CDC Group, the UK government-backed private equity fund focused on emerging markets, is changing tracks. The fund of funds has indicated that it would build a bigger exposure into debt financing as against its existing business model which almost entirely focuses on equity participation either directly in companies or through investments in other private equity funds.

The idea behind the new strategy is to plug the financing gap between demand and supply for debt as banks are reluctant lenders in less developed markets and in many countries banking institutions are not strong enough to cater to the requirement. The decision follows a review of business by consultancy firm McKinsey a few months back.

CDC has projected that its debt investments will comprise as much as 20-25% of portfolio by 2019. CDC chief executive Richard Laing has said, "We have decided to look more closely at debt. In sub-Saharan Africa it is difficult to raise debt. Banks are not doing what they should be doing so there is an opportunity to invest in debt funds." It would invest in debt funds and will also provide credit lines to commercial banks starting with Saharan Africa before venturing into other markets such as India.

Cash Crunch To Delay Debt Push

But, the push towards debt exposure is likely to gain currency only in the medium term as availability of cash is an issue right now. According to its annual report, CDC has £1.3 billion (€1.5 billion) of cash as against outstanding commitments of £2 billion. Not surprising then CDC plans to prune its new fund commitments this year. The cut down was visible last year as well, when it restricted new commitments to £605 million, 45% less than the previous year.

Actis, the emerging markets private equity fund spun out of CDC whereby the UK government sold 60% stake to its staff led by senior partner Paul Fletcher for £373,000 in 2004, remains CDC’s main fund manager, managing about half of group’s commitments. However, only about one third of its drawn-down commitments last year were to Actis.


CDC, which has faced criticism for investing in developed companies rather than emerging businesses in developing countries, reported a decline in portfolio value for the first time in seven years. Total net assets decreased 13% to £2.3 billion and the value of its portfolio fell to its lowest point in five years, dropping 22% to £928 million. Most of this was due to a decline in the value of its investments and not a realised loss.

This represented a gross portfolio loss of 33%, compared with a gain of 57% in 2007, but this was better than the MSCI Emerging Markets Index which fell 55%, say reports.

Falling stock markets across emerging markets such as India, Brazil, China and South Africa led to 33% drop in the value of CDC’s portfolio of investments in 59 private equity funds across Asia, Africa and Latin America. But this partly offset when CDC converted its US dollar-based investments into pound sterling for its accounts.

CDC has managed an average annual return of 18% since 2003. More than half of CDC's portfolio is in Africa even as it made more investments in Asia in 2008.

According to this  FT report, Richard Laing, CDC chief executive, attributed CDC's outperformance amidst sharp drop in equity valuations to backing private equity groups that use minimal debt in their investments and typically invest in smaller, faster-growing companies.


"The Indian and sub-Sahara African economies are still growing, albeit at a slower rate, so our fund managers are still finding opportunities to invest in growing companies," said Laing who added that private equity was still actively financing infrastructure projects and small businesses in India and Africa. But he admitted that earnings growth at many African and Asian companies had also slowed.

"I would expect emerging markets’ private equity to continue doing better than the rest of the industry, just for the fundamental reasons of better economic growth and less debt in their investments," he said.

CDC invested £436 million last year and has put in an estimated £100 million in the first quarter of 2009. "We have seen more activity investing in small and medium-sized enterprises in smaller African economies, such as Senegal, Ghana, Tanzania, Kenya and Uganda," according to Laing who has also indicated that CDC would rein in new commitments to a lower level than the £605 million it pledged in 2008.

Early this year, CDC had adopted a new five year investment policy which envisaged atleast 75% of new investments to be made in low income countries (and atleast 50% in sub-Saharan Africa). Upto £ 125 million can be invested over the next five years in SME funds in other developing countries which would include India.

In July last year CDC had jacked up its investment commitments in India to more than $1 billion by committing $185 million in six Indian funds-- Baring India Private Equity Fund III ($50 million), India Value Fund III ($25 million), New Silk Route Private Equity Asia Fund ($50 million), BTS India Private Equity Fund ($20 million), Avigo SME Fund II ($20 million) and VentureEast Proactive Fund ($20 million). 

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