially viable and which manages the Sierra Investment sector in developing markets. Since 2004, promising companies; and Fund from within Sierra Leone. CDC has invested in other SME fund • maintain a strong commitment to the managers as well. These include Avigo principles of responsible investment. in India and GroFin and Business Partners International in Africa. These funds are CDC mostly invests in funds with locally- currently invested in well over 200 SMEs. based fund managers, who are also often first time managers. By so doing, CDC is starting to complement the objective is to help establish and investment in equity funds by a movement develop local financial markets and towards debt capital. Debt financing investment capacity. is often supplied through financial
CDC’s added value
International Knowledge collaboration sharing Alignment of reporting and information Knowledge sharing
Ongoing Fund manager Development impact dialogue on capacity • Employment in portfolio companies effectiveness building and the wider economy 794 65 fund 134 • Increased tax revenues to portfolio Outcomes domestic governments DFID CDC managers funds companies • Increased awareness of ESG • Increased sustainability of businesses • Indirect and trickle down effects into local economies
Third party capital mobilisation
Additional investments Initiatives and support Other investors Chapter 7 – Adding value in emerging markets 71
Site Visits CDC conducts site visits, to monitor its Banro Corporation, has been drawn up according to World Bank portfolio and learn more about the impact standards, includes 150% compensation of its investments. One company visited Democratic Republic for all property lost through relocation. in 2009 was Banro, a start-up mine in the of Congo (DRC) Democratic Republic of Congo. Banro also aims to be a model for A start-up mine that has corporate and social responsibility by First time fund managers received local and NGO showing a long-term commitment to 58% of CDC’s fund managers are support the communities in which it operates. managing private equity funds for the first Although still an exploration, rather than time, introducing risk capital to allow local a mining operation and therefore not yet businesses to realise their expansion Banro is a gold exploration company generating any revenues, Banro has set potential. Historical examples include focused on exploring and developing up the Banro Foundation to help local Aureos, which pioneered SME mining rights in the gold belt of eastern communities improve their economic investments in East Africa in the late DRC. It is listed in both Toronto and New situation. The Banro Foundation spent 1990s, African Capital Alliance, which York. The company owns the gold mining approximately US$0.8m in 2008 on managed the first private equity fund in production licences of four projects along projects including schools, a clinic and Nigeria and GroFin and Business the Twangiza-Namoya gold belt in eastern a water distribution system. The Banro Partners, which are still largely alone in DRC. In 2009, the DRC government Foundation has created panels of providing capital for very small companies stated, “that all aspects of the company’s community members that decide, at a throughout Southern and East Africa. Mining Convention and its mining local level, which projects will be financed. licences respecting the company’s wholly- CDC continues to back first time fund owned gold projects in the DRC are in Community relations are important to managers and in 2009 invested with Rabo accordance with Congolese law”. Banro and are something that the Equity Advisers in India, as well as In addition, the Deputy Prime Minister company has worked hard to develop. Development Partners International and of the DRC and the official in charge of The non-government organisation (NGO), ManoCap in Africa. Supporting such first reconstruction, said: “We congratulate CARE commented: “Banro is an time managers is often considered to be Banro on its professional approach and appropriate partner for CARE as it has very risky by commercial investors but look forward to working together and demonstrated a serious commitment to CDC’s willingness to engage with new supporting them on all projects to community development through the fund managers is an important achieve a win/win for all stakeholders.” activities of its Foundation and its success contribution to the development of in creating capacity-building jobs and stronger capital markets in developing The DRC is one of Africa’s poorest nations opportunities for local Congolese.” countries. CDC works closely with its first with 60% of the population living below time fund managers to ensure that they the US$1.25 a day poverty line. It is also use CDC’s capital and that from other a difficult investment environment, ranking Key data investors to implement the highest 158th on Transparency International’s standards possible. transparency index, an indication of the Investment:1 US$18m challenges of doing business there. Actis Investment period: 2005-present In many cases, CDC plays an important classifies its investment in Banro as Sector: Mining (gold) role in attracting new investors to funds by having high inherent Environment, Social Fund manager: Actis and Governance (ESG) risk in what is a working actively with fund managers to Employment:2 1,409 rural and often unstable region. help them raise capital. CDC can be seen Turnover:2 Yet to commence production as a ‘stamp of approval’ for new fund As the Twangiza site progresses towards Resource (measured, indicated & inferred): managers in emerging markets, 11 million ounces gold reassuring and attracting other investors. becoming operational, Banro has worked hard to ensure that its adverse environmental and social impact is minimised. Banro has 1 US$14m was invested by Actis Africa Fund 2. CDC’s investment in Actis Africa Fund 2 is US$330m; total fund conducted a socio-economic study of size is US$355m. US$4m was invested by the Canada everybody involved in the project and is Investment Fund for Africa (CIFA), which is also managed by Actis. CDC’s investment in CIFA is US$20m; total fund size currently implementing a resettlement action is US$211m. plan for one local community. The plan, which 2 2008.
View of area around Banro mining site A secondary school constructed with funds from the Banro Foundation 72 CDC Development Review 2009
Adding value in emerging markets continued
Reaching underserved markets Support and training for fund managers Fund managers were also able to discuss Part of CDC’s mandate is to address the expectations that investors such as market failure in emerging markets. One One component of the value added by CDC and others have of their fund reports means of measuring this is to look at a CDC is the training provided to fund and valuations. CDC was also able to gain country’s credit rating, a measure of how managers, most of whom are locally further insight into how the new guidelines likely a country is to default on a loan. based in their respective markets. can be best implemented. Countries with a low credit rating are One such training opportunity arose in generally less attractive to investors and September 2009, when new International Beyond the IPEV guidelines, the training therefore prone to lack the capital needed Private Equity and Venture Capital covered other areas of relevance to fund for entrepreneurs. Measuring CDC’s Valuation (IPEV) guidelines were managers, including: portfolio against countries’ access to credit introduced. The guidelines were is not an easy task. CDC has compared its introduced to respond to a desire for • domiciles of holding companies; portfolio from the end of 2009 against two greater commonality across private equity • best practice reporting for mezzanine commonly available measures. in its valuation methods and for more funds; consistency between the International • other international accounting The first is Standard & Poor’s estimates Financial Reporting Standards (IFRS) standards and conflicts with IPEV of the credit rating for individual countries. and United States’ Generally Accepted guidelines on debt; and The second is a ranking for ease of Accounting Principles (US GAAP). • reporting in two currencies where accessing credit as presented by the World investments are made in a local Bank’s ‘Ease of Doing Business’ survey. The Training for fund managers in Africa currency that is not the fund currency. methodology behind this process is still and Asia evolving but the results do provide insight The introduction of the new guidelines The training conducted on the IPEV into the distribution of CDC’s portfolio. allowed CDC to interact closely with its valuation guidelines was a valuable fund managers to discuss the merits of opportunity for CDC to address and help The results from these two analyses the IPEV approach. CDC’s finance team raise its fund managers’ skills in this showed similar results. Out of the subsequently held meetings with 14 fund particular area. The training also improved countries with investment grade ratings managers, in Africa and Asia, to discuss their ability to manage relationships with approximately 15% of CDC’s portfolio the new guidelines. Fund managers who other investors. companies were located in countries with have met CDC’s finance team include the best investment grade. According to Aureos, BPI, Horizon, I&P, Tuninvest and Matters like these can be challenging to the results based on Standard & Poor’s Vantage in Africa and BTS, IDFC, India fund managers in CDC’s markets. The country credit rating, approximately 28% Value Fund Advisers, Kotak and dialogue with fund managers and the of CDC’s capital is invested in companies VentureEast in Asia. concerns raised provided valuable within countries beneath the investment feedback for CDC and ideas for which it grade credit ratings. 23% of companies Comprehensive coverage of topics might need to provide additional support. are in countries which are ungraded and Several additional but related topics the vast majority of these can also be were also discussed during the training assumed to have extremely unstable sessions. The meetings allowed CDC lending markets. to raise specific issues regarding fund reporting in order to improve fund A comparable 29% of CDC’s portfolio manager’s standards in line with best companies were located in the bottom international practice. 60% of countries as ranked in the ‘Ease of Doing Business’ survey. It is in these countries that access to credit is most difficult and where it is likely that fewest commercial investors will invest. As countries ranked at this end of the scale are typically low income, greater levels of CDC’s capital should be invested here in the future.
Number of portfolio companies by Standard & Poor’s Number of portfolio companies by World Bank ease of investment grade getting credit ranking
Largest countries Largest countries (number of companies) (number of companies) China (112), Malaysia (8), A-rated Top 20% Kenya (53), South Africa 121 Botswana (1) 115 (42), Malaysia (8) B-rated but India (167), South Africa India (167), China (112), investment grade 269 (42),Thailand (17) Second 20% 345 Costa Rica (13) B-rated beneath Kenya (53), Nigeria (41), Third 20% Nigeria (41), Thailand (14), investment grade 219 Costa Rica (14) 134 Tanzania (12) Ecuador (1) and C-rated Lower 20% Indonesia (17), Ghana (7), 5 Ukraine (4) 64 Algeria (7)
Ungraded* Tanzania (12), Côte Bottom 20% Côte d’Ivoire (8), 180 d’Ivoire (8), DRC (5) 30 Senegal (5), DRC (5) Source: Standard and Poor’s (www.standardandpoors.com/home/en/us) Regional 106 *Many ungraded countries will be C-rated Source: ‘Ease of Doing Business’ survey – www.doingbusiness.org/EconomyRankings Chapter 7 – Adding value in emerging markets 73
Third party capital mobilisation Sierra Investment Fund, ManoCap had already made several One of CDC’s objectives is to mobilise investments in Sierra Leone including in third party capital investment in emerging Sierra Leone Splash (the country’s first mobile payment markets by demonstrating the benefits of A pioneering fund in an company) and Ice Ice Baby (IIB), a successful investment to other capital supplier of clean flaked ice to fishermen providers. In this way, CDC can act emerging post conflict and other consumers in Freetown, Sierra as a ‘stamp of approval’ for new fund country Leone’s capital. Ali Khalil, Operations managers in emerging markets, Manager at IIB, commented on the improvements seen in recent months at reassuring and attracting other investors. In November 2009, CDC became the first the company: “IIB gives me courage to DFI to make a private equity commitment add more effort to the job because when Since 2004, CDC has committed more focused solely on Sierra Leone since the I first started the equipment broke down than US$5bn to 65 fund managers. end of the country’s civil war in 2002. frequently but since major investments Alongside CDC’s commitments, other CDC committed US$5m to Sierra have taken place we now have two investors have committed a total of Investment Fund, which makes generators instead of one and the US$24.3bn to these 65 fund managers. investments in small and medium sized business is starting to grow.” Capital from other DFIs accounts for enterprises in the West African nation. only US$2.3bn of this figure. The fund, which is the first of its kind DFID has a long history of supporting in Sierra Leone, is managed by locally Sierra Leone and is its largest donor, New methodology for estimating third based manager, ManoCap. party capital mobilisation contributing around £48m in aid last year. Gareth Thomas, Minister of State at DFID The CDC Board and the UK government’s CDC’s investment will provide financial said: “Sierra Leone is moving forward. Department for International Development backing to entrepreneurs in Sierra Leone, This landmark investment by CDC is (DFID) agreed that from 1 January 2009 stimulating economic growth and testament to Sierra Leone’s progress and CDC should follow a new methodology strengthening the burgeoning private will ultimately benefit people living in when assessing the extent to which third sector in the country. The country has extreme poverty by creating employment, party capital raised by a fund is due to made significant economic and political improving services and driving forward the presence of CDC. progress since the end of the civil war and economic growth.” its democratic government is keen to The new methodology applies to all fund attract foreign investment. The country managers and recognises that CDC can has until recently largely been ignored by only influence investors committing investors because of its history of violent Key data capital at the same time or after CDC. conflict, its poor infrastructure and a In addition, it is recognised that CDC’s shortage of managerial skills. Population: 6 million capital is likely to have had most impact Average per capita income: US$300 p.a. in mobilising capital for first time funds Economic growth in Sierra Leone has Average life expectancy: 49 as opposed to later funds with the been strong, averaging about 7% annually same manager. Gross national income: US$1.4bn over the past five years, despite a chronic Human development index: last out of lack of access to credit. While Sierra 177 countries based on 2005 data Leone has been reliant on donor funding, Ease of doing business: 148 out of 182 CDC’s commitment to private sector based on World Bank 2010 indicators investment will encourage entrepreneurial Average GDP growth: 7% over past 5 years talent to establish and grow businesses, which in turn will increase employment and reduce poverty.
Some of the beneficiaries of investment by the Sierra Investment Project 74 CDC Development Review 2009
Adding value in emerging markets continued
Commitment of third party capital at fund engagement was important in keeping CDC will encourage the fund closings prior to the one in which CDC investor representatives off the fund participates does not qualify for inclusion manager’s investment committee. This managers of investee funds in CDC’s estimate of capital mobilised. preserves the independence of the fund and the companies in which Commitments by other investors in the management from its investors. it directly invests to operate same fund closing as CDC or in subsequent closings count towards (Total fund $51m; CDC $10m; others $46m) in ways that, in addition to mobilisation and are subject to a generating financial returns so-called tapering factor. Insights from evaluations that meet the expectations CDC’s evaluation work in 2009 provides The tapering factor applied will depend further details on CDC’s role in investing of investors, provide other on whether it is a first, second or a alongside the capital of others. inputs into the private sector subsequent fund as follows: first time funds have no tapering, Fund 2s are The amount of capital invested alongside and community at large. tapered by 25%, Fund 3s are tapered by CDC varies significantly amongst the These will include, by way 50% and Fund 4s onwards are tapered by 20 funds evaluated. Third party capital of example, employment, 75% so that only 25% of investment by stands at US$2.45bn compared to CDC’s others counts as mobilisation. own commitments of US$1.03bn. CDC’s infrastructure benefits, social capital thus represents 30% of the total and environmental benefits, The tapering factor is applied to reflect the committed amount. Of the US$2.45bn application of business growing importance of the fund manager’s capital committed by third parties, 18% own track record as subsequent funds was committed by other DFIs. Other DFIs principles and good are raised. Mobilisation is then calculated invested alongside CDC in 12 of the governance (through the as the ratio of qualifying tapered third 20 funds which were evaluated. party capital committed to a fund to application of the Investment CDC’s commitment. Seven of the 20 funds evaluated raised Code and the creation of a total of third party capital in excess of ancillary support businesses). The target mobilisation rate as agreed with US$100m. Three of these funds were in DFID using the new methodology is at least Africa, two in China and one in South East Excerpt from Investment Policy 200% third party mobilisation of CDC’s Asia. The final fund to raise more than committed capital on a three year rolling US$100m in third party capital was a basis. Over the three year rolling basis from specialist debt fund. The two SME funds 2007 to 2009, CDC achieved a figure of evaluated raised less than US$10m in 278% capital mobilisation. CDC’s total private capital between them. This commitment was US$1,505m over this illustrates the difficulties faced in raising period. Based on CDC’s new methodology capital for such strategies. for measuring third party capital mobilisation the third party capital Nine of the fund managers evaluated deemed attributable to CDC’s presence had been successful in raising successor was US$4,187m. funds. CDC invested in all except one of these successor funds. A total of Example US$3.4bn in capital has been committed to these funds with CDC’s capital representing Shorecap II – CDC played a key role in 17% of the total. This suggests that the creation of Shorecap II, a microfinance CDC’s capital is not required to the same fund and was an investor at first close. extent in successor funds and that a core CDC was involved from the earliest part of CDC’s work is to maximise capital discussions and was able to establish for first and second funds. appropriate levels of personal fund manager commitments and a workable management fee structure. CDC’s
Third party capital mobilised (US$m) Total capital committed to CDC’s fund managers (US$m)
3 1CDC US$5.3bn 2 Other DFIs US$2.3bn 1 3 Commercial 2,170 investors US$19.3bn 2
1,200 662 817 578 265
2007 2008 2009
CDC commitment Mobilised capital Chapter 7 – Adding value in emerging markets 75
International collaboration Integration of findings across the management of environmental and participating DFIs and beyond social risks which was endorsed by International collaboration with other The key outcomes and recommendations all member institutions. stakeholders in emerging markets is of the study have now been incorporated essential for CDC for three reasons: into CDC’s revised Toolkit for fund Current initiatives managers and will also be integrated into The EDFI meeting in Helsinki in • to share our experience and insights CDC’s ESG training sessions with fund September 2009 identified 11 themes with others and learn from their managers from 2010 onwards. to be addressed by dedicated working knowledge; groups during the six month period • to reduce overlapping efforts and In addition, the findings of the report will leading up to the next meeting. repetition of work; and be presented to the ESG representatives The themes covered a broad array • to increase the efficiency and of the broader EDFI community in early of topics including: effectiveness of our development 2010 with a view to achieving further impact. harmonisation and alignment of • agreement on DFI internal practices perspectives among the DFIs. (definition of SMEs, exclusion lists, For these reasons CDC pursues broad investment fund categorisation, international collaboration and outreach EDFI and current collaboration transparency); across many channels. In 2009, in initiatives • specific ESG risks and topical addition to our ongoing work with all The EDFI Working Group on knowledge (climate change adaptation, the European DFIs (EDFI), CDC Harmonisation of Environmental and corporation governance, gender commissioned a study together with FMO Social Standards was established in 2006. matters); (the Dutch DFI), IFC and Norfund (the Initially set up as a short-term effort to • client reporting harmonisation; and Norwegian DFI) to investigate how to produce standards for co-financed • an aligned EDFI perspective on the encourage gender positive outcomes investments, the outcome and the updating of the International Finance in our investments. dialogue was deemed so successful that Corporation’s (IFC) Performance the working group has continued to meet. Standards. Gender study In particular, the ongoing harmonisation Collaboration in commissioning of of reporting formats, exclusion lists, EDFI London meeting in 2010 gender study standards and alignment on other matters The latest bi-annual gathering for the EDFI The gender study was commissioned in was considered valuable, not only for Working Group on Harmonisation of the autumn of 2009. The intention was to DFIs but also for funds and investee Environmental and Social Standards took provide practical guidance for the DFIs’ companies. The DFI members now meet place in April 2010 in London and was investment teams and fund managers every six months to discuss current issues organised by CDC. The outcomes of on how to address gender matters in and challenges as well as to exchange the 11 working groups were presented to investee companies. Specific efforts were information and lessons learned. all the participants. Further opportunities made to generate actionable and for alignment were also discussed pragmatic recommendations which would Achievements in 2009 including joint training of fund managers benefit the investee companies as well as In 2009 another step towards greater and sharing of training and other material. their employees. harmonisation was achieved when all Finally, the priorities and strategic EDFI members on 9 May 2009 signed direction for the next period was The study outlined gender-related risks the ‘EDFI Principles on Responsible discussed and specific working groups and opportunities in selected regions, Financing’, a declaration on environmental assigned to each of the agreed topics. countries and sectors in which the DFIs and social principles to be followed by are invested directly as well as indirectly all members when co-financing projects. through funds. The study provided a EDFI members have already started selection of best practice case studies implementing the declaration and have where companies and fund managers put into action a sound basis for the have applied some of the recommended approaches in the study. Further details of the study are discussed on pages 54 and 55.
EDFI member states
AWS – Austria BIO – Belgium CDC – UK COFIDES – Spain DEG – Germany FINNFUND – Finland FMO – The Netherlands IFU – Denmark NORFUND – Norway OeEB – Austria PROPARCO – France SBI-BMI – Belgium Sifem – Switzerland SIMEST – Italy SOFID – Portugal SWEDFUND – Sweden 76 CDC Development Review 2009
Adding value in emerging markets continued
UNPRI and the principles • asset owners: Other Engagements The United Nations Principles for organisations representing end-asset African Venture Capital Association Responsible Investment (UNPRI) is an owners who hold long-term retirement (AVCA) initiative to promote the incorporation of savings, insurance and other assets; AVCA is a Johannesburg-based not-for- ESG issues into mainstream investment • investment managers: profit entity founded to promote, develop decision-making and ownership practices. investment management companies and stimulate private equity and venture There are six principles that are voluntary serving an institutional and/or retail capital in Africa. AVCA is committed to and aspirational in nature and cover ESG market and managing assets as a promoting high ethical standards of issues and related policies and practices. third-party provider; and business conduct and professional It also includes disclosure of information • professional service partners: competence in the private equity and on ESG issues, collaboration and organisations offering products or venture capital industries. CDC’s support reporting on progress in implementing services to asset owners and/or of AVCA further strengthens the the principles. investment managers. development of local financial markets through AVCA’s training offerings in The intention is that the application of the CDC’s involvement and rationale private equity broadly, as well as more principles will contribute to demonstrating CDC is actively involved in two working specific offerings in valuation and the business case behind ESG sensitive groups, the Emerging Markets and the stakeholder management. investment – thereby illustrating both Private Equity Working Groups. CDC can better long-term financial returns and the contribute from 60 years of presence in Royal African Society (RAS) opportunity to align the objectives of emerging markets and hopes to learn RAS is one of Britain’s foremost societies institutional investors and those of society from the experiences of others. In addition, focusing on Africa, with a history going at large. our fund managers should benefit from back more than 100 years. Its in-depth third capital raised from fellow UNPRI knowledge, long-term engagement and UNPRI signatories signatories, something that should result broad membership base makes it an UNPRI signatories form part of a network in more stringent incorporation, disclosure important meeting place for all parties with opportunities to pool resources and and implementation of internationally interested in African emerging markets, influence, lower the costs and increase approved ESG principles. investors and non-investors alike. RAS the effectiveness of research and active aims to foster a better understanding ownership practices with regard to The portfolio companies will also be able of Africa in the UK and throughout the responsible investment. The initiative also to benefit as investments originating from world and to disseminate knowledge supports investors in working together to UNPRI signatories will give access to a and insight to make a positive difference address systemic problems that, if network that can provide support and to Africa’s development. remedied, may then lead to more stable, experience towards implementing sound accountable and profitable market ESG policy whilst also supporting CDC regards its corporate membership conditions overall. In total there are 592 increased financial returns. Perhaps most and sponsorship of RAS as a vital channel current signatories, which can be divided importantly however is the opportunity to reach a broader community of into three groups: that the UNPRI provides to participate in influencers, investors and providers of and drive a global ESG discussion with third party capital. The various signatories with more than US$18 trillion conferences and other events taking of assets in 36 countries. place at RAS bring about a better understanding of the respective markets and what it takes to succeed, both commercially and from a development impact perspective.
The large number of UNPRI signatories and assets under management (AUM) provides an excellent opportunity to learn from and contribute to discussions on responsible investing
750 20
637 15 500 531 447 10 362 Signatories 250 305 AUM (US$bn) 263 5 100 135 0 0 Apr 06 Oct 06 Apr 07 Oct 07 Apr 08 Oct 08 Apr 09 Oct 09
AUM Signatories Chapter 7 – Adding value in emerging markets 77
Emerging markets challenges – The range and extent of risks also differ Fact finding investing for commercial returns significantly depending on the country Local knowledge, independent sources and the sector of investment. In some of information and local presence are Emerging markets can provide impressive countries macroeconomic factors such needed throughout the life of the returns but there are also significant risks as infrastructure, monetary policy and investment. involved which deter many investors. regulatory environment may present CDC draws on more than 60 years formidable challenges to the business Extensive research is required in early of investing in these markets with a community. Many emerging markets also stages. This applies equally to markets, respectable commercial track record face substantial political risk. There can companies and key individuals running and broad exposure across a wide range also be large differences between different the business. of sectors and countries. This section sectors and the risks they present. examines CDC’s experience and Construction, for example, is a sector Structure highlights some of the most significant that involves large investments and is Corruption and lack of transparency are challenges and measures that an heavily dependent on public permits serious issues in many emerging markets. investor can take to manage these and certificates which may induce Great attention to detail in governance risks and increase the probability corrupt practices. arrangements is therefore required along of a successful investment. with robust and clear legal agreements. Select key lessons learnt Equally important is clear communication Emerging markets and investment While the risks are many and market on transparency of information, definitions fundamentals information often leaves much to be of roles and responsibilities and While emerging markets are different to desired, much can be learned from reporting obligations. developed markets, the fundamentals for CDC’s and other DFIs’ decades of investors are broadly the same. Investors experience in these markets. Some of The adoption of ESG best practices can in emerging markets should: CDC’s key lessons learnt relate to investor yield significant commercial and non- approach, fact finding and structure commercial benefits and is often a key • conduct thorough due diligence around the investment. differentiator in emerging markets. It can on potential investments; enhance community relations, strengthen • take a long term perspective; Investor approach brand and attract and retain talent. It is • manage risk as appropriate for Investors must expect risk and have a also a vital consideration in sectors with the portfolio; tolerance for it. This does not mean taking higher ESG risks such as extractive • never compromise on standards; and unnecessary risks, but rather managing industries, construction and • always seek to import best practices them better and devoting more effort to manufacturing. A diversified portfolio where they are needed. doing so throughout the lifecycle of the across sectors and countries is even more investment including during due diligence. important in emerging markets as these Notable differences between emerging are often subject to stronger influence markets and others A long term perspective is essential as of macroeconomic and political factors. Despite the lasting validity of these emerging markets on an individual basis principles there are also important can be very volatile. Should an investor not The successful investor will be the one differences. Investors in developed have the stamina to remain invested for a who understands, respects and acts economies are generally able to rely on long time and outlast possible troughs it upon these principles of investing in impartial, expedient and non-corrupt might impact the return on the investment. emerging markets. judicial institutions to settle disputes, breaches of contractual obligations and A pioneering mentality and a willingness CDC’s results, which over the last other legal matters. This is often not the to approach the unknown is required to five years have out-performed the case in emerging markets where a judicial confront these challenging business market, demonstrate that investing in process can take more than 10 years to environments. Lack of data, poor these markets can be both highly complete, corruption may be manifest infrastructure, short supply of skilled local developmental and financially successful. and impartiality is not always guaranteed. labour and other constraints require Furthermore, the availability and accuracy innovative approaches and perseverance. of information about markets, companies and individuals often leaves investors less informed than in developed economies.
Key considerations for investments in emerging markets
Investor approach > Tolerance for risk > Long term perspective > Pioneering mentality
Fact finding Increased probability > Local knowledge and presence of successful investment > Background research and checks
Structure > Corruption and governance > Best practice approach to ESG > Diversified portfolio 78 CDC Development Review 2009
One example of a challenging investment Forbes, Actis conducted detailed due Key data is Alexander Forbes whose transformation diligence on the issues arising from the after a poor corporate governance previous practice of ‘bulking’. Investment:1 US$96m event, prior to Actis’ investment, Investment period: July 2007-present is described below. It was Actis’s conclusion that the matter Sector: Financial services had been satisfactorily and professionally resolved by Alexander Forbes. Actis was Fund manager: Actis 2 Alexander Forbes, also fully supportive of an Alexander Employment: 3,541 Forbes initiative around the time of due Turnover:3 ZAR4.782m South Africa 3 diligence that the business practices of Turnover growth: ZAR344m Rebuilding the reputation each of its operations should be assessed EBITDA:3 ZAR1.178m by independent auditors. The audit EBITDA growth:3 ZAR1m of a leading investment and highlighted several practices that fell Taxes paid:3 ZAR166m insurance intermediary short of international best practice, which Alexander Forbes duly addressed. 1 US$52m was invested by Actis Africa Fund 2. CDC’s Moreover, the Board was made aware of investment in Actis Africa 2 Fund is US$330m; total fund In 2007, CDC’s fund manager Actis size is US$355m. US$32m was invested by the Canada invested more than US$96m in Alexander certain breakdowns in internal controls. Investment Fund for Africa (CIFA), which is also managed Forbes, a diversified financial services As a result, a risk manager was appointed by Actis. CDC’s investment in CIFA is US$20m; total fund and a risk and compliance unit created. size is US$211m. US$12m was invested by the Actis Africa company specialising in risk services, Empowerment Fund. CDC’s investment in the Actis Africa financial services and investment Risk management has subsequently Empowerment Fund is US$50m; total fund size is US$50m. solutions. The company holds a dominant become one of the CEO’s main goals. 2 2008. 3 12 months to 31 March 2009. position within the South African marketplace. Since Actis’s investment, Alexander Forbes has also focused on Broad-Based Between 1996 and 2004, Alexander Black Economic Empowerment and has Forbes had become involved in the achieved an impressive level 3 rating. practice of bulking. This involved the This, accompanied by the company’s company grouping together the current improved environmental management accounts of around 1,700 pension funds systems, has helped to restore Alexander in order to negotiate better interest rates. Forbes’s international reputation. For a Without disclosing the practice to clients, company of Alexander Forbes’ Alexander Forbes was itself receiving international standing, reputation is vital; income due to this ‘bulking’, which upon Actis’s investment and input has played discovery clients felt should have been an important role in the process passed on to them. After a Financial of restoring the company’s credibility. Services Board (FSB) investigation, Alexander Forbes discontinued the scheme in 2004 and paid ZAR368m (c.US$50m) back to clients and a further ZAR12m (c.US$1.6m) to the FSB consumer education fund. Before making its investment in Alexander
Other banks in which CDC is invested: Other banks in which CDC is invested: Banque Commerciale du Rwanda (BCR) Equity Bank, Kenya Appendix 80 CDC Development Review 2009 Appendix CDC’s Investment Code
CDC’s mission is to generate wealth in emerging markets, particularly in poorer countries, by providing capital for investment in sustainable and responsibly managed private sector businesses.
CDC invests in the creation and growth of commercially viable private businesses in poor countries. Commercially sustainable businesses, supported by CDC, play a vital part in economic development: they employ and train people, pay taxes, invest in research and development, and build and operate infrastructure and services. This contributes to economic growth, which benefits poor people. CDC also mobilises private investment in these markets both directly and by demonstrating profitable investments.
Sustainable private sector development requires responsible business management of environmental, social and governance (“ESG”) matters. This Investment Code defines CDC’s principles, objectives, policies and management systems for sustainable and responsible investment with respect to ESG.1 It also includes an Exclusion List, which specifies businesses and activities in which CDC will not invest.2
1. Principles
CDC, and the businesses in which its capital is invested, will:
• comply with all applicable laws; • as appropriate, minimise adverse impacts and enhance positive effects on the environment, workers, and all stakeholders; • commit to continuous improvements with respect to management of the environment, social matters and governance; • work over time to apply relevant international best practice standards,3 with appropriate targets and timetables for achieving them; and • employ management systems which effectively address ESG risks and realise ESG opportunities as a fundamental part of a company’s value.
2. Objectives and policies
2a. The environment
Objectives
• To minimise adverse impacts and enhance positive effects on the environment, as relevant and appropriate, from the businesses in which CDC’s capital is invested. • To encourage the businesses in which CDC’s capital is invested to make efficient use of natural resources and to protect the environment wherever possible. • To support the reduction of greenhouse gas emissions which contribute to climate change from the businesses in which CDC’s capital is invested.4
Policy
Businesses in which CDC’s capital is invested will:
• operate in compliance with applicable local and national laws (as a minimum); • assess the environmental impact of their operations as follows: > identify potential risks and appropriate mitigating measures through an environmental impact assessment where business operations could involve loss of biodiversity or habitat, emission of significant quantities of greenhouse gases, severe degradation of water or air quality, substantial solid waste or other significant negative environmental impacts;5 and > consider the potential for positive environmental impacts from business activities; and • take appropriate actions to mitigate environmental risks, ameliorate environmental damage, and enhance positive effects as follows: > where an activity is assessed to present significant environmental risks, work over time to apply the relevant IFC policies and guidelines,6 if these are more stringent than local legislation, with appropriate targets and timetable for improvements; and > as appropriate, work over time towards international environmental best practice standards.7
1 CDC’s Investment Code is compatible with the 2006 International Finance Corporation (“IFC”) Policy and Performance Standards on Social and Environmental Sustainability (“IFC Performance Standards”). See www.ifc.org/ifcext/enviro.nsf/Content/PerformanceStandards. A Fund Manager that follows the IFC Performance Standards fulfils the requirements on the Environment and Social Matters set out in this Investment Code. The Investment Code is also compatible with the 2007 agreement for common environmental and social standards among the European Development Finance Institutions (“EDFI Rome Consensus”). 2 CDC’s Exclusion List is compatible with those of the IFC and the EDFI Rome Consensus. 3 As referenced in this Investment Code and as may develop over time. 4 In line with the 1994 United Nation Framework Convention on Climate Change and the associated 2005 Kyoto Protocol (“UN Framework Convention”), see www.unfccc.int/2860.php as may be amended from time to time. Appendix 81
2b. Social matters 2b.i. Labour and working conditions
Objectives
• To require the businesses in which CDC’s capital is invested to treat all their employees and contractors fairly and to respect their dignity, well-being and diversity. • To encourage the businesses in which CDC’s capital is invested to work over time towards full compliance with the International Labour Organization (“ILO”) Fundamental Conventions8 and with the United Nations (“UN”) Universal Declaration of Human Rights.9
Policy
Businesses in which CDC’s capital is invested will:
• comply with applicable local and national laws (as a minimum); • not employ or make use of forced labour of any kind; • not employ or make use of harmful child labour;10 • pay wages which meet or exceed industry or legal national minima; • treat their employees fairly in terms of recruitment, progression, terms and conditions of work and representation, irrespective of gender, race, colour, disability, political opinion, sexual orientation, age, religion, social or ethnic origin, or HIV status; • allow consultative work-place structures and associations which provide employees with an opportunity to present their views to management; and • for remote operations involving the relocation of employees for extended periods of time, ensure that such employees have access to adequate housing and basic services.
2b.ii. Health and safety
Objectives
• To attain safe and healthy working conditions for employees and contractors of the businesses in which CDC’s capital is invested. • To safeguard the health and safety of all those affected by the businesses in which CDC’s capital is invested.
Policy
Businesses in which CDC’s capital is invested will:
• comply with applicable local and national laws (as a minimum); • assess the health and safety risks arising from work activities; and • take appropriate actions to eliminate or reduce risks to health and safety as follows: > where an activity is assessed to present significant health and safety risks,11 work over time to apply the relevant IFC policies and guidelines,12 if these are more stringent than local legislation, with appropriate targets and timetable for improvements; and > as appropriate, work over time towards international best practice standards for health and safety.13
5 Activities with potential significant adverse environmental impacts that are diverse, irreversible or unprecedented; mindful of potential cumulative, secondary or synergistic impacts that may occur as a consequence. 6 The IFC Performance Standards and the 2007 IFC Environmental, Health and Safety Guidelines (“IFC EHS Guidelines”), as may be amended from time to time and adopted by CDC. IFC EHS Guidelines include general guidelines and industry sector guidelines for forestry, agribusiness/food production (including fisheries), general manufacturing, oil and gas, infrastructure, chemicals (including pharmaceuticals), mining and power. See www.ifc.org/ifcext/enviro.nsf/Content/PerformanceStandards and www.ifc.org/ifcext/policyreview.nsf/Content/EHSGuidelinesUpdate. 7 Including the range of internationally certifiable environmental standards issued by the International Organization for Standardization (“ISO”), the ISO 14000 series, notably including standards for environmental management systems (ISO 14001) and greenhouse gas emissions (ISO 14064-65), as may be amended from time to time. See www.iso.org. 8 The ILO Fundamental Conventions are the Conventions on Freedom of Association and Collective Bargaining; Forced Labour; Child Labour; and Non-Discrimination, as may be amended from time to time. See www.ilo.org/ilolex/english/docs/declworld.htm for the texts of these Conventions and a list of the countries that have ratified each of them. 9 See www.un.org/Overview/rights.html. 10 As defined by the ILO C138 Minimum Age Convention from 1973 and the ILO C182 Worst Forms of Child Labour Convention from 1999. See www.ilo.org/ilolex/english/docs/declworld.htm 11 Activities that could have a severe health or safety impact for workers or affected communities. 12 The IFC Performance Standards and the IFC EHS Guidelines, as may be amended from time to time and adopted by CDC. See www.ifc.org/ifcext/enviro.nsf/Content/ PerformanceStandards and www.ifc.org/ifcext/policyreview.nsf/Content/ EHSGuidelinesUpdate. 13 Including OHSAS 18001, the international occupational health and safety management system specification, and industry specific international good practice standards related to the safety of product use, e.g. the international Good Manufacturing Practice (“GMP”) standards for food and pharmaceutical products promoted by the World Health Organization (“WHO”), see www.who.org. 82 CDC Development Review 2009
2b.iii. Other social matters
Objectives
• To be objective, consistent and fair with all stakeholders of the businesses in which CDC’s capital is invested. • To recognise and, as appropriate, promote the social development impact from the businesses in which CDC’s capital is invested.
Policies
Businesses in which CDC’s capital is invested will:
• take account of their impact on employees, contractors, the local community and all others affected by their operations as follows: > identify potential adverse effects and appropriate mitigating measures through a social impact assessment in cases involving resettlement, critical cultural heritage, indigenous peoples, non-local labour or other issues where the negative impact could be significant;14 and > consider social development contributions; and • take appropriate actions to mitigate risks, ameliorate negative impacts, and enhance positive effects.15
2c. Governance: Business integrity and good corporate governance
Objectives
• To ensure that CDC, and the businesses in which CDC’s capital is invested, exhibit honesty, integrity, fairness, diligence and respect in all business dealings. • To enhance the good reputation of CDC. • To promote international best practice in relation to corporate governance in the businesses in which CDC’s capital is invested.16
Policy
CDC, and the businesses in which CDC’s capital is invested, will:
• comply with all applicable laws and promote international best practice,17 including those laws and international best practice standards intended to prevent extortion, bribery and financial crime; • uphold high standards of business integrity and honesty; • deal with regulators in an open and co-operative manner; • prohibit all employees from making or receiving gifts of substance in the course of business; • prohibit the making of payments as improper inducement to confer preferential treatment; • prohibit contributions to political parties or political candidates, where these could constitute conflicts of interest; • properly record, report and review financial and tax information;18 • promote transparency and accountability grounded in sound business ethics; • use information received from its partners only in the best interests of the business relationship and not for personal financial gain by any employee; • clearly define responsibilities, procedures and controls with appropriate checks and balances in company management structures; and • use effective systems of internal control and risk management covering all significant issues, including environmental, social and ethical issues.
14 Activities with potential significant adverse social impacts that are diverse, irreversible or unprecedented. 15 As relevant, by applying IFC Performance Standards on Land Acquisition and Involuntary Resettlement; Indigenous Peoples; and Cultural Heritage; as may be amended from time to time and adopted by CDC. See www.ifc.org/ifcext/enviro.nsf/Content/PerformanceStandards. 16 Including the 2004 Organisation for Economic Cooperation and Development (“OECD”) Principles of Corporate Governance, as may be amended from time to time. See www.oecd.org. 17 Including the 2005 UN Anti-Corruption Convention, see www.unodc.org/unodc/en/treaties/CAC/index.html; the 1997 OECD Anti-Bribery Convention, see www.oecd.org; and, as relevant, the 2005 Extractive Industries Transparency Initiative (“EITI”), see www.eitransparency.org; as may be amended from time to time. 18 CDC promotes the International Financial Reporting Standards (“IFRS”) issued by the International Accounting Standards Board (“IASB”), see www.iasb.org; and the International Private Equity and Venture Capital Valuation Guidelines (“IPEVC”), see www.privateequityvaluation.com. Appendix 83
3. Exclusions
CDC’s capital will not be invested in the following businesses or activities:
• production of or trade in any product or activity deemed illegal under applicable local or national laws or regulations, or banned by global conventions and agreements, such as certain: > hazardous chemicals, pesticides and wastes;19 > ozone depleting substances;20 and > endangered or protected wildlife or wildlife products;21 • production of or trade in arms, i.e., weapons, munitions or nuclear products, primarily designed or primarily designated for military purposes; or • production of, use of or trade in unbonded asbestos fibres.22
CDC’s capital will not be invested in businesses for which the following activities or products are, or are intended to be, a significant source of revenue:
• gambling; • pornography; or • tobacco or tobacco related products.23
4. Management systems for CDC’s fund managers24
In order to implement CDC’s Investment Code effectively, CDC requires its Fund Managers to enter into a formal agreement pursuant to which each Fund Manager commits to an investment undertaking similar in substance to sections 1 – 4 of this Investment Code.25
Where Fund Managers have effective control or significant influence over portfolio companies,26 CDC requires its Fund Managers to procure that such portfolio companies sign an undertaking confirming that they will operate in line with sections 1 – 3 of this Investment Code.
CDC also requires its Fund Managers to establish and maintain ESG management systems27 which:
• assess the impact of all new investments on ESG matters as an integral part of the investment appraisal process; • give new investments a risk rating on ESG issues to determine the appropriate level of management and monitoring; • if an investment is made despite identified shortcomings in relation to ESG issues, or if any issues would arise during the investment period, assist the portfolio company concerned to develop an action plan to address such issues, with appropriate targets and timetable for improvements; • encourage the managers of portfolio companies to work towards continuous improvements in these areas, with targets for improvements as appropriate; • encourage the managers of portfolio companies to adopt and implement policies relating to ESG matters, particularly where businesses entail significant risks; • monitor portfolio companies’ performance on ESG matters and their progress towards relevant action plans and targets for improvements; • monitor and record incidents involving portfolio companies that result in loss of life, material effect on the environment, or material breach of law, and promote appropriate corrective actions; and • consider sections 1 – 3 of this Investment Code in all investment and divestment activities.
19 Including those specified in the 2004 Stockholm Convention on Persistent Organic Pollutants (“POPs”), see www.pops.int; the 2004 Rotterdam Convention on the Prior Informed Consent Procedure for Certain Hazardous Chemicals and Pesticides in International Trade, see www.pic.int; and the 1992 Basel Convention on the Control of Transboundary Movements of Hazardous Wastes and their Disposal, see www.basel.int; as may be amended from time to time. 20 As covered in the 1999 Montreal Protocol on Substances that Deplete the Ozone Layer, see www.ozone.unep.org, as may be amended from time to time. 21 As covered in the 1975 Convention on International Trade in Endangered Species or Wild Flora and Fauna (“CITES”), see www.cites.org, as may be amended from time to time. 22 This does not apply to purchase and use of bonded asbestos cement sheeting where the asbestos content is less than 20%. 23 Except, in the case of tobacco production only, with an appropriate timeframe for phase-out. 24 For the purposes of the Investment Code, “Fund Manager” means (i) investment fund managers managing capital on behalf of CDC; (ii) financial institutions managing and/or investing capital on behalf of CDC; and (iii) other intermediated institutions managing and/or investing capital on behalf of CDC. 25 By side letter or equivalent agreement. 26 A Fund Manager will be deemed to have significant influence over a portfolio company where its fund has (i) an ownership interest in the portfolio company in excess of 20%, which is presumed to be a level that allows for participation in the financial and operating policies of a portfolio company (if the percentage is lower but gives rise to the same participation, this will also meet the definition of significant influence); or (ii) board representation to a level that allows for participation in determining the financial and operating policies of the portfolio company; or (iii) rights to influence the financial and operating policy decisions of the portfolio company pursuant to a shareholders’ or similar agreement. 27 Further guidance on ESG management systems and assessments is provided in CDC’s Toolkit for Fund Managers, see www.cdcgroup.com. Guidance on environmental and social management systems and assessments is provided in IFC Performance Standard 1, see www.ifc.org/ifcext/enviro.nsf/Content/ PerformanceStandards. ISO 14001 is a certifiable international standard to help organisations minimise how their operations negatively affect the environment, see www.iso.org. 84 CDC Development Review 2009
To demonstrate the implementation of this Investment Code, CDC requires its Fund Managers to:
• report annually on the implementation of their ESG management systems and on the performance of portfolio companies against sections 1 – 3 of this Investment Code in a format acceptable to CDC;28 • set targets for improvements where appropriate; and • as soon as possible inform CDC about incidents involving portfolio companies that result in loss of life, material effect on the environment, or material breach of law, and any corrective actions taken.
5. Management systems for CDC
CDC will:
• assist its Fund Managers as appropriate to establish and maintain ESG management systems; • monitor the implementation of the Investment Code through its Fund Managers’ annual reports, with verifications as appropriate; • evaluate its Fund Managers’ implementation of the Investment Code periodically, using internal and external sources as appropriate, usually: > at the end of a fund’s investment period or the half-way point of the duration of a fund, which would typically be five years after a standard fund has commenced; and > at the end of the duration of a fund, which would typically be 10 years after a standard fund has commenced; • in instances where CDC invests directly and independently, establish and maintain ESG management systems substantially similar to those described above for its Fund Managers; • consider the cumulative effects of CDC’s investments with respect to the Investment Code and: > minimise adverse effects; > maximise development impact; and > promote synergies; • identify major risks and opportunities associated with climate change in investments and potential investments made by its Fund Managers and proactively promote through those Fund Managers the application of international best practice standards in the reduction of emissions of greenhouse gases;29 • incorporate lessons learned into CDC’s future investment strategy; • keep up-to-date on new developments with respect to relevant international agreements and best practice standards; and • review this Investment Code periodically to ensure its continuing suitability and effectiveness.
28 A suggested format for ESG reporting is available on CDC’s website, while other reporting formats could be acceptable. See www.cdcgroup.com. 29 In line with the UN Framework Convention, as may be amended from time to time, and including IFC Performance Standards, IFC EHS Guidelines, and ISO 14064-65, as may be amended from time to time and adopted by CDC. See www.unfccc.int/2860.php, www.ifc.org/ifcext/enviro.nsf/Content/PerformanceStandards, www.ifc.org/ifcext/policyreview.nsf/Content/EHSGuidelinesUpdate and www.iso.org. Footnotes 85 Footnotes
Introduction and Chapter 1 1. Low income countries are defined by CDC in accordance with the World Bank’s 2006 categorisation as those countries with Gross National Income (GNI) below US$905 per annum. 2. Middle income countries are defined by CDC in accordance with the World Bank’s 2006 categorisation as those countries with Gross National Income (GNI) between US$905 and US$11,115 per annum. 3. OECD, www.oecd.org. 4. UNODC, www.unodc.org/unodc/en/treaties/CAC/index.html. 5. Including those specified in the 2004 Stockholm Convention on Persistent Organic Pollutants (POPs), see www.pops.int; the 2004 Rotterdam Convention on the Prior Informed Consent Procedure for Certain Hazardous Chemicals and Pesticides in International Trade, see www.pic.int; and the 1992 Basel Convention on the Control of Transboundary Movements of Hazardous Wastes and their Disposal, see www.basel.int; as may be amended from time to time. 6. As covered in the 1999 Montreal Protocol on Substances that Deplete the Ozone Layer, see www.ozone.unep.org, as may be amended from time to time. 7. As covered in the 1975 Convention on International Trade in Endangered Species or Wild Flora and Fauna (CITES), see www.cites.org, as may be amended from time to time.
Chapter 2 8. ‘Voices of the Poor’, The World Bank (2009). www.worldbank.org. 9. Sub-Saharan Africans Rank the Millennium Development Goals. Tortara, R. (2009), Gallup Inc. 10. The Eurostat definition has been used in the benchmarks against EU 15 fatality rates: The incidence rate = (number of fatal accidents at work that occurred during the year/number of persons in employment in the reference population) x 100,000. A fatal accident at work is a discrete occurrence in the course of work with physical or mental harm, leading to death within one year of the accident. It excludes accidents on the way to or from work, occurrences having only a medical origin, and occupational diseases. To adjust for differences between the Member States in the distribution of workforce across the risk branches, a standardisation is made giving each branch the same weight at national level as in the European Union total.
Chapter 3 (Asia) 11. Annual Deal Round Up 2009. www.vccedge.com; 12. Reserve Bank of India, www.rbi.org.in. 13. Article ‘Worryingly fragile’, The Economist, 13 November 2009. 14. ‘Global Employment Trends’, January 2010 publication, as appeared on www.ilo.org. 15. IFC ‘2008 Annual Report: Creating Opportunities’. 16. Alternative Assets Network ‘Asia Private Equity Review Jan 2010’ www.altassets.com. 17. ‘China’s Yuan may struggle to meet 3% inflation target’, 6 March 2010, Bloomberg News, www.bloomberg.com. 18. Article ‘Sensex adds 81 per cent in 2009’, as appeared on www.indianexpress.com. 19. www.kaizenpe.com. 20. UNESCO, www.unesco.com.
Chapter 3 (Africa) 21. ‘What kind of fiscal stimulus for Africa’, The World Bank, www.worldbank.org. 22. ‘A Rapid Impact Assessment of the Global Economic Crisis on Uganda’, The International Labour Organization, www.ilo.org. 23. ‘New Financiers are Narrowing Africa’s Infrastructure Deficit’, The World Bank, www.worldbank.org. 24. Transparency International, www.transparency.org/policy_research/surveys_indices/cpi/2009.
Chapter 4 (Alternative investment) 25. The ‘bottom of the pyramid’ is a common reference for the largest, and poorest socio-economic group. In global terms, it applies to be on US$2 a day, typically in developing countries. 26. ‘Africa’s Infrastructure. A time for transformation’; The World Bank, www.worldbank.org. 27. ‘Microfinance in Africa, State-of-the-sector report’; CARE www.care.org. 28. Microfinance Investment Exchange, www.mixmarket.org. 29. Robinson, Marguerite S, ‘Microfinance: the Paradigm Shift from Credit Delivery to Sustainable Financial Intermediation’, in Mwangi S Kimenyi, Robert C Wieland and J D Von Pischke (eds), 1998, ‘Strategic Issues in Microfinance’, Ashgate Publishing: Aldershot. 86 CDC Development Review 2009
Chapter 4 (Agribusiness) 30. ‘2008 Annual Report: Creating Opportunities’. International Finance Corporation, www.ifc.org.
Chapter 4 (Financials) 31. ‘World Investment Report’ (2008); UNCTAD, www.unctad.org. 32. ‘Non-performing assets for banking industry to rise’, Crisil Rating, 2009.
Chapter 4 (Consumer) 33. ‘Special Report: Developing world to overtake advanced economies in 2013’ (2009); www.euromonitor.com.
Chapter 5 34. ‘Clean Energy Trends 2008’; Clean Edge www.cleanedge.com. 35. ‘The impact of climate change on pro-poor growth’; Department for International Development, www.dfid.org. 36. International Labour Conference, 98th Session, 2009 Report VI, Gender equality at the heart of decent work. 37. UNIFEM (2009) www.unifem.org. 38. ‘Embedding Gender in Sustainability Reporting – A Practitioner’s Guide’, 2009; document produced by the Global Reporting Initiative on the International Finance Corporation. 39. Catalyst, 2007. The Bottom Line: Corporate Performance and Women Representation on Boards. McKinsey & Company. 2007. Women Matter: Gender diversity, a corporate performance driver. Deszõ, Cristian L., and David Gaddis Ross. 2008. 40. ‘UNDP Gender Guidance for National Aids Responses’; UNDP, www.undp.org.
Chapter 6 41. Gases which contribute to climate change, such as carbon dioxide and methane. 42. As defined by IFC’s Performance Standards and IFC/World Bank EHS Guidelines, and as may be amended from time to time and adopted by CDC. The significance of a business contribution to GHG varies between industry sectors. A common threshold is 100,000 tons CO2 equivalent per year for the aggregate emissions of direct sources and indirect sources associated with purchased energy for own consumption. This or similar thresholds will apply to such industry sectors or activities as energy, transport, heavy industry, agriculture, forestry, and waste management in order to help promote awareness and reductions of emissions. Estimation methodologies are provided by the Intergovernmental Panel on Climate Change (IPCC), various international organisations, and relevant country agencies.
Chapter 7 43. Excluding the seven microfinance fund managers. Data disclaimer 87 Data disclaimer
Whilst we have used our reasonable Data on employment and taxes paid, as efforts to ensure the accuracy of data with all other data, in this report save for used in this report, certain data has not audited financial data, should be read as been audited or independently verified. indicative of magnitude rather than exact Most of the data has been provided to us figures. We have therefore rounded all by our fund managers. Fund managers data in a conservative manner. We have and portfolio companies have reviewed avoided extrapolations, which would the case studies specifically about them. show estimated data for CDC’s entire portfolio, in order to keep quoted figures Data on employment and taxes paid has as close as possible to the information we been received from many but not all of have received from our fund managers. CDC’s portfolio companies. We have received this data from the fund managers Apart from tax data and unless otherwise who have invested our capital (and the stated the financial data and valuations capital of others) in these businesses. contained in this report relate to the year Data may be from different points in time ended 31 December 2009. but was requested to relate as closely to year end 2008 as possible. Employment Any errors or omissions are regrettable data may sometimes include contract but, as with any report based on extensive workers and other non-permanent data received from third parties in workers. Tax data mostly refers to developing countries, difficult to avoid corporate taxes paid in 2008 by CDC’s entirely. CDC will continue to seek to portfolio companies. improve its efforts to ensure data quality and enrich its knowledge management systems in future.
✉ Feedback CDC welcomes all feedback on this report and is seeking opportunities to improve the standard of its publications. A feedback form is published online to facilitate this. Please see www.cdcgroup.com
Alternatively, feel free to contact CDC by email at [email protected]. Contacts for CDC’s ESG and communications team are also available from the website. 88 CDC Development Review 2009 Acronyms and additional information
Below is a list of acronyms that occur in ILO International Labour Design the report. It is not intended to be Organization Rare Corporate Design. exhaustive, but does show some of the IPEV International Private Equity and acronyms that occur frequently. Venture Capital Valuation Photographs All photographs originate from CDC’s AVCA African Venture Capital IRR Internal Rate of Return library of photographs of investee Association ISO International Standards companies. They are either supplied BCR Banque Commerciale du Rwanda Organisation by fund managers or were taken by CDC staff on site visits. BPDC Best Practice and MFI Microfinance Institutions Development Committee MIV Microfinance Investment CDM Clean Development Mechanism Vehicles CDP Carbon Disclosure Project MIX Microfinance Investment Exchange CEO Chief Executive Officer MNO Mobile Network Operator CER Certified Emissions Reductions MSCI Morgan Stanley Composite COO Chief Operating Officer Index DFI Development Finance Institution NGO Non-Governmental DFID Department for International Organisation Development Norfund The Norwegian DFI DRC Democratic Republic of Congo NPA Non-performing assets EBITDA Earning before interest, tax, OECD Organisation for Economic debt and amortisation Cooperation and Development EDFI European Development OHSAS Occupational Health and Finance Institutions Safety Advisory Services EHS Environment, Health and RAS Royal African Society Safety SEIA Socio-Economic Impact ESG Environment, Social and Assessment Governance SME Small and Medium Sized FDI Foreign Direct Investment Enterprises FMCG Fast Moving Consumer Goods TTFC Truong Thanh Furniture FMO The Dutch DFI Corporation FSB Financial Services Board TZS Tanzanian Shilling GDP Gross Domestic Product UNCTAD United Nations Conference on GHG Greenhouse Gas Trade and Development GTAP Global Trade Analysis Project UNDP United Nations Development Program GTLP Global Trade Liquidity Program UNPRI United Nations Principles for IC Investment Committee Responsible Investment IFC International Finance Corporation US GAAP United States’ Generally IFPT International Finance Accepted Accounting Principles Participation Trust WWf World Wildlife Fund IFRS International Financial ZAR South African Rand Reporting Standards
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Printed on FSC certified paper, and using ISO14001 certified Environmental Management System. 100% of the inks used are vegetable oil based. 95% of press chemicals are recycled for further use and on average 99% of any waste associated with this production will be recycled. This document is printed on Revive Pure White Uncoated, a fully recycled paper containing 100% post consumer waste certified by the Forest Stewardship Council. The pulp is bleached using an Elemental Chlorine Free (ECF) process. Chapter 8 – SME Investments 89 Fund managers
Global Tuninvest IDFC Private Equity www.tuninvest.com www.idfcpe.com Actis Vantage Capital India Value Fund Advisers www.act.is www.vantagecapital.co.za www.ivfa.com Aureos Kotak Mahindra Group www.aureos.com Microfinance www.kotak.com Cordiant Capital Access Holding Lok Capital www.cordiantcap.com www.accessholding.com www.lokcapital.com Minlam Asset Management Advans New Silk Route Advisors www.minlam.com www.advansgroup.com www.nsrpartners.com Shorecap International Berkeley Partners Rabo Equity Partners www.shorecap.net www.berkeley-energy.com www.raboprivateequity.nl Africa Caspian Capital Partners Ventureast www.caspianadvisors.com www.ventureast.com Adlevo Capital Catalyst Microfinance Investors www.adlevocapital.com China www.catalyst-microfinance.com Advanced Finance and Investment Group Global Environment Fund Capital Today www.afigfunds.com www.globalenvironmentfund.com www.capitaltoday.com African Capital Alliance Global Trade Liquidity Programme CDH Investments www.aca-web.com www.ifc.org www.cdhfund.com African Lion CITIC Capital www.afl.co.za Asia www.citiccapital.com Business Partners CMIA Capital Partners www.businesspartners.co.za AIF Capital www.aifcapital.com www.cmia.com Citigroup Venture Capital International FountainVest Partners (Asia) www.citigroupai.com Centras Capital Partners www.centrascapital.com www.fountainvest.com Development Partners International Keytone Capital Partners www.dpi-lip.com JS Private Equity www.js.com Legend Holdings ECP Africa www.legendcapital.com.cn www.ecpinvestment.com Kendall Court www.kendallcourt.com Qiming Venture Partners Ethos Private Equity www.qimingventures.com www.ethos.org.za Lombard Investments www.lombardinvestments.com Tripod Capital International GroFin www.tripodcapital.com www.grofin.com Navis Capital Partners www.naviscapital.com Horizon Equity Latin America www.horizonequity.co.za Saratoga Capital www.saratogacapital.com Advent International Corporation Helios Investment Partners www.adventinternational.com www.heliosinvestment.com India Altra Investments I&P Management www.altrainvestments.com www.ip-mngt.com Ambit Pragma Ventures www.ambitpragma.com Nexxus Capital ManoCap www.nexxuscapital.com www.manocap.com Ascent Capital www.ascentcapital.in Patria Banco De Negocios Medu Capital www.bancopatria.com.br www.meducapital.co.za Avigo Capital Partners www.avigocorp.com Société Générale Asset Management www.sgam-ai.com Baring Private Equity Partners India www.bpeindia.com Sphere Holdings www.sphereholdings.co.za BTS Investment Advisors www.btsadvisors.com Travant Capital www.travantcapital.com ICICI Venture www.iciciventure.com CDC Group plc Cardinal Place Level 2, 80 Victoria Street London SW1E 5JL
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