The Impact of Funds: An Evaluation of CDC 2004-121 By Josh Lerner, Ann Leamon, Steve Dew, Dong Ik Lee Abstract: CDC was founded in 1948 as part of the U.K. government’s efforts to develop the economic resources of Britain’s remaining colonies. Since then, CDC has pursued a series of strategies to “do good without losing money,” as its original mission was phrased. Its approach has included agricultural investments, project finance loans, direct private equity investment, lending, investment in and operation of power companies, and fund-of-funds investment. The group also developed an extensive network of offices and experts on the ground in emerging/frontier markets. In 2004, however, CDC was split in two groups: the portfolio of companies and the network went with the privatized fund manager Actis, while CDC remained government-owned and pursued a fund-of-funds strategy. In 2012, CDC’s remit expanded to include direct investing and lending. This article represents an effort to learn the lessons of its eight years of funds investment. In short, we determine that funds investment was an efficient method of investing large amounts of money with a small staff to build more businesses in more countries than would have been possible using a direct-investment model. CDC’s financial performance exceeded its benchmark MSCI Emerging Markets Index between 2004 and 2008, and in 2010, but restrictions in CDC’s investment parameters that were enacted in 2009 made comparisons to broader based indices more challenging. CDC has routinely met its goals for investment allocation by national income and geographic parameters and for third- party fund mobilization. While the dataset provided was truncated and results therefore underestimated, we could credit its investments with 345,056 new direct jobs between 2008 and 2012, $41.6 billion in new revenues, $4.8 billion in increased Earnings before Interest, Taxes, Depreciation and Amortization (EBITDA), and $2.1 billion in new taxes paid. Finally, CDC has played an extensive role in supporting first-time fund managers. Over the evaluation period, it backed 62 first-time managers (50.4% of the total funds in which it invested). Some of these have become leaders in their markets. The organization, in short, has had a transformative effort on its markets of interest. 1 We were commissioned by CDC to review its performance between 2004 and 2012, and received compensation to do so. Nonetheless, the content of this working paper reflects our opinions, and not those of CDC. Page 2 Contents Section 1 Introduction ........................................................................................ 10 1.1 History of CDC ................................................................................................................... 10 1.1.1 2004-2006 ................................................................................................................................ 10 1.1.2 2007-2009 ................................................................................................................................ 12 1.1.3 2010-2012 ................................................................................................................................ 13 1.2 Background of this Paper .................................................................................................. 14 Section 2 Data and Methodology ........................................................................ 15 2.1 Data ................................................................................................................................... 15 2.1.1 Data Cleansing ......................................................................................................................... 17 2.1.2 Caveats ..................................................................................................................................... 18 2.2 Methodology ..................................................................................................................... 19 Section 3. Evaluation of CDC’s Fund Results ......................................................... 21 3.1 CDC’s Key Performance Indicators .................................................................................... 21 3.1.1 2004-2008 ................................................................................................................................ 22 3.1.2 2009-2012 ................................................................................................................................ 26 3.1.3 Summary .................................................................................................................................. 27 3.2 CDC’s Development Impact Mission ................................................................................. 28 3.2.1 Change in Employment ............................................................................................................ 30 3.2.2 Firm-Level Economic Performance .......................................................................................... 37 3.2.3 Objective 1: To Attract Third Party Commercial Capital to Emerging Markets ....................... 45 3.2.4 Objective 2: To Provide Capital to a Broader Range of Businesses ......................................... 47 3.2.5 Objective 3: To Build Capacity for Investing, DI and ESG by Supporting Local and Regional Hands-On PE managers ......................................................................................................................... 53 3.3 Case Studies ...................................................................................................................... 60 Section 4. Conclusion ........................................................................................... 62 Section 5. Appendices .......................................................................................... 66 5.1 Appendix: Detailed Results of First-Time Fund Managers ................................................ 66 5.2 Appendix: Tests of Significance —ANOVA ........................................................................ 79 5.3 Appendix: CDC’s Classification of Countries in Each Region ............................................. 82 5.4 Appendix: Cases of ACA, AfricInvest, Celtel, and Caspian (IFIF) ....................................... 84 5.4.1 ACA (CAPE I) ............................................................................................................................. 84 5.4.2 AfricInvest (MPEF II) ................................................................................................................. 86 2 Page 3 5.4.3 Caspian Advisors (IFIF) ............................................................................................................. 89 5.4.4 Celtel, Portfolio Company of Actis (Africa Fund I) ................................................................... 92 Glossary ................................................................................................................... 96 Bibliography ............................................................................................................ 97 Table of Tables Table 3-1: National income and geographic investment targets 2004-2008 ................................ 23 Table 3-2: CDC Gross Return v. MSCI Emerging Markets Index 2004-2008 (bold indicates CDC outperformance) ............................................................................................................................ 25 Table 3-3: National income and geographic investment targets 2009-2011 ................................ 26 Table 3-4: CDC Net Return v. MSCI Emerging Markets Index and other benchmarks 2009-2012 27 Table 3-5: CDC's cumulative annualized results relative to benchmarks, 2004-2012 ................... 28 Table 3-6: Overall distribution of development impact (Direct Employment, Revenue, EBITDA, and Taxes in $USD millions) ........................................................................................................... 29 Table 3-7: Total change in direct employment by region and industry ......................................... 31 Table 3-8: Average change in direct employment per company by region and industry. ............ 32 Table 3-9: Change in total and average direct employment, and number of companies by fund- level IRR. ......................................................................................................................................... 34 Table 3-10: Total change in direct employment of companies in the portfolios of first-time managers by IRR. ............................................................................................................................ 35 Table 3-11: Total and average change in firm-level financial performance by region and industry in $USD millions ............................................................................................................................. 37 Table 3-12: Total and average change in firm economic performance by fund IRR in $USD millions ........................................................................................................................................... 42 Table 3-13: Total and average change in revenue, EBITDA, and taxes of companies by first-time fund managers in $USD millions .................................................................................................... 44 Table 3-14: Example for calculating CDC's third-party mobilization