AUREOS MANAGED FUNDS
As previously mentioned, Aureos is a joint venture between CDC and Norfund, which manages 14 country/regional Funds. These Funds make investments between US$500,000 and US$3 million in small- and medium-sized enterprises (SMEs) wishing to expand, or they finance local management buy-out teams acquiring businesses.
The Funds serve many of the smaller economies, where there are few opportunities for CDC to make large investments. The following map shows the locations of the funds. Their investments are listed in Appendix D.
CDC'S SECTOR FOCUS
CDC's investment policy concentrates on investing in sectors likely to be critical to long-term economic development. Sectors excluded are those which manufacture nuclear or military equipment, or derive a substantial portion of their turnover or profit from gambling, pornography or illegal drugs.
CDC has a policy to maintain a diverse portfolio, spreading its investments across a range of sectors. Exposure to any sector beyond 20 per cent of the total portfolio triggers a management review.
World Bank's Africa Region Working Paper (August 2001):
"The technological revolution provides an opportunity to get information to the poor in a way that can be used by them to change their lives. "
This chart shows the split of our investments by sector. Power and agribusiness are discussed later.
The following chart shows new investments by sector, with the pattern varying from year to year. Over the five year period (1997-2001), the sectors accounting for the highest proportions of investment are:
agribusiness, food and beverage (20 per cent);
financial institutions (14 per cent); and
infrastructure (13 per cent).
INVESTMENTS IN THE POWER SECTORCDC GLOBELEQ
Investment in the power sector has always been important for CDC, as it plays a critical role in enabling the economic development of poor countries. It currently represents 27 per cent of the portfolio, the largest sector by value. The World Bank has recently indicated that 2.5 billion of the world's poor lack adequate access to modern energy supplies. Regular electricity is not only a key requirement for industry and commerce, but also a core component for civil society for the provision of basic services, such as health and education. We have transferred all our power equity investments into a new entity, CDC Globeleq. In mid-2001 it was our intention to raise additional private capital into CDC Globeleq to expand the portfolio further. However, external events (11 September, Enron and the Argentina crisis) have forced us to delay this plan until more favourable market conditions permit.
INVESTMENTS IN AGRICULTURE
CDC's objectives and roles within the agribusiness sector have changed on an ongoing basis during its 50 years' existence. In the 1950s, CDC focused on setting up several major agricultural enterprises. These achieved little success and were generally over-capitalised, resulting in CDC getting itself into severe financial difficulties. During the 1960s and 1970s, CDC adopted a more conservative approach and concentrated on providing low-cost lending, often to state-owned agricultural businesses. In the 1980s, as the world became disenchanted with state-led development strategies, CDC looked to support private sector development, before attempting to create a few world-class, integrated commodity businesses during the mid-1990s.
CDC has repeatedly faced the problem of poor profitability and low returns from agricultural investments and the debate over CDC's cyclical involvement in agriculture is not new. The 1972 Annual Report states "many agricultural projects, particularly involving smallholders . . . have had to be ruled out . . . because the overall rate of return is well below that necessary to cover the service of the capital invested . . .". Government's response in 1972 was to provide CDC with subsidised loans for investment in agriculture, and later to set targets for the proportion of new investments in renewable natural resources.
From a low of 16 per cent of the portfolio in 1972, agribusiness peaked at about half of CDC's portfolio ten years ago. The decrease since then to the current 11 per cent has been mainly due to three factors:
lower levels of new investment in agribusiness, because investment propositions offer poor rates of return, as developing countries increasingly compete with subsidised dumping and limited market access;
disposal of agribusinesses as going concerns to new owners better placed than CDC to manage and grow the business; and
reduction in the reported value of agribusiness investments, as their poor financial performance requires us to make provisions against their cost in our accounts.
By value, agribusiness investments represent 11 per cent of the 2001 portfolio, compared to 28 per cent by original cost. Such value erosion obviously reflects the poor profitability of agricultural activities.
In current world circumstances, the prevailing high level of state subsidies to farmers in the developed world seriously undermines the viability of agricultural production in many of CDC's countries, especially throughout Africa. Unfortunately, many western nations, in effect, exclude African agriculture from their home markets. The US and the European Union Agricultural Subsidy Policies entrench first world protectionism, which leaves developing country agribusiness with limited opportunities to access the world's largest markets and operate profitably. CDC therefore puts emphasis on agricultural opportunities which do not have to compete with subsidised alternatives and where market access is more available. Below we discuss our interests within African agriculture, which have received widespread media/political comment in recent times.
CDC'S EXPERIENCE IN AFRICAN AGRICULTURE
CDC's fortunes in the African agribusiness sector in Africa have been mixed. Approximately half of the 133 projects have remained in existence, but only five of the 37 agribusiness equity holdings that CDC has held over the five years until end 2000 are worth today as much as we have invested in them, and those that are, actually depend on quota access to OECD markets at many times the world price. As at the end 2000 valuation, CDC estimated a capital loss of £130 million on an African agribusiness portfolio that cost £225 million to acquire and develop. Since then relevant commodity prices have fallen further.
During the 1990s, CDC found itself in competition with other specialist agribusiness players for some of the few attractive opportunities, with the result that it may have overpaid for the agribusiness in question. Recently, CDC has sold certain African agribusinesses to specialist larger operators who are better placed to develop them further. Larger operators are better positioned to engage lower cost freight facilities and acquire easier access to key markets.
In the main, CDC has demonstrated that African agribusiness, with a large enough subsidy, can provide rural employment but it has not demonstrated that African agribusiness is an attractive home for private capital.
Despite the poor profitability of this sector worldwide, CDC remains substantially committed to agricultural investment:
owns and manages a 3,500 ha rubber plantation in Cote d'Ivoire;
owns and joint manages Swazi Sugar, the third-largest sugar producer in Southern Africa;
owns and manages the largest arable farm in Southern Africa, based in Zambia;
owns and manages a 4000 ha teak plantation in Tanzania;
is a significant investor in one of the top integrated producers and marketers of bananas in Ecuador; and
is a significant investor in oil palm plantations, located across Indonesia and Papua New Guinea.
SECTOR FOCUS OF OTHER DEVELOPMENT FINANCE INSTITUTIONS
It is interesting to compare CDC's sectoral split to that of the other DFIs. IFC's portfolio includes 2 per cent in agriculture and forestry (2001 data). DEG reports 6 per cent of its portfolio in agriculture (2000 data), and FMO does not show it as a separate sector. Both DEG and FMO focus on financial institutions, with 44 per cent and 48 per cent respectively in this sector.
To fulfil CDC's role, we need to employ highly qualified and experienced professionals in finance and other related disciplines. Potential investors in CDC and alongside us in projects will judge the quality and track record of our people in making an investment decision. Of 36 professional hires in 2001, all had degrees and half had additional accounting or finance qualifications. Five had MBAs, two were engineers and one a forester. Few had substantial private equity experience and our attempts to attract such people are hampered by the absence of industry-standard remuneration structures.
As part of our move towards operating more commercially, we need to achieve staffing levels and productivity which are comparable with competitors, and have an expense base more in line with market norms. We continue to replace expatriate staff with suitably qualified and experienced local staff wherever possible. Currently, four of our Country Managers are local (in Kenya, Nigeria, Pakistan and Zambia), and six of the Aureos Funds are managed by local executives.
We continue to invest in our staff, providing a full range of appropriate training, as well as on-the-job coaching. This includes a private equity skills training course which progresses from basic concepts through to complex deal structuring issues. We have implemented a new staff appraisal scheme which incorporates feedback on individuals' strengths and weaknesses from people across the organisation. This is intended to engender a greater sense of mutual dependence and team work and to calibrate relative individual performance. At a CDC level, the results show an organisation responding well to change with a high and genuine enthusiasm for our business direction, and one which takes the ownership of investments seriously. More confidence and greater deal experience, however, were cited as the most frequent personal development needs.
Headcount at the end of 2001 was approximately 300, which excludes the employees in CDC's managed subsidiary companies which amount to 30,000.
CDC'S FINANCIAL PERFORMANCE
In common with all other international financial institutions, CDC's financial results are heavily influenced by the external economic and financial marketslocal, regional and globalin which it operates. The volatility in financial market conditions since PPP was announced in 1997 has caused CDC's equity investment activities to be undertaken in difficult and uncertain market conditions.
Chairman's Statement: CDC Annual Review, 2001:
"The conditions for growing value in the CDC universe were significantly unfavourable throughout the year 2001. The wider effect of the US recession on global demand and trade; the collapse in value of technology and telecommunications companies; the slide in hard and soft commodities prices; the slowdown in privatisations, mergers and acquisitions activity and equity issuance; and acute currency devaluation in certain emerging markets, have all taken their toll. The problems of Enron and Argentina in the second half of 2001 compounded what was already a difficult environment. "
CDC's financial performance is largely driven by the financial performance of our underlying investments and their year-end portfolio valuation. The "revenue account" includes income from investments in terms of dividends, loan interest and fees, less CDC's operating costs. We have made a positive return in the revenue account for each of the last three years. The "capital account" reflects any changes to the valuation of our investments, above or below their cost, in line with the British Venture Capital Association guidelines (as explained on pages 22-23 of the 2001 CDC Annual Review); such movement can be realised or unrealised and in 2001 we applied a conservative valuation to the portfolio, in light of prevailing uncertain market conditions.