CDC Strategy

Transcription

1 CDC Strategy

2 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

3 1. Summary and evolution of strategy

4 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

5 Evolution of CDC Strategy 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 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

6 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

7 2. CDC mission and focus on development impact

8 CDC is sharpening its mission for the next phase and, like DFID, is seeking to serve people in poorest countries 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

9 CDC achieves its mission by directing capital to businesses with high potential for development impact and then supporting their financial success CDC will select investments with high development impact potential that Build successful businesses Investment criteria 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

10 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 IFC data shows that successful investments, measured by IRR, are also those that are most successful in creating new jobs Delivering positive returns Delivering development impact Jobs created But will avoid investments where positive returns and development impact are not both achievable Examples Value creation through Leverage Price arbitrage Examples Grants Aid % -40% -20% 0% 20% 40% 60% IRR Source: draft IFC data on 64 funds invested

11 3. Investment strategies

12 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

13 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 Indicative key market data Africa S. Asia No. of GPs Ave. annual funds raised $1.9bn $4.4bn Ave. no. deals p.a Ave. deal size $20m $17m Market concentration (top 10 GPs market share) 68% 22% Approx. CDC market share 10% 3% Approx. DFI/IFI Debt $3.5bn $1.6bn GDP $1,700bn $2,000bn Population 1bn 1.5bn Estimated data Sources: CDC internal, EMPEA full year 2011 EM PE statistics ( ), 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 Key issues Africa 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

14 Funds Africa market summary Current situation The private equity market across Africa is currently about 1/5th the size of the market in London/South- East England Excluding South Africa and Egypt this figure falls by 80% Over the past 5 years, the number of General Partners (GPs) has grown significantly in Africa, from a small base to around 150 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 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 Indicative market summary Est. number of GPs 150 Ave. funds raised p.a. $1.9bn Market share of top 10 GPs 68% Ave. number of investments p.a. 53 Average deal size $20m GDP Population $1,700bn Estimated data Sources: World Bank, CDC internal, EMPEA full year 2011 EM PE statistics ( ) CDC summary 1.0bn 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

15 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

16 Funds Asia market summary Current situation The private equity market across South Asia is currently about 4/5ths the size of the market in London / South-East England Excluding the major cities this figure falls by around 70% Over the last five years, the number of GPs has grown exponentially from a small base to more than 300 The market is highly fragmented with the top 10 GPs accounting for only around 22% of the market 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 The regional split of CDC s $1.2bn commitments since 2004 across 34 funds is $1.14bn in India; $50m in Pakistan and Bangladesh 17 of the 34 funds were first time funds, representing 51% of total commitments to South Asia Overall 75% of disbursements via CDC s India funds have been invested outside of the major cities, much greater than the market norm. Indicative market summary Est. number of GPs 300+ Ave. funds raised p.a. Ave. funds invested p.a. $4.4bn $6.0bn Market share of top 10 GPs 22% Ave. number of investments p.a. 367 Average deal size $17m GDP Population $2,000bn Estimated data Sources: Venture Intelligence , World Bank CDC summary 1.5bn No. of funds 34 No. of GPs 23 Undisbursed commitments $441m No. of investee companies 213 Ave. disbursement p.a. $121m Median CDC ownership % 16% As at 31 Dec

17 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

18 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 Total ave. annual DFI/IFI commitment $3,547m $1,550m Estimated data Sources: EDFI ( ), IFI (S Asia) financial statements (SSA: ), IFI (S Asia) financial statements (except for EIB: ) CDC debt summary S-S Africa S. Asia Current CDC portfolio $36m $12m Ave. annual CDC commitment $22m $3m As at 31 March

19 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

20 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 Microfinance debt funds Direct investments in MFIs 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 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

21 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 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 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 Develop a shadow portfolio of opportunities for follow-on growth capital from private equity and DFI portfolios and other sources 74% 17% Invest in a range of deal sizes from $10m to $50m for general private equity and $20 to $100m for infrastructure 15% 32% 51% 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

22 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 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 30% 22

23 4. Financial projections

24 55% of CDC s portfolio today is invested in our new universe Direct equity Africa S. Asia Equity portfolio $52m $24m CDC portfolio at 31 Dec 2011 $m Microfinance Africa S. Asia Microfinance portfolio $8m $12m Debt Africa S. Asia Debt portfolio $25m $0m Ongoing Funds Africa S. Asia No. GPs No. Funds No. Investee co s Fund portfolio $1,030m $525m Ave. disbursements p.a. $225m $121m Median CDC ownership 19% 16% Excluded Investments* No. GPs 22 No. Funds 62 No. Investee co s 415 Ave. disbursements p.a. $339m Investment portfolio $1,342m *Investments that fall outside CDC s new universe 24

25 Indicative strategy projections show a growing portfolio, with an increasing percentage invested directly CDC portfolio CDC portfolio Africa Funds 34% 25% Asia Funds 17% 15% Debt 1% 12% Microfinance 1% 4% Direct equity 2% 27% Excluded investments* 45% 17% 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 *Investments that fall outside CDC s new universe 25

26 5. Execution

27 CDC will execute its new direct equity and debt strategies in two distinct phases with Phase 2 informed by learning from Phase 1 Phase 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 Market driven based on learning from Phase 1 Phase Sector focus with specialist teams Willing to lead transactions selectively alongside continuing co-invest and co-lending strategies Capital and management capacity building CDC team largely built and resource now well matched to market opportunity 27

28 CDC s strategy is intended to reach businesses of all sizes Infrastructure Large / Mid Size Enterprises SME Early stage Micro Via banks Via funds Funds Harnesses local knowledge Builds local investment capacity Allows a small team to deploy capital widely and effectively Debt 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 Funds Debt and microfinance Direct equity 28

29 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 Portfolio Home Overseas ($bn) IFC >1,700 >1, DEG FMO Proparco CDC * 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

30 6. Measurement

31 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

32 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. Quantitative Data collected defined by marketconsistent approach Output based on IFC and DFI industry standards Qualitative Numerous stories of intended and actual impact 32

33 End