CDC Strategy 2012-2016
Contents
1. Summary and evolution of strategy
2. CDC mission and focus on development impact
3. Investment strategies
4. Financial projections
5. Execution
6. Measurement
2
1. Summary and evolution of strategy
A five-year strategic plan, laying the foundations for a distinctive, effective DFI
with a greater appetite for risk and a clear focus on development impact
•
Development impact embedded in all CDC’s investment strategies, based on three elements
- Supporting the building of businesses and creating jobs
- Focusing on Africa and South Asia, especially the poorer regions
- Backing commercially viable, successful businesses, financial institutions and essential
infrastructure
•
•
A highly rigorous, commercial approach to assessing investments
-
Success highly correlated to impact, especially sustainable job creation
-
Demonstration effect essential for attracting commercial capital to follow
Investment through funds remains important for CDC
-
Especially the critical role of sponsoring and anchoring first time funds in developing the private
equity markets
•
But will be supplemented by equity and debt, provided directly – initially through co-investment/colending
•
A longer term vision to return closer to CDC’s roots
-
Building small numbers of businesses at scale over a 10 year+ time horizon alongside high calibre
management teams
•
Greater focus on tracking, measurement and communication of impact alongside financial performance
and ESG
•
A phased approach to execution as the organisation grows significantly to implement a more
complicated and resource intensive strategy
4
Evolution of CDC Strategy
2012-16 plan confirms and builds on last year’s high level business plan
CDC 2010
•
•
Investment strategy almost exclusively focused on PE (private equity) funds
Broad geographic remit - emerging markets, including China, South East Asia and
Latin America
High Level Business Plan 2011
•
•
Aspiration to build direct strategies in equity and debt alongside PE fund selection
Geographies focus on Africa and South Asia
CDC Strategic Plan 2012-16
•
•
Mission statement more explicit
New ex-ante investment criteria to
ensure focus on development impact
•
•
Greater focus on more challenging
regions across Africa/South Asia
Vision to take CDC closer to its
heritage in building businesses
5
CDC’s universe will shrink to Africa and South Asia with an aspiration to
direct capital over time towards the more challenging regions
CDC’s old universe
CDC’s new universe
…
6
2. CDC mission and focus on
development impact
CDC is sharpening its mission for the next phase and, like DFID, is seeking to
serve people in poorest countries
2004
2012
“CDC supports the building of businesses
throughout Africa and South Asia, to create
jobs and making a lasting difference to
people’s lives in some of the world’s poorest
places.”
“CDC’s mission is
to generate wealth,
broadly shared, in
emerging markets”
support: alongside like-minded partners, we bring together
fresh approaches, entrepreneurs and pioneering finance
building: directing capital to promising businesses that
grow and prosper over the long-term with maximum
impact on their wider economies
businesses: we help build business of all sizes and in
sectors we believe to be the most developmental as
well as vital infrastructure and financial institutions
jobs: boosting jobs lies at the heart of economic growth for individuals, families and communities it’s the key to a
better future
8
CDC achieves its mission by directing capital to businesses with high potential
for development impact and then supporting their financial success
Investment criteria
CDC will select investments with high development impact potential that
• Build successful businesses
• Create jobs and an environment for jobs
• Deploy capital across Africa and South Asia, with a strong appetite for the
most challenging places
CDC will take a highly rigorous commercial approach to assessing individual
investments but with the flexibility to take a longer term investment horizon and accept
elements of higher risk within the portfolio
Results sought
Successful businesses with reasonable investment returns
• losses typically mean no impact
• returns give a demonstration effect for fully commercial capital
Measurement will take place before (ex-ante) and after (ex-post) investment
9
Financial return and development impact are not mutually exclusive:
CDC seeks to invest in ways that deliver both
CDC will invest where there is high
correlation between growing businesses
and creating jobs with financial returns
Delivering positive
returns
IFC data shows that successful investments,
measured by IRR, are also those that are
most successful in creating new jobs
Delivering
development impact
Jobs
created
6
5
4
3
2
1
But will avoid investments where positive returns
and development impact are not both achievable
0
Examples
Value creation
through
• Leverage
• Price arbitrage
Examples
•
•
Grants
Aid
-60%
-40%
-20%
0%
20%
40%
60%
IRR
Source: draft IFC data on 64 funds
invested 2000-2010
10
3. Investment strategies
Investment strategies
CDC’s investment strategies will focus on Africa and South Asia, with a particular
appetite for the poorer regions, and will invest capital through
1) Intermediated vehicles
• Private equity funds
• Debt funds
• Microfinance funds
2) Direct investment
•
Equity
•
Debt instruments
12
CDC’s markets in Africa and South Asia have similar sized economies but the private
equity markets have developed differently – this creates opportunities for a re-shaped CDC
Key issues
Indicative key market data 2007 - 2011
Africa
S. Asia
Africa
150
300++
•
$1.9bn
$4.4bn
•
53
367
$20m
$17m
Market concentration (top 10 GPs’ market share)
68%
22%
Approx. CDC market share
10%
3%
$3.5bn
$1.6bn
$1,700bn
$2,000bn
1bn
1.5bn
No. of GPs
Ave. annual funds raised
Ave. no. deals p.a.
Ave. deal size
Approx. DFI/IFI Debt
GDP
Population
Estimated data
Sources: CDC internal, EMPEA full year 2011 EM PE
statistics (2007-2011), World Bank, Venture Intelligence
•
•
•
•
Target private equity market is small (Africa + South Asia is comparable in
size to London + South-East England)
CDC plays an important role in Africa – a relatively small market outside
South Africa/Egypt
But has taken a smaller share in an overcrowded and key metropolisfocused Indian market
Investing equity and debt directly allows CDC to take a longer-term view
than is possible through traditional private equity fund structures
•
•
•
•
Small economies outside South Africa and
Egypt
Private equity market focused on South Africa,
Nigeria and Kenya
DFIs provide large part of funding, but
increasing interest from commercial capital
Substantial unsatisfied infrastructure need but
not getting built
Fragmented / few major corporate champions
Critical bottleneck is experienced management
with a track record of building successful
businesses
South Asia
•
•
•
•
•
•
More private equity funds than opportunities in
India
Nascent private equity market in Bangladesh /
Pakistan
Returns generally below Limited Partner (LP)
expectations
Similar infrastructure need
Several national champions / family
conglomerates
Relatively developed public capital markets
provide viable alternative to private capital
13
Funds Africa market summary
Current situation
• The private equity market across Africa is currently
about 1/5th the size of the market in London/SouthEast England
•
•
•
150
Ave. funds raised p.a.
$1.9bn
Market share of top 10 GPs
Over the past 5 years, the number of General
Partners (GPs) has grown significantly in Africa, from
a small base to around 150
Average deal size
The market is concentrated with the top ten GPs
accounting for around 68% of funds raised
A steady stream of new funds continue to emerge as
the market builds in a relatively orderly fashion
•
Fund-raising has become extended and uncertain,
and expected returns of some important maturing
funds likely to be below expectations
•
Est. number of GPs
Excluding South Africa and Egypt this figure falls by
80%
•
•
Indicative market summary
CDC’s investments represent about 13% of total PE
funds raised, making an important supporter of this
market
First time teams rely on DFI backing, and private
capital looks for DFIs’ continued support in Fund 2,
Fund 3
Ave. number of investments p.a.
68%
53
$20m
GDP
$1,700bn
Population
1.0bn
Estimated data
Sources: World Bank, CDC internal, EMPEA full
year 2011 EM PE statistics (2007-2011)
CDC summary
No. of funds
51
No. of GPs
32
No. of investee companies
463
Ave. disbursement p.a.
$225m
Undisbursed commitments
$565m
CDC market share
13%
Median CDC ownership %
19%
As at 31 Dec 2011
14
Funds Africa
In Africa, CDC’s fund strategy is to
•
•
•
•
•
•
•
Maintain and create new relationships with fund managers who are strongly aligned with CDC’s
mission to build businesses and create jobs across Africa especially in more challenging
geographies
Support strong teams with a deep knowledge of their markets and an ability to identify and add
value to those business that can grow and create jobs over a medium-term time horizon
Maintain a balance of diversified strategies across pan-African, sector-focused, regional and SME
funds
Increase CDC’s sector focus on infrastructure, agribusiness and access to finance
Support the creation of new funds especially in more challenging areas by proactively encouraging
talented new teams and by helping them to attract capital alongside CDC’s with a view to
shortening the fund-raising period
Explore the creation of new pools of capital that can take higher risk, especially in frontier markets,
alongside CDC’s shareholder DFID, and other like-minded investors
Commit similar amounts to new and existing relationships over the next five years, with on average
around $100m pa committed to each category
15
Funds Asia market summary
Current situation
• The private equity market across South Asia is
Indicative market summary
currently about 4/5ths the size of the market in London
/ South-East England
Est. number of GPs
•
Ave. funds raised p.a.
$4.4bn
Excluding the major cities this figure falls by around
70%
Ave. funds invested p.a.
$6.0bn
•
Over the last five years, the number of GPs has grown
exponentially from a small base to more than 300
•
•
•
300+
Market share of top 10 GPs
Ave. number of investments p.a.
The market is highly fragmented with the top 10 GPs
accounting for only around 22% of the market
Average deal size
The challenging fundraising environment, combined
with returns below expectations, suggests that
consolidation is likely – with only the stronger
performers and more focused and/or distinctive
strategies likely to succeed in raising funds
Population
22%
367
$17m
GDP
$2,000bn
1.5bn
Estimated data
Sources: Venture Intelligence 2004-2011,
World Bank
CDC summary
The regional split of CDC’s $1.2bn commitments since
2004 across 34 funds is $1.14bn in India; $50m in
Pakistan and Bangladesh
No. of funds
34
•
17 of the 34 funds were first time funds, representing
51% of total commitments to South Asia
No. of GPs
23
Undisbursed commitments
$441m
•
Overall 75% of disbursements via CDC’s India funds
have been invested outside of the major cities, much
greater than the market norm.
No. of investee companies
213
Ave. disbursement p.a.
Median CDC ownership %
$121m
16%
As at 31 Dec 2011
16
Funds Asia
In South Asia CDC’s fund strategy is to
•
•
•
•
•
•
Maintain and create new relationships with fund managers who are strongly aligned with CDC’s
mission to build businesses and create jobs across South Asia especially in the more challenging
regions
Support strong teams with a deep knowledge of their markets and an ability to identify and add value
to those business that can grow and create jobs over a medium-term time horizon
Maintain a balance of diversified strategies across SME and venture capital and sector specific
strategies, especially in agribusiness and infrastructure
Support the creation of new funds especially in more challenging areas by proactively encouraging
talented new teams and by helping them to attract capital alongside CDC’s with a view to shortening
the fund-raising period
Explore the creation of new pools of capital that can take higher risk, especially in frontier markets,
alongside CDC’s shareholder DFID, and other like-minded investors
Commit similar amounts to new and existing relationships over the next five years, with on average
around $100m
17
Debt
Current situation
• The existing debt portfolio is the product of a fundsbased approach and is focused outside CDC’s current
core geographies. CDC has a very small share of the
DFI/IFI debt market in sub-Saharan Africa and South
Asia
•
Following the crisis, international commercial banks
have reduced their exposure to Africa giving CDC an
important role to play in meeting this need
Indicative market summary
S-S Africa
S. Asia
No. of relevant DFIs/IFIs
21
16
Total ave. annual DFI/IFI
commitment
$3,547m
$1,550m
Estimated data
Sources: EDFI (2006 – 2010), IFI (S Asia) financial statements
(SSA: 2006 – 2009), IFI (S Asia) financial statements 2009 – 2011
(except for EIB: 2008 – 2010)
CDC debt summary
S-S Africa
S. Asia
Current CDC portfolio
$36m
$12m
Ave. annual CDC commitment
$22m
$3m
As at 31 March 2012
18
Debt
CDC’s debt strategy is to
•
Build a broad debt portfolio including infrastructure and corporate loans, credit lines to financial institutions and
selective trade finance facilities all focused on the regions of sub-Saharan Africa and South Asia where businesses
have difficulty attracting capital
•
Increase debt exposure specifically through four approaches
•
•
Debt funds, seeking out and backing credible managers
•
Co-financing, in debt deals led by other DFIs and IFIs, particularly in infrastructure, financial institutions and
corporate growth
•
Risk sharing, in debt deals led by reputable international commercial banks and increasing volumes through shortterm trade related instruments
•
Selective direct loans to financial institutions in more challenging places to extend financial inclusion where they
have the potential to operate to acceptable standards in relation to ESG
Develop productive co-financing relationships with selective DFIs and IFIs
In the longer term, CDC has the ambition to source infrastructure and corporate debt opportunities directly.
19
Microfinance
CDC’s microfinance strategy is to
• Invest in microfinance to build commercially
sustainable companies focused on the developmental
goal of providing access to finance through:
• Microfinance PE funds
• Microfinance holding companies
CDC’s existing investments in MF
$120m of exposure to Microfinance initiatives globally
5 MF Private Equity funds
3 MF Holding companies
1 MF local currency debt fund
• Microfinance debt funds
• Direct investments in MFIs
As at 31 March 2012
• Play an important role as a provider of long term, patient capital and as a leader around innovation with a focus on
making investments in South Asia and sub-Saharan Africa
• Adopt a more proactive approach to engage with key stakeholders in the microfinance sector, including regulators,
policy makers, the Consultative Group to Assist the Poor (CGAP) and other sector specialists, DFID and DFIs
• Be an advocate for the SMART Campaign
• Be an advocate for the UN Principles for Responsible Investments in Inclusive Finance
20
Direct equity co-investment
CDC’s direct equity co-investment strategy is to
• Rebuild CDC’s direct investment capabilities and support businesses that are creating jobs and building
infrastructure in Africa and South Asia, prioritising investments in economies where businesses have difficulty
attracting capital
•
Seek co-investment opportunities aligned to CDC’s mission, led by private equity funds and DFIs that
• build on CDC’s existing relationships
15%
32%
• leverage their in-country presence, origination and investee company management capabilities
•
•
•
•
Seek co-investment rights from CDC-backed private equity funds that are active in developmental deals
•
Invest in a range of deal sizes from $10m to $50m for general private equity and $20 to $100m for infrastructure
Develop a reputation as a quick, rigorous, commercial and consistent co-investor
Remain sector agnostic at first due to small number of opportunities in CDC’s markets
51%
Develop a shadow portfolio of opportunities for follow-on growth capital from private equity and DFI portfolios and
74%
other sources
17%
CDC will build a team and use the knowledge gained during this co-investment period to develop the Corporate
Pioneering strategy (see next slide)
21
Corporate pioneering
CDC’s corporate pioneering strategy is to
• Invest in a small number of businesses that can be built to scale, over the long-term, into economies where the
private sector is under-developed
•
Seek out and support the highest calibre management teams capable of executing a long-term expansion strategy
without relying on creating a CDC organisation across the region
30%
•
Play to CDC’s strengths in combining a long-term investment horizon (10 years +), the ability to make multiple followon investments (up to an aggregate of $50m-$200m), a willingness to take majority equity stakes and a team that
works closely with management
30%
•
Build this strategy slowly based on the knowledge gained during the co-investment period
CDC will execute this strategy through different approaches
• Identify the most promising businesses with potential to grow into small/challenging economies (the initial
investment could be made in more developed regions)
•
Identify the most promising management teams with interest in small/challenging economies and create vehicles for
them to execute their strategies
•
•
Identify sector focused themes suited to this strategy and the necessary management and corporate targets
Consider joint ventures with multi-national and/or other corporates who have a desire to roll out strategies into more
challenging regions
22
4. Financial projections
55% of CDC’s portfolio today is invested in our new universe
Direct equity
Equity portfolio
Africa
S. Asia
$52m
$24m
CDC portfolio at 31 Dec 2011
$m
Microfinance
Microfinance portfolio
Africa
S. Asia
$8m
$12m
Africa
S. Asia
$25m
$0m
Debt
Debt portfolio
Ongoing Funds
Africa
S. Asia
No. GPs
32
23
No. Funds
51
34
463
213
$1,030m
$525m
Ave. disbursements p.a.
$225m
$121m
Median CDC ownership
19%
16%
No. Investee co’s
Fund portfolio
Excluded Investments*
No. GPs
22
No. Funds
62
No. Investee co’s
Ave. disbursements p.a.
Investment portfolio
415
$339m
$1,342m
*Investments that fall outside CDC’s new universe
24
Indicative strategy projections show a growing portfolio, with an increasing
percentage invested directly
CDC portfolio
CDC portfolio
2011
Africa Funds
34%
25%
Asia Funds
17%
15%
Debt
1%
12%
Microfinance
1%
4%
Direct equity
2%
27%
45%
17%
Excluded investments*
2011
2016
*Investments that fall outside CDC’s new universe
2016
Between 2011 and 2016, a significant proportion
of CDC’s portfolio will remain outside the new
universe as commitments made prior to the new
strategy must be honoured. This will decrease
over time as the investments are realised and is
likely to be <5% of CDC portfolio by 2018.
25
5. Execution
CDC will execute its new direct equity and debt strategies in two distinct phases
with Phase 2 informed by learning from Phase 1
Phase 1 - 2012-3
Re-entering direct
equity/debt markets
•
•
•
•
Sector agnostic as knowledge and capacity grows
Co-invest and co-lending – unlikely to lead transactions
Capital provision only
CDC team will be resource constrained
Phase 2 - 2014-6
Market driven based on
learning from Phase 1
•
•
Sector focus with specialist teams
•
•
Capital and management capacity building
Willing to lead transactions selectively alongside continuing co-invest
and co-lending strategies
CDC team largely built and resource now well matched to market
opportunity
27
CDC’s strategy is intended to reach businesses of all sizes
Infrastructure
Large / Mid Size
Enterprises
Early stage
• Targets frontier markets where provision
of debt capital is under-developed
• Provides capital to financial institutions
which help SMEs
Direct equity
• Targets larger businesses with high
potential development impact
• Gives CDC more influence over individual
investments
• Closer relationship with management
Via funds
Micro
• Harnesses local knowledge
• Builds local investment capacity
• Allows a small team to deploy capital
widely and effectively
Debt
Via banks
SME
Funds
Funds
Debt and
microfinance
Direct
equity
28
Resources
•
•
To execute the strategy CDC needs to grow rapidly to move from its focus on fund-offunds investing to add direct equity and debt investment expertise
CDC is understaffed compared to other DFIs pursuing mixed investment strategies
Institution
Staff
Home
Overseas
Portfolio
($bn)
IFC
>1,700
>1,600
29.9
DEG
373
20
7.3
FMO
294
0
7.6
Proparco
142
29
4.7
CDC
49
0
4.9
* As at end of 2011
As at end 2011
•
•
Rapid growth will create large execution risk in 2012 and beyond
New remuneration framework will ensure CDC recruits talented individuals aligned to
CDC’s mission
29
6. Measurement
A new approach is proposed: three distinct parts with different purposes
CORE
Tracking
Communicating Impact
Core
• Closely tied to mission/strategy
• Drives compensation
Tracking
• For progress of investments and learning for CDC
Communicating Impact
• For wider stakeholder objectives
• Quantitative data
• Qualitative stories
• Managed by a new function in CDC
31
New measurement approach will ensure rigorous selection of investments, ongoing management and effective demonstration of impact
Core
Drives selection of investments which:
• Build businesses and create jobs
• Deploy capital into hard environments
• Maximise the likelihood of economic success
Tracking
Throughout investment period
• Investments monitored regularly against financial, developmental,
Environmental, Social and Governance (ESG) goals
• Regular visits for deeper picture
For risk management, identification/addressing issues, team sharing and
learning
Communicating Impact
•
•
Shared where possible – open source model
For multiple audiences – shareholder, stakeholders, internal, website etc.
Qualitative
Quantitative
•
Data collected defined by marketconsistent approach
•
Output based on IFC and DFI industry
standards
•
Numerous stories of intended and actual
impact
32
End