CDC Group plc Development Review 2009

Our missionis to foster growth in sustainable businesses,helping to raise living standards in developingcountries.

Our investment policyis to make more than 75% of new investmentsin low income countries* and to invest morethan 50% of our funds in sub-Saharan Africa.* Those with an annual gross national income (GNI) per capita of less than US$905 as defined by World Bank 2006 data.

Contents

Introduction1 Development highlights2 Statement from the Chief Executive4 Statement from the Chair of CDC’s

Best Practice and DevelopmentCommittee

5 Chapter 1: About CDC6 Why governments invest in

development finance institutions (DFIs)7 Where CDC invests8 How CDC invests9 The Investment Code – CDC’s

principles for sustainable andresponsible investments

10 Governance of ESG

13 Chapter 2: CDC performance14 Financial performance17 Economic performance19 ESG performance21 Serious incidents22 Private sector development 23 Evaluations

25 Chapter 3: Regional reviews26 Asia31 Sub-Saharan Africa36 Other regions

39 Chapter 4: Sectors in focus40 Alternative investment44 Agribusiness and forestry47 Financial services49 Consumer

51 Chapter 5: Initiatives taken in 200952 Climate change54 Gender equality56 Updated CDC Toolkit

for fund managers

57 Chapter 6: External perspectives58 Independent evaluations59 An external perspective on

measurement of CDC’s developmentimpact

60 Other approaches to measuring andquantifying development impact

64 Audit of CDC’s processes toimplement its Investment Code on ESG

68 Independent assurance report to CDC Group plc

69 Chapter 7: Adding value in emerging markets

70 Reaching markets and sectors withpoor access to finance

70 Building local capital markets andlocal investment capacity

72 Support and training for fundmanagers

73 Third party capital mobilisation75 International collaboration77 Emerging markets challenges

79 Appendix80 CDC’s Investment Code

85 Footnotes87 Data disclaimer88 Acronyms and additional information

Development highlights

CDC Development Review 2009 1

794Underlying portfolio companies located in 71 countries

733,000People employed in portfolio companies reportingemployee data

US$2.8bnLocal taxes paid by portfolio companies reporting tax data in 2009

£359mNew investments in developing countries, 61% in Africa

£742m1

Other capital mobilised

Thought leadershipGender and climate change studies completed in 2009 for inclusion in revised toolkit for fund managers

Fund evaluations7 out of 20 development impact evaluations performedindependently of CDC in 2009

CDC’s Investment CodeProcesses externally audited for the first time

1 See page 73 for an explanation of how mobilisation is measured.

2 CDC Development Review 2009

Statement from the Chief ExecutiveRichard Laing

CDC exists to improve people’s lives in developing countries. We need toassess how effective we have been and I am therefore pleased to present CDC’s second annual report on thedevelopmental effects of our investments.CDC’s first development review Growthfor Development, published in 2009 was well received. This report extendsand deepens the analysis of CDC’sdevelopment impact and reportscomprehensively on CDC’s work in 2009.

The role of economic growth inreducing poverty

As a DFI, helping businesses to growsustainably is central to CDC’s mission.We have been supporting thedevelopment of the private sector in poor countries for more than 60 years. It is through economic growth thatopportunities are created for poor peopleto establish a long-term route out ofpoverty for both themselves and their families.

CDC is an integral part of the Departmentfor International Development’s (DFID)strategy to help support the private sectorin developing countries. Flourishingbusinesses give individuals employmentand training opportunities and, throughthis, the prospect of a more secure future.For governments, successful businessesgenerate profits and taxes, whichcontribute to public services,infrastructure, innovation and a strongerlink between state and taxpayer.

Doing good and doing well

For the first time, CDC’s extensive datacollection in 2009 enabled us to runregression analyses of non-financialfactors on our portfolio. The mostinteresting and not entirely surprisingresult was that there seems to be acorrelation between how well a fundperforms financially and how good thequality of its Environment, Social andGovernance (ESG) management systemsare. In other words an investor who isdoing good in society in emergingmarkets is also more likely to be doingwell financially. While these are only initialfindings and more rigorous analysis andextensive data collection is needed it isindeed encouraging. The analyses areexplained in further detail on pages 14and 15.

CDC’s portfolio in 2009

At the end of 2009, we had capitalinvested in 134 funds managed by

a total of 65 different fund managers. This represents an increase of six fundmanagers in 2009, all providing vitalcapital during a year of challengingfinancial conditions across CDC’smarkets. With supplies of commercialcapital to developing countries fallingback in 2009, capital from DevelopmentFinance Institutions (DFIs) has taken oneven greater significance. Despite thedifficult conditions, we invested £359m in promising businesses in 2009. Thenumber of CDC’s portfolio companies at the end of 2009 stands at 794, anincrease of 113 on 2008. Across ourportfolio, CDC’s capital is invested inbusinesses that employ a total of 733,000people in the 617 companies thatreported employment data.

Challenges in 2009

For CDC’s investment team, theenvironment in 2009 was challenging.With lower liquidity and fewer exits across our portfolio, CDC was forced to scale back the level of its new fundcommitments. A total of £207m wascommitted by CDC in 2009, down by£390m on 2008’s figure. Despite this fall in2009, our total outstanding commitmentsstand at around £1.6bn. This capital is available to our fund managers forinvestment in businesses over the coming years.

By the end of 2009, a more optimisticoutlook had returned to many of CDC’skey investment areas. While westerneconomies shrunk, GDP growth in sub-Saharan Africa remained positive at 2.5% and was almost 7% in India overthe course of 2009. More generally,developing economies have lower debtburdens as well as higher growth ratesthan most developed economies. Basedupon these fundamental strengths, CDCis hopeful that market conditions andinvestment opportunities will continue to improve in 2010.

Pioneering investment in 2009

Despite the tough financial backdrop,CDC continued to invest in new, oftenpioneering, funds in 2009. Two funds in particular showed CDC’s dedication to investing in previously underservedregions and sectors. In June, CDCcommitted US$10m to Rabobank’s India Agribusiness Value Fund, a fundwhich focuses on enhancing all aspects of the agribusiness value chain – fromfarming to production and marketing. Thefund is the first agribusiness-only privateequity venture in India. In Sierra Leone,

“An investor who is doinggood in society in emergingmarkets is also more likely to be doing well financially.”

CDC backed the first private equity fundto emerge since the end of the country’s civil war. The fund will provide backing to businesses, particularly SMEs, and will boost the private sector in thisemerging economy.

CDC’s Investment Code on ESG issues

2009 was also the first full operationalyear of CDC’s new Investment Codewhich began on 1 January 2009. Thecode acts as a comprehensive guide to ensure that CDC’s investments are continually improving towards best international practices on theenvironment, safe and fair workingconditions and good practices incorporate governance. The code isdesigned to complement the role ofprivate equity as a long-term investmentvehicle and recognises that fundmanagers are well placed to implementbest international practices on ESG inportfolio companies.

In 2009, 83% of companies covered by CDC’s evaluations made ESGimprovements following investment by the fund manager. Whilst this is aconsiderable achievement, it is also a very necessary one. 73% of companiescovered by the evaluations had, at thetime of initial investment, ESG issues or opportunities for improvement. Wecontinue to work with our fund managersto promote and ensure that ESGimprovements take place across portfolio companies.

How CDC is adding value as an investor

The role of development finance is toprovide capital where there is a shortageof commercial investors. DFIs can alsohelp reduce the perception of risk amongcommercial investors and therebycatalyse even greater levels of third partycapital. CDC agreed in 2009 a newmethodology with DFID for assessing thethird party capital that it has mobilised inthe funds in which it is an investor. Themethodology recognises that CDC’sinfluence is greatest in mobilising capitalfor first funds than subsequent ones. Wefound that over the past three years CDChas mobilised 278% more capital to fundsthan from its commitments alone. Thisbeats the 200% target set for us by DFID.Please refer to chapter 7 for more detailson our work in mobilising capital and themethodology behind this.

CDC chooses its fund managers carefullyto ensure they bring a strong local

presence to the investment process. All except two of CDC’s 65 private equityfund managers have local offices, withcountry locations ranging from Nigeria toZambia, Indonesia to Sri Lanka. Thedevelopment of a sustainable, vibrantinvestment infrastructure is a key part ofeconomic development and our backingfor local managers means that we supportpoor countries’ economic growth bydoing more than just placing our capital in businesses.

Early in 2010, we completed updates toour Toolkit for Fund Managers. The newpublication will give fund managers andothers an improved and more user-friendly resource to demonstrate howgood management on ESG can add valueto investments. The Toolkit provides toolsfor integrating ESG analysis intoinvestment decisions and explores thebusiness case for doing so. We will shareour new Toolkit with all our fund managersas well as any other interested externalparties in the first half of 2010. The toolkitis available on the CDC website:www.cdcgroup.com

International collaboration and initiatives

Through our work with internationalpartners we are making a difference to thinking on issues key to enhancingdevelopment impact. There is adisproportionate number of poor womenin the world and in order to find ways toaddress this we commissioned a study on gender in collaboration with three otherDFIs. The study provides best practiceguidelines and advice on how toimplement gender equal standards inprivate sector companies in developingcountries. We also commissioned aclimate change study to help our fundmanagers better understand and manageclimate change risks across their portfolios.

Various collaboration and opportunities for speaking engagements were alsoundertaken during the year. CDC workedwith Oxfam and the Church of England to raise the profile of private equityinvestment in developing countries; inWashington early in 2009 we met withother DFIs to find innovative ways to helpour markets meet the challenge of therecession; and in November 2009 we leda fact-finding visit to help Bangladeshipolicy makers make their country a betterplace to invest. We also became asignatory to the United Nations Principlesof Responsible Investment (UNPRI) andare actively involved as a SteeringCommittee member in two of its working

groups. Being a UNPRI signatory enablesus to engage in closer dialogue with andbring our experience and insights to otherinvestors whilst also learning from them.

Evaluating CDC’s performance

A cornerstone of CDC’s system formeasuring development impact is theevaluations of its funds.

For the first time, in 2009 we decided touse independent assessors to carry outsome of our evaluations. Seven out of 20 evaluations were completed by TripleValue Strategy Consulting. This hasprovided valuable external validation ofCDC’s evaluation process and showedthat CDC on average rates its funds’performance at least as critically as thethird party. In addition, Triple Value hasalso contributed new ideas to CDC’sthinking on how to measure development.

Over the investment period of the 20funds under evaluation, a total of 87,000new jobs were created. Just 22 of the 265companies reporting this data sawemployment decrease. A total of 68% ofcompanies in the funds evaluated saw anincrease in profitability followinginvestment from CDC’s fund managersand 82% saw an increase in revenues.Over US$3bn was paid in taxes todomestic governments over the period ofinvestment by 179 companies reportingthis data to CDC. In this way, CDC’sinvestment brings real economic benefitsto those countries it reaches.

Final words

2009 proved a challenging year for CDC,fund managers, portfolio companies andemerging markets. Our portfolio wasnevertheless able to respond well to thesechallenges and we expect the outlook for2010 to be more favourable. Lookingahead, our 2009-13 Investment Policystipulates that at least half of the newinvestment made will go to sub-SaharanAfrica and at least three quarters of ourinvestments to low income countries1.CDC will thereby continue its efforts toreach markets where investment capital is scarce and continue to offer them a sustainable route out of poverty.

Richard LaingChief Executive

Statement from the Chief Executive 3


Statement from the Chair of CDC’s Best Practice and Development Committee Jonathan Kydd

Obligations of managing public money

One of CDC’s most significantachievements over the past few years hasbeen to establish a system to measuredevelopment impact. This was a vital step and one that took considerable timeand thought. As a consequence CDC’ssystems for monitoring and evaluation are as comprehensive as any in thedevelopment finance industry. CDC’soutsourcing of seven impact evaluationsto an independent third party marks afurther stage in the development of arobust approach to analysing the benefitof CDC’s capital to local economies.

There is no room for complacency here.The demand for even more thorough andnuanced understanding of the linksbetween commercial capital and povertyreduction is growing. CDC must continueto be proactive in this area and work toensure that its evaluation work andEnvironment, Social and Governance(ESG) systems remain at the forefront of the industry. This is further discussed in chapter 6.

Priorities in 2010

In the upcoming year, CDC will continueto refine its systems that measuredevelopment impact. As an intermediatedinvestor, the intellectual and practicalchallenges here are complex. It is vital thatCDC’s Investment Code is implementedby its fund managers. The findings of theaudit into CDC’s ESG systems will play an important part in driving this process.This is the first audit of its kind for CDCand marks an important step towardsassessing the effectiveness of thesystems that CDC has worked hard to establish.

CDC will also focus on enhancing itsunderstanding of its portfolio in theupcoming year. Internally, it will assess the climate change impact of its portfolio.Externally, CDC will contribute to andlearn from other investors who aresignatories to the UNPRI. CDC also hosted a working forum for ESG anddevelopment impact issues between theEuropean DFIs in London in April.

CDC Board visit to Bangladesh

In order to observe first hand the impactthat development capital can have, CDC’sBoard visited Bangladesh in November oflast year. Bangladesh might appear a riskydestination for foreign investment.Although its GDP has been growing at 6% per annum, developing businesses in the country face severe challenges.These include environmental problems,lax corporate governance standards and a lack of power infrastructure.

Preconceptions can be misleading and it is CDC’s role to demonstrate to othersthat responsible and successful investingis possible. CDC and its Board co-hostedtwo seminars attended by over 100participants from the investment andgovernment communities to discuss therole of the private sector and privateequity in development. In Bangladesh, a new entrepreneurial generation isemerging which understands how privatesector development can transform livesas well as the value of developingbusinesses sustainably and withadherence to the best internationalbusiness and ESG standards. It is part ofCDC’s mission to help foster this talent bybacking the entrepreneurs and investorsthat will bring greatest benefit toBangladesh. While our recent support forits nascent private equity industry is new,Bangladesh is not a new market for CDC.Indeed, it was to address Bangladesh’spoor power capacity in the early 2000sthat CDC backed three gas-poweredplants, through its former Globeleqsubsidiary, that provided 25% of thecountry’s electricity.

Reflections

In 2010, I shall be retiring from CDC’sBoard after 13 years and as Chairman of the Best Practice and DevelopmentCommittee. My association with CDC is a source of great pride and proved avaluable complement to my academicwork as a development economist, with a focus on Africa. CDC stands, as it hasalways stood, at the pioneering edge ofthe private sector’s ability to improve livesand reduce poverty.

Prof. Jonathan KyddChair of CDC’s Best Practice and Development Committee

CDC’s role

As a long-standing member of CDC’sBoard I have been fortunate to be part ofsome of the most significant changes inCDC’s history and thinking on economicdevelopment. Whilst these changes haveseen the organisation’s structure andbusiness model transform, CDC’s driveand effectiveness in supporting the privatesector in poor countries is as strong as ever.

The Chief Executive has mentioned in hisintroduction that the global economiccrisis which unfolded in 2009 presentedconsiderable challenges to CDC.Fortunately, as a consequence of itsfinancial success in recent years, CDCwas well-placed to continue investing new capital in developing countries at a time when it was most needed.

As a Development Finance Institution (DFI),CDC is ideally suited to providing capitalto markets where there are higher risksand where investment is in short supply.CDC’s investment targets for 2009-13 aremore ambitious than any European DFIequivalent. At least 50% of new capitalcommitted by CDC is to be deployed insub-Saharan Africa and at least 75% tolow income countries.

As an investor in private equity funds,CDC’s capital is invested for the longerterm and therefore assists companies togrow and develop over time. CDC’s role in supporting new fund managers toestablish vibrant private equityinfrastructure in developing economiesshould not be underestimated.

CDC can also help to address specificproblems across emerging markets. Oneexample of this is CDC’s commitment tothe Global Trade Liquidity Programme, a major global initiative coordinated by the IFC, designed to help overcome theshortage of short-term trade financewhich stemmed from the financial crisis.

About CDC

Chapter CDC is a development finance institution (DFI) owned by the UK government’s Department for International Development(DFID). CDC is a core part of DFID’s strategy to reducepoverty and create sustainable economic growth throughprivate sector development in emerging markets. It has beenprofitable in all but four years since its foundation in 1948.

At the end of 2009, CDC was invested in 794 companiesthrough 65 fund managers. These investments are spreadacross 71 developing countries. Further details of CDC’sintermediated investment model and the importance of thismodel are discussed in this chapter.


Chapter 1: About CDC

Background

CDC was the first DFI. It was established in1948 to strengthen the economies of theformer British colonies by providing financefor businesses by way of loans and equity.In 1970, CDC started investing outside theCommonwealth. Since its inception over60 years ago, CDC has been supportingpromising businesses in Africa, Asia andLatin America and kept reinvesting itsprofits to an ever larger number ofcompanies in these emerging markets.

Why governments invest inDevelopment Finance Institutions

There is a wide consensus among policymakers and economists that growth is the most important factor in sustainablepoverty reduction. Unlike some other DFIs,CDC focusses exclusively on private sectorinvestments. Commercially successfulbusinesses provide employmentopportunities which are critically neededin poor countries that often suffer fromchronically high unemployment rates.

By providing finance for promisingbusinesses in developing countries, DFIs canhelp to stimulate private sector developmentin economies underserved by commercialfinancial institutions. Companies whichreceive investment generate newemployment and pay taxes, offering bothindividuals and governments prospectsfor forging their own route out of poverty.Profitable and growing businesses alsogenerate increasing tax revenues thatallow low income country governments tofund their own development programmesthrough investments in primary education,health services and infrastructure.

DFIs have a particular role to play inenabling investment in underserved projecttypes and settings, investing in under-capitalised sectors and mobilising otherinvestors. DFIs can be particularly potentwhen they invest capital in regions sufferingfrom market failure and where access tocapital for businesses is in short supply.

DFIs can also have a catalytic role byfacilitating additional investment flows into emerging markets. They fulfil this roleprimarily through:

• helping mobilise private capital andexpertise through their long experienceof emerging markets. DFIs encourageadditional funding for promisingbusiness which might not be committedwithout the presence of the DFI;

• increasing the visibility of promisingopportunities and offering tailoredfinancing solutions, thereby mitigatingrisk to other parties; and

• creating a multiplier effect in which their own capital is added to by privateinvestors.

DFIs provide added value by the way in which their approach and types ofinvestments sometimes differ from thoseof a more mainstream investor. The DFIsfulfil this by:

• investing at an early stage in enterprisesin developing countries which areseeking finance;

• providing financial solutions that otherprivate sector investors would generallynot be willing to use;

• being cogniscent of and managingtypically higher risks in emergingmarkets;

More than 25 investments

15–25 investments

6–14 investments

1–5 investments

CDC’s investments by year end 2009: 794 investments in 71 countries

Current portfolio

Sub-Saharan Africa45% of CDC’s portfolio£640m, 28 countries

Asia43% of CDC’s portfolio£607m, 27 countries

Latin America5% of CDC’s portfolio£73m, 12 countries

North Africa7% of CDC’s portfolio£91m, 4 countries

Low income countries1

54% of CDC’s portfolio£762m

Middle income countries2

46% of CDC’s portfolio£648m

CDC is a development finance institution (DFI) owned by the UKgovernment’s Department for International Development (DFID). CDC is a core part of DFID’s strategy to reduce poverty and create sustainableeconomic growth through private sector development in emerging markets. It has been profitable in all but four years since its foundation in 1948.

Chapter 1 – About CDC 7

• developing and growing projects andbusinesses over the longer term asopposed to shorter term approaches;and

• investing in small and medium sizedenterprises (SMEs), with a particularfocus on Africa.

Poverty remains a reality for large parts of the population in emerging markets.Continued investment in locally basedfunds and companies to provideeconomic growth and poverty reductiontherefore remains as important as ever.The first of the UN MillenniumDevelopment Goals aims to reduce byhalf the number of people living beneaththe poverty threshold by 2015. This target is still some way short of being met forsub-Saharan Africa in particular. South Asiaby contrast has kept closer to matchingits target of less than 25% of people livingbeneath the poverty line by 2015.

Where CDC invests

CDC’s investments are focused on the poorest countries. When CDC’sinvestment policy for the 2009-13 periodwas formulated, DFID and CDC set out three policy targets to guide CDC’s new commitments:

• 75% or more of new investments shallbe in low income countries1;

• 50% or more of new investments shallbe in sub-Saharan Africa; and

• up to £125m may be committed toSME funds in middle income countries2.

As a result of these policy targets a largerproportion of CDC’s new investments aredirected towards low income countriesthan any other DFI. CDC also seeks toaddress issues such as the scarcity ofdebt capital for companies andinfrastructure projects across emergingmarkets and in sub-Saharan Africa inparticular. Through investment in debtfunds CDC intends to develop andstrengthen African debt capital markets.

“While developed countrieswere initially those mostaffected (by the decline in 2008 of FDI flows), the decline has now spreadto developing countries, withinward investment in mostcountries falling too. Thedecline poses challenges formany developing countries, asFDI has become their largestsource of external financing.”

Ban Ki-moon, World Investment Report2009, UNCTAD

The Global Trade LiquidityProgramme

One example of DFIs’ ‘additional’ value: provision of finance during the financialcrisis.

BackgroundThe financial crisis which began in late2008 has had a mixed effect on CDC’score markets and geographies. One wayof measuring this is to look at foreigndirect investment (FDI). The WorldInvestment Report for 2009 demonstratesthe significant impact of the crisis on FDI.FDI inflows decreased 14% worldwide in2008 and 44% in the first quarter of 2009compared to first quarter 2008.

Impact on FDI inflows in emergingmarketsAlthough a greater share of overall FDIwas directed at developing markets in2009, the report paints a gloomy picture forthe year as a whole. Pledged investmentfor developing countries has also fallenback. This means less capital has beencommitted to emerging markets and, in thissense, the financial crisis will continue to befelt in Africa and Asia for some time to come.

Although data is not yet available for theemerging markets as a whole, it is possibleto see the impact of the crisis on individualcountries. In India, FDI flows decreased byan estimated 16% in 2009. In South Africa,this decrease was approximately 13%. In such an environment of diminishedcapital, the role of DFIs becomes evenmore important.

One response: The Global TradeLiquidity ProgrammeIn 2009, CDC committed US$75m to theGlobal Trade Liquidity Programme (GTLP),a fund initiated by the International FinanceCorporation (IFC). The GTLP is designed to address the scarcity of trade finance inemerging markets which resulted from the financial crisis. At the time of theprogramme’s launch, trade was estimated

to have declined by as much as 10% in2009, the largest decline since this measurewas introduced.

The GTLP has a total size of US$5bn with commitments from a range ofinstitutions. These include a combinationof governments, DFIs and private sectorbanks. The programme hopes to mobilisean estimated US$50bn of trade whichwould not have happened withoutsupport from the GTLP.

President of the World Bank, RobertZoellick commented at the launch: “As a result of the concerted efforts of the partner governments, developmentfinance institutions and banks, the GTLPhas quickly moved from concept to realityand will start to provide significant supportfor trade in developing countries.”

The GTLP fully reflects CDC’s desire to provide solutions to changingcircumstances in the emerging markets. It also reflects part of CDC’s new strategyto finance debt as well as equity which isdiscussed further in chapter 7.

Board visit to Bangladesh (2009) Board visit to Zambia (2008)

About CDC continued

India contains the largest number of poorpeople of any country in the world withapproximately 450 million people living on less than US$1.25 per day. 340 millionof these, or more than 70%, live in ruralareas. Bangladesh is also extremely poor, with 50% of its 150 million peopleclassified as poor under the World Bankpoverty line. Parts of South East Asia aresimilarly poor – in Vietnam, 23% of peoplelive on less than US$1.25 a day.

How CDC invests

CDC’s operating model Since 2004, CDC has been constituted asa fund-of-funds. This business model wasestablished following a major restructuringby CDC’s shareholder, DFID. As a fund-of-funds, CDC is not a direct investor intocompanies in emerging markets. Instead it deploys its capital through private equityfunds which in turn invest in thesecompanies. These funds thereby provideCDC with an indirect share in thebusinesses in which the fund managerinvests. Through these investments thefund managers provide companies withaccess to capital that allows them toexpand and improve their businesses.Other investors, both public and private,invest alongside CDC with these fundmanagers. This further expands theaccess to capital for fund managers toinvest in businesses in emerging markets.


At the end of 2009, CDC had capitalinvested in 134 funds which in turninvested in 794 companies which werespread across 71 countries worldwide.The largest share of CDC’s portfolio valueis located in sub-Saharan Africa whichrepresents 45% of CDC’s portfolio valueand some £640m while 43% is invested inAsia. 54% of CDC’s portfolio was at theend of 2009 committed to low incomecountries according to the World Bank’s2006 categorisation.

Nature of the investment universe CDC’s investment universe is directedtowards low and middle income countrieswhere a large proportion of people live inabsolute poverty. A typical measure ofabsolute poverty is the World BankUS$1.25 a day poverty line (US$38 permonth), defined as consumption orincome below this threshold. By investingin under resourced markets and sectorswhere CDC’s investments are moreneeded, the financial, economic, ESG,and private sector development outcomesare likely to be greater.

Sub-Saharan Africa has the highestproportion of the world’s poor with 51%of the population, nearly 400 millionpeople, living beneath the poverty line.Nigeria, sub-Saharan Africa’s mostpopulous country has the continent’sgreatest number of poor with as many as90 million people in that category. Kenya,another country that is home to asubstantial number of CDC portfoliocompanies, has 20% of its population inpoverty. CDC also directs its capital tolow-income countries in Asia, with a focuson South Asia and the Mekong region ofSouth East Asia. The largest of theseinvestment destinations is India.

Top investment destinations

India19% of CDC’s portfolio167 companies£268m

China14% of CDC’s portfolio112 companies£197m

South Africa10% of CDC’s portfolio42 companies£134m

Nigeria9% of CDC’s portfolio41 companies£121m

Kenya3% of CDC’s portfolio53 companies£44m

World’s poor by region*

1

2

3

4 56 7 1 Sub-Saharan Africa 28%

2 China 15%3 India 33%4 Other Asia 18%5 Latin America &

Caribbean 4%6 Middle East & North

Africa 1%7 Europe & Central Asia 1%

CDC portfolio value by region

12

3

45

61 Sub-Saharan Africa 45%2 China 14%3 India 19%4 Other Asia 10%5 Latin America 5%6 North Africa 7%

*Per World Bank regional divisions *Information and communications technologies

CDC portfolio value by sector

2

34

5

6

7

89 10

1

1 Financials 20%2 Consumer 14%3 Industrials 13%4 Energy & utilities 10%5 ICT* 10%6 Healthcare 8%7 Infrastructure 8%8 Mining 6%9 Agribusiness 5%10 Others 6%

CDC capital CDC invests with fund managers.

Fund managersCDC’s fund managers invest incompanies in developing countries.

Portfolio companiesPortfolio companies expand andimprove upon their businesses.

Economic growthFund managers sell portfolio companies and return proceeds to CDC and other investors. Proceeds are reinvested by CDC.

4

3 1

2

CDC’s business model: capital for investment in growing businesses in developing countries

12

3

4

Realisation of investmentsPrivate equity is a long-term investmentvehicle. Capital invested through CDC’sfund managers is realised only when the fund manager’s shareholding is sold. The majority of the commercial returnsoccur towards the end of the investmentperiod. However, the capital provided tocompanies helps businesses realise theirgrowth potential and thereby generatemore immediate and sustainable benefits.These include taxes paid and jobs createdin the local economies.

Exits and re-investments Typically after four to seven years (in which business improvements can be made) CDC’s fund managers sell theirinvestments in portfolio companies. This can happen through an initial publicoffering on the local stock market, a tradesale to another company in the samesector, an investment by a new investor, or, in some cases, an investment by thecompany’s own management.

Profits from these sales are returned by the fund manager to CDC and otherinvestors. CDC reinvests the proceedsfrom these long-term investments in newfunds, which in turn deploy CDC’s capitalinto new companies. Capital is therebyredeployed in new companies in need ofgrowth capital.

The importance of Environmental,Social and Governance factors Environment, Social and Governance(ESG) matters are key considerations forCDC when it invests. This stems not onlyfrom CDC’s commitment to responsibleinvesting but also because good ESGstandards can increase the value ofbusinesses. Good ESG standards canconstitute a source of competitiveadvantage, for example by enhancingbrand value or by qualifying a company to bid for certain contracts.

CDC therefore devotes considerable effortto assisting its fund managers in this area.The fund managers in turn work closelywith their portfolio companies in thepursuit of continuous improvements in corporate governance and promotinghigh environmental and social standards.CDC’s ESG work is described in greaterdetail later in this report, particularly inchapters 2 and 6.

Supporting fund managers andcompaniesAs a fund-of-funds, CDC does not play a direct role in managing the investmentsmade by its fund managers. Instead, itprovides support to its fund managersand by extension, also indirectly to theportfolio companies. For portfoliocompanies, with assistance from fundmanagers, the period of investment whichcan be up to ten years, provides time torealise corporate growth opportunitiesand bring about improvements inbusiness practices.


Actual 2009 investments At the end of 2009 CDC had investmentswith 65 different fund managers in a total of 134 funds. During the year CDC’sfund managers made £359m of newinvestments in developing economies withCDC’s capital, a reduction of 18% on therecord levels achieved in 2008. CDC alsocommitted a total of £209m to new funds,again a substantial reduction caused bythe constraints of the financial crisis, but still representing a major commitment to underdeveloped capital markets.

The Investment Code – CDC’sprinciples for sustainable andresponsible investments

Key objectivesThe Investment Code defines CDC’sprinciples, objectives, policies andmanagement systems for sustainable and responsible investment from an ESGperspective. It is a key guiding documentfor all CDC’s investments. It wasdeveloped in collaboration with DFID and became effective on 1 January 2009.It is set out in Appendix 1.

The Investment Code replaced CDC’sBusiness Principles and contains updatesand revisions in light of the developmentof international best practice.

Economic growth

We help mobilise private investment in poorer countries by demonstrating a successful track record.4 2

Portfoliocompanies

Fundmanagers

Mobilisingotherpeople’smoney

CDCcapital

3

1


Advisory Services (OHSAS) standards on health and safety. In addition, CDC willensure that its fund managers are madeaware of refinements to best practices as these develop across the developmentfinance industry. This is particularly thecase with respect to the IFC PerformanceStandards and Environmental Health and Safety (EHS) Guidelines.

Corporate governance is a particularlyimportant area of focus in many emergingmarkets. The Investment Code adheres to the Organisation for Economic Co-operation and Development (OECD)3Principles of Corporate Governance, the UN Anti-Corruption Convention4, the OECD Anti-Bribery Convention andthe Extractive Industries TransparencyInitiative. The purpose is to promotegreater accountability and transparency,to define management responsibilities at portfolio companies and to set upeffective risk control systems.

The exclusion list ensures CDC’s capital is not invested in products or activitiesprohibited by local or national laws orregulations. It also incorporates certainproducts or activities banned by globalconventions and agreements. Thisincludes hazardous chemicals, pesticidesand wastes5; ozone depleting substances6;and endangered or protected wildlife orwildlife products7; and unbondedasbestos fibres. Conversely, the exclusionlist recognises the challenge of investingin some African companies and thusallows investment in tobacco production if there is a clear phase-out plan in place.

Governance of ESG

Legal agreements to ensure adherenceto the Investment CodeWhen CDC commits capital to a fund, itplaces the fund and the manager of thefund under a legal obligation to operate inaccordance with an investment codeidentical to or substantially similar toCDC’s Investment Code. Theseobligations may be included in the corelegal documents for the fund or in a sideletter agreement. The only exception tothis is where CDC is a late stage investorin a fund which is already operating inaccordance with the ESG principles ofother DFIs which are broadly similar toCDC’s Investment Code.

When a fund invests in a portfoliocompany where it has effective control orsignificant influence, CDC requires thefund manager to procure an ‘investmentundertaking’ from the portfolio companythat it will operate in line with the fundmanager’s investment code.

This is to allow CDC to exercise a degreeof influence on ESG standards at portfoliocompanies. With this commitment, CDCexpects its fund managers to buildawareness among portfolio companies onwaste reduction, pollution control andenergy consumption as well as adequatesafeguards for the wellbeing of employeesand local communities. It also allows CDC tobe positioned closer to portfolio companiesthan is typical for a fund-of-funds.

The key objectives as stated in theInvestment Code are to:

• minimise adverse impacts and enhancepositive effects on the environment,workers and all stakeholders of CDCand the businesses in which CDC’scapital is invested; and

• promote improvements over time, as relevant and appropriate, given thelevel of risks involved or opportunitiesto add value.

The Investment Code thus takes aforward looking approach, recognisingthat ESG standards may be poor at thetime of a fund manager’s investment. Bybringing about ESG improvements overthe course of the investment period,CDC’s capital can be used as a catalystfor improvement. The funds to which CDChas committed capital from the start of2009 have signed this version of CDC’sInvestment Code. Fund managers thatsigned up to CDC’s previous ESG policieswill be encouraged, where possible, to adopt the Investment Code in future.

Alignment with international ESGreference standardsThe Investment Code is linked to andclosely aligned with the most important ofthe international reference standardsrelated to ESG.

For labour and working standards theInvestment Code aligns with theInternational Labour Organization (ILO)core labour conventions, the InternationalStandards Organisation (ISO) series andthe Occupational Health and Safety

About CDC continued

• Formal agreement withCDC to commit to theInvestment Code – byCDC’s standard sideletter or equivalent

• Investment strategy in line with CDC’sexclusion list

• Awareness of ESG risks and opportunitiesand how portfoliocompanies shouldaddress these, e.g. if investment strategyincludes high risksectors like oil and gas,mining, or large scaleagribusiness

• Awareness of country/regional ESG risks

• Assess newinvestments on ESGmatters: > sector risks> issues or opportunities

to add value > quality of investee

company ESGmanagementsystems

• Give new investmentsa risk rating on ESGmatters to determinethe appropriate level of management andmonitoring

• Where fund managershave effective controlor significant influence,procure an investmentundertaking fromportfolio companies in line with CDC’sInvestment Code

• Assist portfoliocompanies to developaction plans to addressany ESG issuesidentified during duediligence, withappropriate targets and a timetable forimprovements

• Encourage managers ofportfolio companies to: > adopt and implement

sound ESG policies> work towards

continuousimprovements

• Monitor portfoliocompaniesperformance on ESGand progress towardsaction plans forimprovements

• If ESG issues arise,assist portfoliocompanies to addressthem in a timely manner

• Report annually to CDC • Monitor and record any

serious ESG incidentsin portfolio companiesand inform CDC

• Consider ESG mattersat divestment:> any ESG issues with

potential buyers?> will sound ESG

practices continueunder new owners?

CDC requires its fund managers to consider ESG matters in all of their investment activities

Fundraising –CDC investment Due diligence Investment

Investmentmanagement Exit> > > >


The procurement of a signed investmentundertaking is a requirement only in caseswhere a fund manager is considered tohave ‘significant influence’ over a portfoliocompany. Usually such influence stemsfrom one of the following factors:

• an ownership interest in the portfoliocompany in excess of 20%; or

• board representation allowing forparticipation in financial and operatingpolicies; or

• rights to influence pursuant to ashareholders’ or similar agreement.

CDC recognises that its fund managersinvest in companies ranging from SMEs tolarge enterprises with a significant regionalpresence and across every industrysector. Consequently, fund managers do not always have effective control orsignificant influence and may not be in aposition to procure a written undertakingfrom portfolio companies. This in no waydiminishes the responsibility of fundmanagers to work to ensure that thecompanies in which they invest CDC’scapital operate in line with CDC’sInvestment Code.

ESG risk rating of portfolio companiesBy promoting good business practices in poor countries, CDC’s investmentscontribute to development. Environmentaland social risks are typically low forinvestments in financial institutions,media, information and communicationstechnologies or retail. CDC recogniseshowever that some industry sectors areinherently of greater ESG risk than others.

Industries that typically have high ESGrisk include:

• industries with high risks of pollution; • activities which affect the natural

environment; • resource intensive industries; • businesses which use low skilled

workers in countries with weakemployment legislation;

• businesses which involve workershandling hazardous substances;

• businesses which can pose health and safety dangers for consumers; and

• sectors that involve large contracts,particularly those involving governments.

In 2009, CDC obtained sufficient datafrom fund managers and evaluationreports to complete a comprehensiveESG risk rating of the portfolio. In total,CDC obtained risk ratings from 542 companies across CDC’s portfolio, of which a total of 50 companies wererated high risk for environmental matters,26 for social matters and 29 for corporategovernance. A total of 85 companies inCDC’s portfolio were found to be high riskon one or more ESG rating.

CDC also performed an analysis ofindustry sectors with high ESG risks.Mining is the riskiest sector with 62% of investments categorised as high risk.Energy and utilities follows at 45% andagribusiness at 38% of investments ratedas high risk. This sector overview of riskrating shows consistency across thevarious funds managers and individualfunds. This consistency suggests fundmanagers have a good understanding of CDC’s risk rating guidance material and how to apply it to their portfolios.

ESG support for fund managersCDC invests across a wide range ofindustry sectors and works closely with its fund managers to monitor companies’ESG performance, address issues whenthey arise and to ensure support is soughtfor industries with high ESG risk.

Building on this existing work, the ESGrisk rating analysis can be used to targetportfolio companies for site visits andfund managers for additional support.This system will bring CDC’s expertiseand support to where it is most neededacross the portfolio.

A specific resource for fund managers is CDC’s Toolkit for fund managers toaddress ESG risks. More details on theToolkit can be found in chapter 5 of thisreport, as well as on CDC’s website.

An additional resource is the large numberof case studies available on CDC’swebsite. These examples demonstratesuccess stories and lessons in addressingESG risks and opportunities. They alsoshow how responsible business practicescan attract international customers,reduce risks, build stronger brands andoften also reduce costs.

An example of how good ESG practicescan contribute to a company’s success isillustrated by CDC’s investment in TruongThanh Furniture Corporation (TTFC). The case study on the following pagedescribes this investment in more detail.

CDC’s step-by-step risk rating process for portfolio companies

YesYes

YesYes

YesYes

Yes

No

No

No

No

No

No

NoYes

YesYes

Yes

No

No

No

No

*Catalytic effect is not considered for funds where CDC has entered in the final close, hence the number of funds rated on catalytic effect is fewer than for the other performance measures.

Follow-upactions:

High priority• Reviewing portfolio company with fund manager• Strengthening fund manager ESG

management system• Conducting site visit

in addition to:

Increased monitoring• Reviewing portfolio company with

investment team• Conducting site visits if appropriate

in addition to:

Regular monitoring• Collecting ESG reports• Following up on ESG actions from ESG

reports; monitoring reports; investmentpapers; evaluations; and incident reports

ESG risk rating exists?

High ESG risk/inherent ESG risk?

Quality rating of ESGManagement system?

Low quality of ESGmanagementsystems?

CDC is only DFI investor?

Data on employees and turnoverexists?

Largeturnover/number ofemployees?

Step 1 Step 2 Step 4Step 3

Truong Thanh FurnitureCorporation (TTFC), VietnamA successful furnituremanufacturer with a keenenvironmental awareness

Vietnam is an emerging economy in SouthEast Asia and an increasingly populardestination for foreign investment.Nonetheless, over 23% of the 87 millionpopulation live below the US$1.25 a daypoverty line. The main economic driversare primary industries such as rice, coffee and fish as well as garments andpetroleum. Furniture manufacturing is notcurrently included on this list despite therelative abundance of both local andimported timber. TTFC with its sevenfactories and approximately 6,500employees at the end of 2009 marks asignificant shift in utilising this valuablenatural resource responsibly.

CDC’s fund manager, Aureos investedUS$3m in TTFC in 2006 in order to helpthe Company expand its operations. In particular, the funds financed theconstruction of new modern factories inDaklak and Binh Duong. These factorieshave enabled the company to establish a competitive advantage, offering salaries that compete well with the risingmanufacturing salaries in Vietnam. With the help of further private sectorinvestment, TTFC also completed theconstruction of a training centre in 2007.This training centre has helped addressthe shortage of skilled labour that affectsthe furniture manufacturing market.

The Company’s expansion was achieveddespite the Global financial crisis affecting exports. TTFC currently exportsapproximately 70% of products to more than 30 countries worldwide.Consequently, the recent market

turbulence has affected the Company’sprofit margins. Despite the additionalstrain resulting from the financial crisis,the Company recorded a robust rise inturnover in 2009 and remained profitablethanks to its effective change in strategy.Employment at TTFC has also grownsignificantly in 2009 with the full operationof the new factory in Binh DuongProvince, and with it opportunities forpreviously unskilled labourers in Vietnam.

TTFC has successfully developed itsbrand in local and international marketsduring the past few years based on itscommitment to sustainable practices insourcing the timber as well as managingits workforce. When in March 2008 theEnvironmental Investigation Agency (EIA)published a report into Vietnam’s timberindustry, the findings were that 500,000cubic metres of illegal logs weresmuggled into Vietnam each year. Eightmajor furniture companies were cited inthis report, which was damaging to thewhole industry. TTFC, however, was notincluded on this list. The company hasalso received various awards from theVietnamese government attesting to itsquality and success. TTFC is recognisedas an industry leader.

What has really set apart TTFC from itscompetitors is the attention the companypays to its social and environmentalimpact. The company is ISO 9001certified reflecting improvements inproduction knowledge and qualitymanagement. The company has alsogradually applied Social Accountability8000 (SA 80001) in an attempt to providedecent working conditions for itsemployees. Following a recent review,TTFC has implemented all the health and safety recommendations suggestedby Aureos. Further, the company hasintroduced annual health checks for its workforce.

Key data

Investment:2 US$3.0mInvestment period: 2006 - presentSector: Furniture manufacturingFund manager: AureosEmployment:3 6,500

1 The SA 8000 certification is a leading standard for managinghuman rights in the workplace.

2 US$3m was invested by Aureos. CDC’s investment in AureosSouth East Asia Fund is US$20m; total fund size is US$70m.

3 2009.

About CDC continued


On the environmental side, TTFC hasdeveloped a system to allay concernsover the sourcing of wood used in itsmanufacturing process. The system isdesigned to ensure that all wood used in furniture manufacture is sustainablysourced. The plan was developed with the World Wildlife Fund (WWF) and theVietnam Forest and Trade Network.Already the programme has seensignificant results and in 2008, thecompliance manager reported no timberpurchases from unapproved sources.

As a critical input for its success, TTFChas been extremely active in forestrymanagement. In total, the company hasbeen approved to grow 100,000 hectaresof forest in Vietnam. This includesmanagement of two-to-four year old treeson an existing forestry plantation and anapproved 40,000-hectare plantationproject in Phu Yen province. In an industrythat has come under intense scrutiny,TTFC’s projects are pioneering and pointthe way towards a more sustainable futurefor Vietnamese furniture manufacturing.As these standards are necessary forreaching new international exportmarkets, TTFC is well placed to continueits development and emerge strongerfrom the recent global crisis that hadseverely affected Vietnamese exports.

Furniture manufacturing at TTFC

CDC assesses the development impact of its capital across a number of measures. These include financial performance,economic performance, ESG performance and the broaderimpact of capital on the development of the private sector indeveloping economies. Various examples of CDC’s impact onthese measures are discussed in this chapter along with more in-depth analyses of the factors that help to drive performance.

Examples of the role CDC’s capital can play in developingpromising businesses are also included for illustration.

CDC performance

Chapter

Financial performance

This section examines CDC’s financialperformance in 2009 in comparison withprevious years and comparable emergingmarkets indices. There is also an analysisof potential explanatory factors behindCDC’s financial performance. Additionalinformation on financial performance canbe found in CDC’s Financial Review andAnnual Report and Accounts.

Why financial performance mattersFinancial performance is essential to CDCfor four principal reasons:

• building sustainable companies: CDC’s mission is to foster growth insustainable businesses, helping to raiseliving standards in developing countries.Portfolio companies therefore have tobe developmentally and financiallysuccessful to provide a lastingcontribution to society. Only then willthere be a sustainable and lastingsource of income to raise livingstandards in the emerging marketswhere CDC’s fund managers invest;

• building lasting capital markets: As a fund-of-funds, CDC supports thegrowth of companies as well as thedevelopment of local and regionalcapital markets. It is therefore essentialthat the fund managers are able togenerate financial returns in responsiblebusinesses to be sustainable and toraise capital for local investments;

• attracting third party capital: In mostemerging markets there is insufficientaccess to finance for local businesses.More investors are needed to addressthis gap including private investors.They will only come in if there areopportunities to generate financialreturns through investments incommercially viable and successfulcompanies. CDC therefore needs todemonstrate returns from its portfolio toattract investors to a range of markets,sectors and asset types; and

• investing increasing amounts of CDCcapital in emerging markets: Bygenerating returns from its investmentsand re-investing the proceeds CDCprovides ever larger amounts of capital toemerging markets without any additionalcontributions from the UK government.

Portfolio financial overview2009 began in the midst of the worstfinancial crisis in decades. In comparisonto 2008, CDC’s performance in 2009represented a strong recovery. Keyhighlights were as follows:

• total return for 2009 was £207mcompared to a loss of £359m in 2008.This represents an average annualreturn of 16% over the past five years;

• new investments in 2009 totalled£359m. This represents a decrease of18% on 2008 levels but £35m abovethe average annual investment for theperiod 2004 to 2008 of £324m;

• new investments on a five-year rollingbasis stood at 75% in low income

countries, exceeding the rolling five-year target of 70%; and

• new investments on a five-year rolling basisstood at 64% in sub-Saharan Africaand South Asia in 2009, exceeding therolling five-year target of 50%.

MSCI index performanceWhilst CDC has traditionally used the MSCIEmerging Markets US$ index to measureits performance, individual countryweightings within the index are not reallyrepresentative of the geographical spreadof CDC’s actual investment universe. Inparticular, the index does not includemany low income countries in Africa andAsia. As a result, Morgan Stanley, inconjunction with CDC developed in 2009an index more appropriate to CDC’sgeographical spread. In 2009, this newMSCI CDC weighted index rose by 57%in comparison to a fall of 51% by thesame measure in 2008. Whilst CDC’sportfolio performance was less than its MSCI benchmarking in 2009, on a three year rolling basis it was 6% ahead of the benchmark.

Performance analysisAn analysis of CDC’s portfolio companiessuggests there is a correlation betweencompanies with higher financial returnsand companies with relatively betterEnvironment, Social and Governance(ESG) management systems. Thisanalysis is based solely upon the 345 companies in which CDC’s fundmanagers invested during the period2003-07. This excludes companies in

ESG management systems and portfoliocompany returns (mean IRR, %)

–7.7

5.67.4

Poor

ModerateGood

Quality of ESG management systems (N=143)


CDC return over 5 years versus market index (MSCI)

400

325

250

175

1002004 2005 2006 2007 2008 2009

CDC portfolio performance in US$MSCI Emerging Markets benchmark

Chapter 2: CDC performanceCDC assesses its development outcome across four dimensions –financial, economic and ESG performance and private sectordevelopment. 2009 showed a stronger financial performance, anincreased number of jobs created and taxes paid, several achievementsin improving ESG performance and continuous development of localcapital markets. Initial analyses also suggest a correlation betweenESG management systems and financial performance.

ESG management systems and portfolio company returns – performanceimprovements over time (mean IRR, %)

Governance risk, ESG managementsystems and IRRs (mean IRR, %)

companies. The most apparentconstraints include the following:

• performance over time: It would beuseful to track the IRRs of the samecompanies over time to reduce theimpact of other influencing factors;

• IRR estimates: These are estimates andthe realised IRR will only be known oncean investment has been exited whichintroduces uncertainty to the analysis;

• ESG management system ratings: Thisis not an exact science, nor perfectlyconsistent across the portfolio as it isdone individually by each of CDC’s 65 fund managers for their respectiveportfolio companies. In addition, for thesample used in this analysis it has beenassumed that the ratings haveremained constant over time, whichmay not always be the case;

• sample size: The relatively small samplesize limits the statistical significance ofany conclusions. This is even more thecase once the analysis is further refinedby year of investment, industry sectorand geography; and

• external factors: There is a multitude of external factors which influence thefinancial performance of any companyincluding exchange rate changes,political developments, competition,regulatory environment and technologicalchange to name the most obvious.

CDC will progress and improve theanalysis of its financial performance overthe next year. It would be beneficial toexpand the number of companies in theanalysis, which would be most effectivelyachieved in collaboration with otherDevelopment Finance Institutions (DFIs).Other priorities include collecting moredata for each company; rating the ESGrisks and management systems for theentire portfolio; and strengthening theconsistency of this process.

It might seem as if the overall IRR is drivenby the year of investment. A control sampleof 396 companies without ratings for ESGmanagement systems has therefore beenincluded. The financial performance for thissample develops in the opposite direction.This result therefore does not contradictthe initial assumption that any ESGmanagement system and good ones inparticular, might contribute to better IRRs.Conversely it does not confirm the initialassumption either. There might be severalreasons why the IRR for this non-ratedgroup of companies develops this way overtime. One plausible explanation is that thereis less data available as a result of possiblynon-existent management systems ingeneral. The initial IRR estimates mighttherefore prove optimistic. As moreinformation becomes available over timeincluding actual performance data the IRRestimates become more accurate.

Governance risk, ESG managementsystems and IRRs Governance risk relates typically to howwell defined roles and responsibilities arein a company, how well managementinformation systems and reporting worksand the level of availability, transparencyand consistency of information. An initialanalysis of portfolio data seems to suggestthere is a close co-variation between ESGmanagement systems and governancerisk as the graph below shows. Twopreliminary conclusions are that ESGmanagement systems and the lowering ofgovernance risk both contribute to higherIRRs. What is not clear from the analysisis the extent to which these two factorsinfluence each other. This analysis doeshowever have several limitations andalternative or complementary possibleexplanations and will be subject for furtheranalysis in 2010.

Conclusions and next stepsThese analyses constitute a first attemptat building a better and more quantitativeunderstanding of our portfolio andfinancial performance. There are limits tothe insights that can be drawn from thisanalysis of some of CDC’s portfolio

which CDC was invested before the startof the intermediated model. Excluded arealso investments after 2007 as InternalRate of Return (IRR) estimates are lessreliable for newer investments.

The analysis shows that companies withgood ESG management systemsoutperform those with poor systems by15.1% in IRR. When controlling for averageincome levels in different countries the trendstays the same. There is still a correlationbetween companies with good and poorESG management systems respectivelyand the financial returns they generate.

One possible explanation might be thatmore financially successful companies arebetter managed. These companies couldfor example also have rigorous andcomprehensive management systems for operational performance, customerrelations, staff training and other areas.The improved performance could thus stemfrom generally better processes andsystems. The attribution to these variousmanagement systems including ESG wouldin such cases require a more comprehensivesample of data and further analysis.

Performance improvement over timeTo help identify if there is a causal linkbetween good ESG management systemsand financial performance it is useful tointroduce a time dimension. All else beingequal, the cause should come before theeffect. In other words, if a good ESGmanagement system indeed explainsbetter financial performance, then theESG management system (the cause)would have come into place beforefinancial returns (the effect) improve.

Analysis of portfolio data also reveals apotential correlation between the length of time over which a company has had orpursued good ESG management systemsand financial returns. The graph belowsuggests that there is a correlationbetween improving financial performanceof a company over time and the presenceof any ESG management system – be it of poor, moderate, or good quality.

Chapter 2 – CDC performance 15

–29.7

–10.6

11.62.7 5.4

8.8 7.3 9.4

17.0

9.4 7.3 2.5

Poor Moderate Good No rating

3–5 years (invested in 2005–07)4–6 years (invested in 2004–06)5–7 years (invested in 2003–05)

Quality of ESG management systems (N=345)

–10.9

10.1

–1.3

2.912.811.8

Low risk

Governance risk level (N=107)

Medium risk

Poor ESG management systemsModerate ESG management systemsGood ESG management systems


CDC’s largest investmentsThe following is a list of CDC’s ten largest investments in terms of portfolio value. CDC supports investments in a broad range of sectors and believes such an approach is beneficial from a commercial, a developmental and a risk management perspective. CDC’s fund managers make investments in companies of different sizes, investing in large companies as well as SMEs andmicrofinance institutions. Some sectors are relatively more capital intensive than others and include power plants, utilities companies,power distribution entities and some manufacturing and process industries, as evidenced in the table below.

Company Description

Paras Pharmaceuticals A leading Indian company producing over the counter healthcare and personal care Invested by Actis Emerging Markets products. Successes for Paras include the painkiller Moov which has taken market share Fund 3; Actis India Fund 2; from multi-national companies and further innovative products in new markets for hair and Actis India Fund 3; Actis South Asia skin care.Fund 2; Actis Umbrella Fund; Aureos South Asia Fund

Globeleq Generation Limited Globeleq develops, owns and operates power generation facilities across emerging Invested by Actis Infrastructure Fund II markets. Globeleq currently owns Songas (a 190MW gas-fired generation project

located in Tanzania) and has interests in two other power projects: Tsavo (a 74MWheavy fuel oil-fired power station in Kenya); and Azito (a 288MW gas-fired power project in Côte d’Ivoire).

Alexander Forbes A diversified financial services company that operates as an intermediary in the Invested by Actis Africa Empowerment investment and insurance industries. Alexander Forbes is represented in 30 countries Fund; Actis Africa Fund 2; Actis with the majority of its operations in South Africa. Umbrella Fund; Canada Investment Fund for Africa; Ethos Fund V

DFCU DFCU was founded in 1964 by CDC and the Ugandan Government. It is a commercial Invested by Actis Africa Fund 1 bank operating in leasing, housing finance and term lending.

Diamond Bank Diamond Bank is the ninth largest bank in Nigeria (with a subsidiary in Benin Republic), Invested by Actis Africa Fund 2; with a strong focus on the SME and corporate sectors. The bank currently has Actis Umbrella Fund; Canada 120 branches, 1,800 staff and a 5% market share.Investment Fund for Africa

ACTOM (formerly A major South African electrical engineering, manufacturing, distributing and contractingAlstom Electrical Industries) company for the power sector. The business has 22 production facilities, 26 operating Invested by Actis Africa Fund 3; units and 21 distribution centres employing over 5,000 people.Actis Emerging Markets Fund 3

Seven Energy An upstream oil and gas company initially focused on Nigeria but with the ambition to Invested by Actis Africa Fund 2; expand in West Africa. The company has rights to a 40% interest in the undeveloped Canada Investment Fund for Africa; onshore Uquo Field to the east of the Niger Delta. Actis Umbrella Fund

Orascom The market leading mobile operator in Algeria with over 14m subscribersInvested by Actis Africa Fund 1 (as at November 2009). The company provides a range of prepaid and post paid

voice, data and multimedia telecommunication services.

Commercial International Bank The largest private sector commercial bank in Egypt. It has over 150 branches,Invested by Actis Emerging Markets Fund 3; over 450 ATMs and over 4,000 employees serving 700 corporate customers,Actis Africa Fund 3 400 small and medium enterprise customers and 380,000 retail customers.

Regal Forest A leading retailer of white and brown goods, electronics and furniture (durable Invested by Actis Latin America consumer goods) in El Salvador, Honduras, Guatemala and Nicaragua, with a market Fund 1 share of around 30% in each country.

CDC performance continued


Economic performance

Economic factors are crucial for growth. The World Bank survey ‘Voices of the Poor’suggests that 70% of the world’s poorbelieve the best way of escaping povertyis to find employment8. A Gallup survey ofmore than 26,000 people in 26 countriesin sub-Saharan Africa identified jobs forthe young as the fourth most importantpriority, after factors such as reducingpoverty and hunger9. Taxes are also vitalfor public services, infrastructure,innovation and a stronger link betweenstate and taxpayer.

CDC assesses, where possible, the widerbenefits from the companies supportedby its capital both to the economieswhere they operate and to the peopleworking for them. However, because CDCinvests through an intermediated modeland does not wholly own the underlyingportfolio companies, quantitively accurateand reliable estimates of employmentmaintained or created or tax revenuesgenerated by CDC’s investments is notpossible. Nevertheless, as theemployment and tax data reported toCDC for 2008 comes from a large sampleof portfolio companies, it is an importantindicator of the number of people thatsustain a livelihood with financial backingfrom CDC and the amount of tax revenuesthat benefit local governments fromcompanies where CDC’s capital is invested.

Collecting data across a portfolio of over794 companies, 134 funds and 65 fundmanagers is a challenge. Differentcompanies across CDC’s portfolio havedifferent year ends, something that makesit difficult to obtain data at a single point in time. CDC also gathers specificmeasurements for different sectors andasset classes, especially small and mediumsized enterprises (SMEs), microfinanceand mining companies. The datapresented below was collected during 2009.

Examples from evaluation reports

From the evaluation work in 2009, CDC gained more information about theeconomic effects of many of its portfoliocompanies. Three examples are givenbelow:

China – a seafood processing company inDongshan province has seen employmentincrease 85% since investment by CDC’sfund manager in 2007. The company nowemploys over 1,200 people. Despitedifficult global conditions affecting exportsto the US, Europe and Japan, the financialperformance of the company continues to be strong. The company was recentlyawarded with China’s ‘Famous Brands’and Fujian ‘Top 20 Golden Enterprise’awards in recognition of its efforts.

Brazil – a telecommunications companysaw employment rise by 400 betweeninvestment in 2007 and the end of 2008.Employment conditions at the company have also improved. It has signed both a collective labour agreement and isproviding an annual health check for itsemployees. Almost US$30m in taxes waspaid by the company to the Braziliangovernment over this period.

East Africa Gold Mines, Tanzania –a gold mining company in which CDCinvested in 1999 helped establishTanzania’s gold market. This market,practically non-existent in 1999, broughtas much as US$763m into Tanzania in2007. The company’s North Mara mine isestimated to have paid US$30m in taxesand royalties to the Tanzanian government.Between 1999 and 2003, employment atthe site increased by 385.

The first annual ESG report from a fund isdue one year from the first investment ofthe fund into a portfolio company. Someof our new fund managers had not yetbeen invested in any of their portfoliocompanies for a full year and were thusnot required to provide an ESG report.However, all fund managers who hadbeen invested for more than a year in any portfolio company duly provided therequired ESG reports. Such reporting is a condition for receiving capital fromCDC. Only nine fund managers did notreport any economic data on portfoliocompanies in 2009. All were recent fundinvestments from which no reporting wasexpected over the period and many hadno current investments.

Taxes and employmentCDC received employment data from 617companies in 2009 as opposed to 514 in2008. The aggregated figures reveal that733,000 people were employed acrossCDC’s portfolio companies and US$2.8bnwas paid in taxes by the 463 companieswhich reported data.

The 308 portfolio companies supportedby CDC’s capital across India, China,other Asian countries reported acombined workforce of 562,000 people.This equates to an average companyworkforce of 1,825.

The average workforce in CDC’s portfoliocompanies in sub-Saharan Africa issignificantly smaller. Only 125,000employees were reported in the 255portfolio companies who provided data,which corresponds to an average of 490 employees. This can be partiallyexplained by the fact that CDC hasinvested in three dedicated SME funds in sub-Saharan Africa.

Taxes paid by industry sector (US$m)

Number of companies reporting data

Number of total CDC portfolio companies in sector

23/38

50/73

80/121

16/25

98/129

35/50

25/40

71/206736

11/18

23/39

31/55

512325315

272

269147

76

70

6851

Cleanertechnologies

Cleanertechnologies

Energy & utilities

Energy & utilities

Microfinance

Healthcare

Healthcare

Microfinance

ICT

ICT

Mining Mining

Financialservices

Financialservices

Agribusiness

Agribusiness

Industry &materials

Industry &materials

Consumergoods &services


Infrastructure

Infrastructure

12/18

108/129

30/40

21/25

28/38

62/73

150/206

94/121184

41/55

44/50

27/39

Employment by industry sector (000s)

Number of companies reporting data

Number of total CDC portfolio companies in sector

133114

96

57

4039

36

15

109

Employment by region

12

3

4

5 6 1 Sub-Saharan Africa 125,000 (255/318)

2 North Africa 23,000 (25/28)3 China 192,000 (93/112)4 India 158,000 (125/167)5 Other Asia 212,000 (90/112)6 Latin America 23,000 (29/57)

(number of companies reportingdata/number of total CDC portfoliocompanies)

Taxes paid by region (US$m)

1

2

3

4

5

6 1 Sub-Saharan Africa 832 (162/318)

2 North Africa 209 (22/28)3 China 591 (73/112)4 India 527 (101/167)5 Other Asia 381 (78/112)6 Latin America 301 (27/57)

(number of companies reportingdata/number of total CDC portfoliocompanies)



CDC has many examples of case studiesin its portfolio companies which aredesigned to inspire and encourageinvestors. Some are past investments that have had a meaningful impact on a national economy. G.E.T Power is onesuch case.

G.E.T Power Private Ltd,IndiaProviding power to ruralIndia, serving half a millionpoor households

The lack of reliable and safe power in poorcountries is a major barrier to growth.Significantly increased investment inpower is particularly important for India’sdevelopment where over half thepopulation does not have access toreliable and safe electricity. Electricity is needed to power small industry andenterprise, run health clinics and lightschools. Without access to reliableelectricity, rural poverty will not beeradicated.

India has a population of over 1bn. An estimated 42% of the population livesbelow the poverty line. In addition, morethan 400 million people, mainly in ruralareas where the majority of India’spopulation is based, lack access toelectricity. Even where access does exist,it is often substandard and outages inexcess of 12 hours are commonplace.Indian government policy has a statedaim, under its ‘Power for All’ agenda, of providing access to electricity for allcitizens by 2011.

G.E.T Power is an Indian service providerin electricity transmission and distribution.It specialises in the design, engineeringand construction of electrical substationsand transmission lines. It has installedover 600 substations and 5,000 circuitkilometres of transmission line sincebeginning operations in 1987.

Three years ago, G.E.T Power entered the rural electrification sector with aninvestment from CDC’s fund managerAvigo. Including the executed andongoing projects, G.E.T Power has 21 projects involving an investment ofUS$150m. This infrastructure will provideelectricity to around half a million ruralhouseholds below the poverty line. Ruralelectrification projects now account forsome 60% of G.E.T Power’s revenue.

G.E.T Power also has substantialexperience in the transmission of powergenerated by wind farms to the Indianutility grid. Wind energy is an importantsource of power generation in Indiaaccounting for 6% of total installed power capacity.

G.E.T Power has experienced substantialgrowth over the past two years and staffnumbers have increased 90% to 453permanent employees and approximately2,000 contractors. G.E.T received theirsecond Safety Excellence Gold Awardfrom Leighton Contractors India foraccomplishing 2,600,000 hours withoutlost time due to injury between May 2007and February 2008.

CDC’s fund manager, Avigo, has madesignificant contributions to thedevelopment of G.E.T Power, providingadvice and assistance on matters ofcorporate governance, strategy, business

Key data1

Investment:2 US$16mInvestment period: 2007- presentSector: Infrastructure – Power distributionand transmissionFund manager: Avigo, SME Fund IIEmployment: 453 permanentEmployment growth:3 213Turnover: US$74mTurnover growth:3 US$53mTaxes paid: US$2.5m

1 2009 figures unless otherwise stated.2 US$16m invested by Avigo. CDC’s investment in Avigo

(SME Fund II) is US$20m; total fund size is US$125m.3 2007-09.

One of G.E.T Power’s 600 substations The majority of G.E.T Power’s electricity is provided torural areas

development and managementrecruitment. Avigo’s investment was usedto assist G.E.T Power to strengthen itsbalance sheet and contributed to thecompany’s transformation from a sub-contractor to a primary contractor.

G.E.T Power plans to expand further its operations over the coming years to provide electricity to more Indianhouseholds.


ESG performance

In 2009, CDC continued its work prior tomaking commitments to new funds toensure that fund managers have well-developed management systems toaddress ESG risks. CDC continues to helpportfolio companies realise improvementsfor the duration of the investment asstipulated by CDC’s Investment Code.There was a significant increase in thenumber of ESG reports submitted in 2009 compared to prior years. However, thequality of reporting varies across the portfolio. Whilst all fund managers fromwhom a report was expected contributed something, 11 fund managers did notproduce full ESG reports. In many cases, this means that ESG risk was reported but there were limited justifications or discussion of actions for improvement.CDC will continue to work with its fund managers to promote better annualreporting on ESG matters.

The promotion of good ESG practices canbe a particular challenge for funds whereCDC is a small investor amongst largercommercial investors. This has notprevented CDC from attempting to raisebest practice. In 2010, CDC will furtherassist fund managers through acomprehensive training programme backedby the new Toolkit for fund managers.

In addition to educating fund managers to assess an investment for ESG risk, the Toolkit will also advise about bestinternational practices as specified inCDC’s Investment Code. This will includeresources on international conventions such as those produced by theInternational Finance Corporation (IFC),the International Labour Organization (ILO)and core environmental standards whichserve as benchmarks for investors in theemerging markets.

2009 evaluation results on economicperformanceTo evaluate a fund’s economicperformance, CDC assesses the extent to which jobs have been created withinportfolio companies, the amount of taxrevenue generated and the increase inportfolio companies’ turnover andprofitability. A more detailed explanationof CDC’s evaluation and performanceratings is provided on pages 23 and 24.

Of the 20 funds evaluated in 2009, two funds received the highest rating‘excellent’ and a further nine were ratedas ‘successful’. One of the two fundsrated ‘excellent’ was a specialist SMEfund which saw the creation of nearly2,000 jobs across East Africa, aconsiderable achievement in a difficultsector. The remaining nine funds were all rated ‘satisfactory’. Some aggregatedresults from the evaluations are presented below:

• 77% of portfolio companies showedemployment growth with 87,000 newjobs created;

• only 8% of portfolio companiesdecreased their number of workers,with 4,300 jobs lost;

• 82% of the portfolio companiesexperienced growth in turnover – only5% saw a decrease;

• 68% of portfolio companiesdemonstrated growth in profitability as measured by EBITDA, while 25%saw a decrease; and

• a total of US$122m in taxes was paidby 15 companies that reported this datain the past year. Over US$3bn in taxeswas paid by 179 companies over theholding period of the fund manager.

2009 evaluation results on ESG performanceOf the 20 funds assessed in 2009, onefund was rated ‘excellent’ in terms of itsESG performance, seven funds wererated as ‘successful’ and four rated‘below expectations’. Typical reasons fora ‘below expectations’ rating include thefund manager performing beneath thehigh standards CDC expects on ESGissues. The remaining eight fundsevaluated were rated as ‘satisfactory’.

In terms of portfolio companies, 71 of the 238 companies for which there wasinformation available were rated as highrisk from one or more ESG perspectives.Possible reasons for a high risk ratinginclude the potential for significantadverse environmental impact, potentialrisk to the local community or to theworkforce or issues related to corporategovernance and business integrity. 120 companies were rated as mediumrisk and 47 as low risk.

Of the 234 companies reporting relevantdata, 73% of evaluated companies hadESG issues at the time of investment:

• 44% had environmental issues;• 44% had social issues; and• 36% had governance issues.

Of these companies, 83% had observedand reported ESG improvements sinceinvestment:

• 45% had reported environmentalimprovements since investment;

• 61% reported social improvements;and

• 53% reported governanceimprovements.

ESG risk rating of 794 portfoliocompanies (%)

1

2

3

4 1 High 11%2 Medium 36%3 Low 19%4 No data* 34%

Mining

Energy & utilities

Agribusiness

Cleanertechnologies

Industry &materials

Healthcare

Microfinance

Financialservices

ICT

Infrastructure


Distribution of high risk assets by sector for companies reporting data (%)

62 29 9

45 8 47

3 80 17

38 55 7

24 63 13

7 61 3221 54 25

27 55 18

3 34 63

3 48 49

1 59 40

High Medium Low

*CDC assesses companies with no data by inherent risk. Many of thesecompanies are in SME funds or are 2009 investments.


Examples of insights related to ESGmatters included in the evaluation reportsare given below.

Environment

Kenya – over the course of theinvestment period at a leading Kenyandairy, considerable improvements weremade to the water treatment facilities. Inparticular, attention was focused on thebiodegradation of wastewater before itwas discharged to local ponds. Treatedwater can and is used for local irrigation,watering of gardens and for equipmentcleaning. Moreover, the dairy activelypromotes environmental initiatives in thelocal community. One example is theinstallation of recycling bins at shops toencourage the recycling of milk bottles.

South Africa – a platinum mining projectwas located near a major game park andan animal migratory path. In order toobtain a licence to develop a mine, thecompany had to undertake discussionswith multiple local stakeholders andengage in an approval process whichensured that development of the mine adhered to strict environmentalregulations and did not negatively impacton the game park and the migration route.

China – the manufacturing of galvanisedsteel sheets generates significant wasteproducts and requires careful monitoring.A Chinese manufacturer in which CDC is invested has introduced an acidregeneration process to reduce its waste outputs.

Social

Kenya – a Kenyan agribusiness companyin which CDC was invested developed amedical centre on site catering to bothemployees and non-employees. Thecentre provides free testing, counsellingand assistance for HIV/AIDS and otherillnesses, in particular malaria and typhoid.The company has collaborated with anorthopaedic workshop whichmanufactures prosthetic limbs and othermedical devices such as braces, bootsand crutches for victims of polio. The site has also developed a programmeproviding assistance and equipment to disabled children in rural villages forwhom such assistance had previouslybeen inaccessible and often unaffordable.

Nigeria – a manufacturer of foam mattresses has appointed a health and safety manager and two qualifiedenvironmental auditors. After a chemicalexposure incident with a staff member,safety procedures within the facilities weremore strictly enforced. The company is inthe process of renewing both its ISO 9000(quality) and ISO 14000 (environmental)certification. The manufacturer firmlybelieves that ESG factors are adifferentiator in the market and hasdeveloped a low-priced product toanticipate market changes and to appeal to people on lower incomes.

El Salvador – during a due diligence visitby CDC, concerns were raised over somehealth and safety practices regarding theuse of personal protective equipment andventilation of spaces where potentiallytoxic chemicals were used and stored. A health and safety committee has beencreated to monitor issues and identifyareas for improvement.

Governance

Malaysia – during the fund manager’s due diligence process it emerged that thecompany held the passports of foreigncontract workers for the duration of theiremployment. The company was aprovider of high precision aluminiumproducts for international oil and gascustomers. CDC’s fund managerrecognised this as a direct contraventionof ILO standards. Upon investment, thefund manager set a 100 day plan to phaseout the practice. It also introduced safetystorage lockers onsite to enable workersto store valuable items.

Kenya – in order to grow a family runorchard into a profitable medium-sizedbusiness, a number of improvementswere required. These related particularlyto the financial management and humanresource management systems at thecompany. With the assistance of the fundmanager, the company was able to createa professional management team anddevelop the requisite skills to run aprofessional business, including financialanalysis and control, inventorymanagement and contract negotiation.

China – at the time of investment by oneof CDC’s Chinese fund managers, an online retailer was a family run business in which corporate governance controlswere weak. Since investment,professional managers have been brought into the company and the fundmanager has also introduced institutionalinvestors in a bid to further improvecorporate governance.

Workers at Equatoria Teak Manufacturing processes Microfinance in Bangladesh



The overall fatality rate in CDC’s portfoliois 3.14 workers per 100,000, which is 26% higher than the latest revised datafor the EU 15 countries. While all fatalitiesare unacceptable, the reported level isclose that of the EU 15 countries.However, it is possible that some fatalities go unreported and that the actual level ishigher. CDC therefore frequently remindsits fund managers that all fatalities mustbe reported, including deaths of non-employees in connection with roadaccidents and other incidents where aportfolio company is not directly at fault to allow corrective action to be taken. A comparison of fatality rates below theoverall portfolio level is difficult. A sectorby sector comparison highlights sectorswhere there are relatively morechallenges, but the small sample sizelimits the extent to which any additionalinsights can be drawn. As an example, the graph below to the left illustrates how one single fatality in the energy andutilities sector brings CDC’s fatality ratefor the sector above the EU 15 rate of 4.2.

Umeme update

Umeme is Uganda’s principal powerdistribution company, featured in lastyear’s report. It manages a network which had suffered from years ofunderinvestment prior to CDC’s investmentin 2005. The resulting disrepair of thedistribution network has resulted in highnumbers of fatalities, often a consequenceof fallen power lines. Measures Umemehas taken in response include:

• capital expenditure on replacing unsafepoles (72,000 to date 2005-09 out of atotal of approximately 120,000 polesrequiring replacement);

• working with the government todiscourage a dangerous culture ofstealing electricity; and

• a public education programme on thedangers connected with electricity andelectricity supply.

Serious incidents

A large portfolio distributed acrossseveral high risk environments10

CDC’s capital is invested in 794companies. 617 of these companiesreported employment data last year andwe know that they employ more than733,000 people. Given the large numberof employees, the large number of highrisk sectors in the portfolio and the relatively higher levels of risk thatcharacterise emerging markets, it is notunexpected that a number of CDC’s fundmanagers have reported fatalities andother serious incidents in their portfoliocompanies. CDC requires its fundmanagers to report without delay anyinstance involving portfolio companieswhich results in loss of life, material effecton the environment, or material breach oflaw and how such an instance was dealtwith by the fund manager. CDC takeseach notification very seriously andfollows up with the relevant fund managerto ensure that complete reports arewritten up (including police and otherreports where applicable), that anyunderlying systemic reasons are identifiedand that corrective action plans areimplemented to prevent reoccurrences.

Total number of incidents lower than in 2008

During 2009, four fund managers reportedone or more serious incidents involvingemployees, sub-contractors andmembers of the public to CDC. A total of30 fatalities were reported compared to41 in 2008. In 2009 there was also oneenvironmental incident and one case ofalleged fraud. Fourteen of the 30 fatalitieswere accidents at work. Examplesincluded three deaths caused by electricshocks when dealing with faulty electricalconnections, three deaths from workers

being trapped under heavy equipment,two deaths involving large machinery andconveyor belts and two deaths resultingfrom disregard for safety directives andtraining. Two fatalities occurred inconnection with robberies when securityguards employed by portfolio companieswere shot and killed. Another six fatalitiesarose from road related accidents.

Managing high ESG risks andimprovements over time

When investing in emerging markets CDCbelieves it is important to add value byreaching countries, regions and sectorswhere it can expand access to finance,make it more affordable and also bringother benefits to these markets. In suchenvironments it is difficult to avoid the riskof fatalities and also important not to shyaway from such cases. Rather, it isimperative to identify commercially viablebusinesses, with great potential to havesignificant development impact. It is alsoessential that the management shows a genuine willingness to improve itsperformance across ESG matters over time to ensure commercially,environmentally and socially sustainabledevelopment.

Benchmarking fatality rates againstinternational data

It is relatively easy to benchmark healthand safety performance across developedcountries due to the rich data available. Inemerging markets on the other hand thereare no similarly comprehensive andreliable sources of data. IFC recommendsusing statistics from the US Bureau forLabor Statistics and the UK Health andSafety Executive. For the purpose of thisbenchmarking exercise CDC looked at thedata used by HSE and in particular theEurostat data for the EU 15 countriesreferred to on its website.

3.14

2.50

Reported fatality rate per 100,000workers: CDC portfolio versus EU 15 data

CDC

EU 15 (2006)

+26%

Industrials

Construction

Manufacturing

Energy & utilities

Agribusiness

Agriculture

Electricity, gas and water

Transport,storage &communications

(2)

(2)

(13)9.8

Reported fatality rate per 100,000workers: sector comparison

CDC

EU 15 (2006)

(xx) Actual fatalities in CDC’s portfolio

9.57.7

2.6

12.6

4.2

1.8

8.9


Examples from evaluation reports

Kenya – a CDC-backed financialinstitution in Kenya provides individualand SME loans to new businesses whichwould generally not qualify for bankingservices with other Kenyan banks orwould not be able to afford the chargesand interest imposed. This is drivingcompetition in the industry and providingfor a previously under-served sector of thepopulation. The bank is presently addingapproximately 5,000 new accounts dailyand by showing that this sector can beserved profitably, the thinking of financialinstitutions across the region is beingtransformed.

Cameroon – a pharmaceuticals companywhich receives investment from one ofCDC’s portfolio companies in Cameroonis having a strong impact in improvinglocal regulatory standards. The companysupplies generic drugs, produced underhigh quality, safe manufacturingconditions. This is important in a countrywhere as much as 50% of medicinesavailable are counterfeit.

Nigeria – a telecommunications portfolio company in Nigeria promotes the co-location of tower sites with mobilenetwork operators (MNOs). Before entryinto the market, there was no such serviceoffered in Nigeria. The company benefitsthe MNOs by allowing them to focus ontheir core business of providing mobiletelephony services and reduce the largeexpenditure required to build towers. In addition, the portfolio company hasimproved the operational efficiency of the tower sites – they have consistentlyachieved greater than 99% uptime on theirown towers compared with approximately75% on owner-operated sites.

local investment capacities in countrieswhere capital markets are traditionallyweak and underdeveloped.

Successor funds

Developing local capital markets takestime. An indication of success over thelonger term is therefore the extent towhich CDC’s fund managers have beenable to raise successor funds. A total of12 successor funds were raised from the20 funds evaluated in 2009 with 82% offund managers proving successful in thisregard. US$3.4bn was raised in thesesuccessor funds with non-DFI capitalaccounting for 65% of this amount. Interms of committed capital, the followingis summary information for the 20 fundsevaluated in 2009:

• 70% of the US$3.5bn in committedcapital to the fund was third party;

• 57% of this capital was non-DFI; and • CDC committed a total of US$1.03bn.

19 of the 20 funds were assessed as‘satisfactory’ or better on private sectordevelopment contributions. Two fundsreceived the highest rating, ‘excellent’whilst a further eight were awarded a ‘successful’ rating.

One of the funds rated ‘excellent’ hasmade a significant contribution to African-led private sector development in Africaand has helped professionalise thetelecommunications industry in Nigeriaand Angola. The other excellent ratedfund has made significant strides towardsprofessionalising the SME sector in EastAfrica and helping management at SMEsto formalise. The fund manager of thissecond ‘excellent’ rated fund has alsoexpanded its operations to build a largersuccessor fund focused more broadlyacross SMEs in sub-Saharan Africa. In 2008, this fund manager won aprestigious award for best initiative insupport of SME development in Africa.

Private sector development

Overview

Across its investment portfolio, CDCrecords information to assess whether its fund managers contribute to thestrengthening of local capital markets.These assessments are made on acountry level and for larger countries the regional level is also considered.Examples of countries where regionaldata is analysed include India, China,South Africa and Nigeria. Further benefitsinclude the wide range of positive effectsfor consumers from expanded andimproved access to goods, services andinfrastructure and better and cheaperproducts and technologies.

Local capacity building

Economic growth in many emergingmarkets is hampered by underdevelopedcapital markets to invest in local start-upsand provide growth capital for localcompanies. One of the contributions ofCDC’s intermediated model is to invest inlocal first time fund managers to developthese capital markets. An indication ofsuccess in this area is the number of firsttime fund managers backed by CDC.58% of CDC’s 65 fund managers aremanaging foreign institutional capital for the first time. Of the six new fundmanagers backed by CDC in 2009, five were first time teams.

All but two of CDC’s private equity fundmanagers operate from local offices in emerging markets. They cover 37developing countries, 14 of which are in low income countries including Côted’Ivoire, Pakistan, Tanzania and Uganda.China, India and South Africa contain thelargest number of local offices with overten in each country. The offices of CDC’sfund managers, which are mainly staffedwith local investment professionals, makean important contribution to strengthening

More than 10 offices

5-10 offices

2-4 offices

One office

CDC’s 65 fund managers have local offices in 37 countries



Evaluations

CDC evaluates the impact of its funds to assess if investments have producedpositive developmental impacts. In 2009,evaluations were performed on 20 funds.The methodology behind these evaluationsand some outcomes from the 2009evaluations are discussed in this section.

Purpose of CDC’s evaluations

CDC invests in funds in order to providecapital available for businesses in poorcountries. The rationale is to enable these businesses to realise their growthpotential in a responsible manner andthereby contribute to economic growth for the benefit of the poor.

Development capital, however substantial,is only one contributing factor behindeconomic growth and poverty alleviation.CDC’s system of development impactevaluations aims to discover the extent towhich CDC’s capital is deployed in moreways than the provision of capital alone.

The purpose of these evaluations,conducted either at the mid-point of thefund’s life or as a final evaluation at theend of the fund (typically after about 10years), is to explore in more detail thecomplete developmental and financialimpact of CDC’s investment.

From an internal perspective, CDCconsiders the ability to perform anevaluation as a personal and institutionallearning experience and a valuable

training tool for CDC’s investment staff.The evaluation process is designed tohelp formulate more detailed judgementsabout all aspects of the performance of afund. This includes the fund’s strategy andregional focus as well as the impact ofinvestment upon portfolio companies.

How CDC performs evaluations

CDC’s evaluation framework,benchmarked against those of other DFIs,is similar but not identical to that used bythe IFC for investments through financialintermediaries. The system is intended to be practical, simple and deliver the key information required by CDC for its investment management andcommunication purposes, as well as for CDC’s Board and shareholder the UKgovernment’s Department for InternationalDevelopment (DFID).

The monitoring and evaluation frameworkused by CDC includes four keyparameters to assess the overalldevelopment outcome for each fundinvestment, based on the performance of a fund as well as its underlying portfoliocompanies: CDC operates a six-scalerating against each performanceparameter, ranging from excellent to poor.

• financial performance – indicatingwhether investments are profitable thus returning capital to CDC for furtherinvestments and demonstrating to otherinvestors that profitable investmentscan indeed be made in emergingmarkets where they are traditionallyreluctant to invest;

• economic performance – indicating theextent to which investments generatebenefits for the local economy, in termsof commercially successful and growingbusinesses that provide employmentand generate tax revenues;

• ESG performance – indicating whetherfund managers and their portfoliocompanies adhere to responsibleinvestment and business practices inline with CDC’s Investment Code andwhether portfolio companies over timeimprove upon their practices from theESG perspective; and

• private sector development – indicatingwhether CDC’s investments havebroader private sector developmenteffects including increased availabilityof capital for businesses in low incomecountries from the third party capitalinvested alongside CDC; more efficientcapital markets; improvements toregulatory environments fromcontributions by fund managers orportfolio companies to new standards.

CDC also evaluates its own effectivenesson two dimensions:

• added value – indicating whether CDChas provided assistance to its fundmanagers in shaping their investmentthesis, upgrading their skills, improvingtheir ESG management and otherimprovements; and

• catalytic effects – indicating the extentto which CDC helps attract commercialinvestors.

• Fund managers’ ability to attract commercialcapital to poor country markets> financial return to investors

• Contributions to economic growth> commercially viable and growing businesses

that generate employment and pay taxes

• Responsible investment and business practices with respect to the environment, social matters and governance (ESG)> fund managers’ ESG management systems and

the ESG performance of portfolio companies

• Broader private sector development effects:> more efficient capital markets> regulatory improvements> benefits to customers from increased

availability of goods, services and infrastructure

• Net IRR of funds versus investment targets• IRR for each exit

• Employment• Taxes paid• EBITDA and turnover (increase over time)• SMEs and low income reach (if relevant)

• ESG issues and improvements over time• Development outlays (if available)• Environmental products/services (if relevant)

• Third party capital• Local capacity building• Enhancements to sectors and benefits

for consumers e.g., increase in telecompenetration, new infrastructure, increasedaccess to power and financial services

• CDC’s direct role in bringing in other investors> focus on commercial capital

• CDC’s direct contributions to improve the way fund managers invest CDC’s capital, for example:> to shape a fund’s investment thesis or terms> to improve fund managers’ ESG management systems> to recruit or contract key technical expertise for responsible and successful investment management

CDC’s monitoring and evaluation framework and indicators

Development outcome Concept Typical performance indicators

CDC effectiveness Concept



ESG performance


Catalytic effects

Added value


Results from 2009 evaluations

A summary of the final rating results fromthe 20 development impact evaluationscompleted on CDC’s funds in 2009 ispresented below. Ratings specific to theeight funds that invested in Asia and theten funds that invested in sub-SaharanAfrica are discussed in the relevantregional sections of the report.

In terms of development outcome, 85% of funds in total were rated ‘satisfactory’or better. Seven funds were rated as‘successful’ and ten as ‘satisfactory’.Three were rated at ‘below expectations’.For these three funds, poor financial andESG performance were the key reasonsfor generating the weak developmentoutcome score.

For the funds under evaluation, 14 of the20 funds were rated ‘satisfactory’ orbetter in terms of financial performance.To some extent, measuring financialperformance was complicated by thefinancial crisis which saw large reductionsin unrealised portfolio value. This hasresulted in more funds, particularly thoseevaluated at mid-point, appearingbeneath CDC’s expectations. Two fundswere rated as ‘excellent’ for financialperformance.

Economic performance shows an overallstronger set of results. This is perhaps not surprising as all the evaluationsdemonstrated how CDC’s investmentsbring about substantial increases inemployment opportunities as well as taxreceivables to governments. All 20evaluations completed in 2009 were ratedas satisfactory or better in terms of theireconomic performance.

Of the 20 funds assessed in the 2009evaluations, one fund was rated‘excellent’ in terms of its ESGperformance, seven funds were rated as ‘successful’ and four rated ‘belowexpectations’. Typical reasons for a‘below expectations’ rating include thefund manager performing beneath thehigh standards CDC expects on ESGissues and shows the need for investorsto manage ESG risks as well asopportunities carefully. Nonetheless, the fact that 16 of 20 evaluations (80%)performed satisfactorily or better on ESGmatters is reassuring. At the companylevel, of the 234 companies reportingdata, 73% of evaluated companies hadESG issues at the time of investment and83% had observed and reported ESGimprovements.

In terms of private sector development,95% of the funds evaluated wereassessed as ‘satisfactory’ or better onprivate sector development contributions.Two funds received the highest rating,‘excellent’ whilst a further eight were ratedas ‘successful’. Only one fund was ratedas ‘below expectations’ for the reasonthat investments have focused toospecifically on one country when this wasnot initially expected of the fund.

CDC also evaluates its own effectivenesson two dimensions – added value andcatalytic effect. This is discussed in moredetail in chapter 7.


2009 evaluations in summary

20 funds

11 fund managers

313 companies

15 mid-point evaluations 5 final evaluations

CDC’s evaluation work in 2009 covered fundsinvesting in companies ofall sizes and in all sectors

10 funds investing in Africa8 funds investing in Asia

13 evaluations conductedby CDC

7 conducted by externalconsultants

Excellent Successful Satisfactory Below Unsatisfactory Poor Satisfactoryexpectations or better (%)

Development outcome – 7 10 3 – – 85%

Financial performance 3 5 6 4 2 – 70%

Economic performance 2 9 9 – – – 100%

ESG performance 1 7 8 4 – – 80%

Private sector development 2 8 9 1 – – 95%

CDC effectiveness 4 9 7 – – – 100%

Added value 3 11 6 – – – 100%

Catalytic* 3 8 4 1 – – 94%

Summary of the ratings from the 20 evaluations completed in 2009

*Catalytic effect is not considered for funds where CDC has entered in the final close, hence the number of funds rated on catalytic effect is fewer than for the otherperformance measures.

3Chapter Under its Investment Policy, 75% of CDC’s new investments will be invested in low income countries for the five year periodfrom 2009 to 2013, with at least half in sub-Saharan Africa. CDC thereby increases its focus on the poorest regions and peoplewhere its investments can have the largest developmentalimpact. By this means, it can also demonstrate to others thelong-term benefits that can be gained from investing in theemerging markets. Sub-Saharan Africa contains, as it did lastyear, the largest share of CDC’s portfolio value and also theregion where the largest proportion of people live in poverty.

In this chapter, analysis is conducted into the impact of CDC’s capital as well as the risks and opportunities specific to different regions. Three of CDC’s fund managers also offer their perspective on the past year, particularly with respect to the challenges of emerging from the financial crisis.

Regional reviews


Since its financial crisis in 1998, most of Asia has enjoyed ten yearsof rapid economic growth and declining poverty, driven by anexpanding private sector. Whilst last year did impact upon CDC’sportfolio companies, CDC still made $75m of new commitments to Asian funds. A pioneering fund in which CDC invested in 2009 is Rabobank’s India Agribusiness Fund.

Chapter 3: Regional reviews – Asia

Review of the past year

Although Asia was not immune to theimpact of the global financial crisis, mostAsian economies were less affected thanEuropean and US counterparts. Manyhave also rebounded strongly in thesecond half of 2009 due to governmentstimulus programmes, pick up in globaltrade activity and continuing domesticdemand. 2009 did see a slow down inprivate equity activity in India, with 287private equity deals amounting to a totalof $4.43bn. This is opposed to 502 dealsamounting to US$11.9bn in 2008 anddemonstrates the impact of the financialcrisis.11 Some private equity funds tookadvantage of the sharp rise in stockmarkets in the second half of the year to exit certain investments successfully.There were 96 exits with a total value of US$2.2bn compared to US$0.93bn in 2008.

While the last year impacted upon CDC’sunderlying portfolio companies, CDC hascontinued to make investments acrossAsia. One pioneering initiative backed byCDC is Rabobank’s India AgribusinessFund, the first private equity fund to focuson the food and agribusiness sector inIndia. CDC also committed to India ValueFund Adviser’s Fund IV and Ascent India’sFund III over the course of the year.

At the end of 2009, CDC had 391 portfoliocompanies in Asia, representing anincrease of 43 on the previous year. With a total portfolio value of £607m, CDC’sinvestments in Asia account for 43% ofCDC’s total portfolio value. India is thesingle largest investment destination forCDC’s capital, with £268m invested in 167 companies. China also represents a substantial proportion of CDC’s totalportfolio with £197m invested in 107 companies.

As a result of CDC’s new InvestmentPolicy which focuses more specificallyupon the low-income countries in Asia,India will continue to be a majorinvestment focus for CDC, as willAfghanistan, Bangladesh, Cambodia,Laos, Nepal, Pakistan and Vietnam.Further discussion of the opportunitiesCDC is currently pursuing is containedlater in this section.

CDC’s Asian portfolio includes companiesoperating in all sectors of the economy.The consumer sector, with a total of 82investments in 12 countries and a totalinvestment value of £148m represents the largest share of CDC’s investmentportfolio in Asia. Industrials is the secondlargest sector in CDC’s portfolio with£98m invested in 82 companies.

£607m CDC portfolio value

£121m invested in 2009

391 companies

4 new fund managers

562,000 people employed in 308 portfolio companieswhich reported data in 2009

US$1.5bn domestic taxespaid by the 252 companieswhich reported data

Total turnover of US$48bn

Total profitability of US$7bn

CDC’s fund managers have investments in 27 countries in Asia

PHILIPPINES

RUSSIA

SERBIA & MONTENEGRO

SOLOMON ISLANDS

SRI LANKA

TAJIKISTAN

THAILAND

TONGA

TURKEY

UKRAINE

VANUATU

VIETNAM

YEMEN

AFGHANISTAN

AZERBAIJAN

BANGLADESH

BELARUS

CAMBODIA

CHINA

FIJI

INDIA

INDONESIA

KAZAKHSTAN

KYRGYZSTAN

MALAYSIA

PAKISTAN

PAPUA NEW GUINEA


15–25 investments

6–14 investments

1–5 investments

Chapter 3 – Regional reviews 27

manager in China failing to disclose apersonal conflict of interest arising out of his shareholding in a publicly tradedcompany. This resulted in the ChiefExecutive Officer (CEO) of the fundstepping down as fund manager at theinsistence of investors.

In another example, promotermismanagement and questionable relatedparty transactions led to a significantdecline in one company’s performance.Intervention by the domestic government,following ongoing concerns about theintegrity of reported performance, resultedin a dilution of the fund manager’s stake in the company.

Both cases highlight the importance ofadequate due diligence by fund managerson the leading shareholders at portfoliocompanies as well as active portfoliomonitoring to prevent governance issuesfrom occurring. When governance issuesdo occur, appropriate remedial actions aremost effective when adopted as quicklyas possible. Fund managers need toexercise rigour in ensuring that stronggovernance procedures, in forms such as independent audit and remunerationcommittees, are implemented.

PakistanThe business environment in Pakistanremains challenging, with privateconsumption and investment expected to remain subdued on the back of thedeteriorating security situation andchronic energy shortages.

Portfolio specific challenges and risks

Many of CDC’s fund managers havecoped relatively well during the globaldownturn. Over the past year, fundmanagers across Asia have demonstratedinvestment discipline and have sloweddown their investment pace. Concentrationhas also focused on building up value intheir existing portfolio companies. Thisprocess has been helped by the quickrecovery in the Asian economies as wellas the strong growth element, low levelsof capital leverage levels and lesssophisticated financial structuring at the company level.

Many of the challenges faced by bothCDC and its fund managers in Asia aretypical of emerging market private equityinvesting in general. Fund managers likelyto succeed best are those with the mostinformative due diligence processes andthose who are most active in monitoringtheir portfolio. Corporate governance andpromoter integrity are further issues thatare often central to a fund manager’sprospects.

ChinaChina has experienced exceptionally rapideconomic expansion over the last decade.One consequence of this is that corporategovernance standards are only nowstarting to catch up with those generallycommonplace for businesses in Europeand the United States. This often remainsa major issue faced by investors whendoing business in China.

Over the course of 2008 and 2009, a fewof CDC’s fund managers faced issuesregarding poor governance at both fundlevel and in their underlying portfoliocompanies. One example involved a fund

Development highlights

CDC has been an active investor in Asiaover the past 60 years and has played apioneering role in supporting promisingbusinesses operating in poor orchallenging countries in the region.

As a consequence of its investments incommercially strong companies, CDC has made a significant contribution toeconomic growth and poverty alleviationacross the continent. About 562,000people are employed in the 308 portfoliocompanies in Asia which reportedemployment numbers to CDC in 2009.This represents reporting from 79% ofCDC’s total portfolio companies in theregion. China employs 192,000 people in the 93 companies that reported data.

In addition, CDC’s portfolio companies are major contributors to governmentrevenues in Asia. About $1.5bn in taxeswas paid to domestic governmentsthroughout Asia. 252 portfolio companiesreported tax data to CDC in 2009,representing about 64% of CDC’s totalportfolio companies in the region. Chinarepresents the largest share of taxes paidin CDC’s Asian portfolio with nearlyUS$600m paid across 73 companiesreporting this data.

In India, CDC has mapped which states130 of its Indian portfolio companies arelocated in against the domestic productper capita of the Indian states. Althoughstates containing cities such as Mumbai,Bangalore and Chennai represent asignificant proportion of CDC’s portfolio,CDC has a presence in more than 22Indian states, nine of which are below the national average for domestic productper capita.

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CDC’s Indian portfolio companies – spanning 20 states with significant presence in mid and lower range states in terms of state domestic product per person12

0.3

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For example, more than two millionpeople were displaced by fightingbetween the army and Taliban militants in 2009.13

In 2007, CDC invested in JS PrivateEquity, a pioneer fund in Pakistan, whichhas to date invested in companiesoperating in the leasing, chemicals andmedia sectors. During this period ofheightened security unrest, the managercontinues to work actively with portfoliocompanies to maximise value extractionand minimise security-related disruption.

Broader regional challenges

Battle against povertyDespite recording remarkable growth over the past decade, the battle againstpoverty remains an ongoing task. 33% of the people in South Asia still live belowthe threshold for poverty, surviving on lessthan US$1.25 per day. The poor in Indiaalone make up over a third of the totalnumber of poor people in the world.

While the situation in China, along with therest of East Asia, paints a more reassuringpicture current poverty rates still exist atlevels of around 10% of the population inEast Asia and the Pacific. There are still anestimated 200 million poor people inChina, with the majority located in ruralWestern China, away from the developedcities of Beijing, Shanghai and Hong Kong.

Challenging labour conditions14

According to the International LabourOrganization (ILO), 77% of all employmentin South Asia is considered to bevulnerable. For such workers, this entailslimited access to social security, income

protection and coverage under labourlegislation which we often take for granted in developed economies. 62% of workers in East Asia are similarlyconsidered vulnerable. By developing the private sector, CDC’s fund managershelp develop employment opportunities in the region.

Infrastructure deficit Infrastructure development is integral in a country’s economic growth. Developinginfrastructure increases productivity,allowing companies to become morecompetitive which boosts regionaleconomies. Core infrastructure assetssuch as roads, railways, airports, portsand power help drive the investmentdecisions of domestic companies and can contribute to an area’s attractivenessto commercial foreign investment. Much of South Asia suffers from inadequateurban and rural infrastructure and ischaracterised by a weak transport andcommunications network as well asinsufficient energy and water supplies.

According to International FinanceCorporation (IFC) estimates, some 30% of India’s households still lack access toelectricity and 20% have no sanitationfacilities.15 India’s infrastructure deficit hasbeen summarised by India’s then FinanceMinister, Palaniappan Chidambaram, whocommented in 2006 that infrastructurewas India’s most glaring deficit andannounced that US$500bn in investmentwould be needed, a third of which needsto come from the private sector.16 India’sinfrastructure deficit was estimated to be impeding economic growth by anestimated 2% per annum.

A fund manager’sperspectiveBaring, India

The Indian economy showed remarkableresilience throughout the global slowdown.However, the large stimulus packages inthe developed economies have created awall of liquidity, resulting in large capitalinflows into India. This has reduced the costof capital and caused short-term currencyappreciation. Currency strengthening islikely to continue on the back of highergrowth and the unveiling of key reformsthat will attract higher capital flows. Overthe long term though, there might be a riskthat India’s large fiscal deficit could affectgrowth prospects by causing inflation andtherefore resulting in rupee depreciation andincreasing the cost of capital.

As a result of large capital inflows intoIndia post March 2009, the economicdownturn did not last long enough to seea full private equity investment cycle inorder to enable deal closures. As aconsequence, companies only in pursuitof capital preferred tapping the publicmarkets rather than private equity since it was cheaper, faster, valuations fetchedwere higher and there were no privateequity terms attached. Furthermore, dueto higher cost of capital, we could notoffer aggressive valuations therebyresulting in losing out on deal closure.

Nonetheless, we believe industry sectorsleveraged to the cycle of asset creation,outsourcing and domestic consumptionwill bulwark long term growth. Particularsectors will offer high return potential over the longer term. These includeinfrastructure where indicators suggestlarge capacity creation is possible forvarious activities, in particular, power androads as well as domestic consumptionand consumer goods, which will benefitfrom India’s strong demographic profile,higher disposable incomes, urbanisationand a regional retail revolution.

Asia continued

Warehousing project in China Construction in India Production of pharmaceuticals


Regional trends

Although the global recession did take its toll on emerging market economies,the second half of 2009 saw many Asiancountries rebounding strongly, largely as aresult of swift government responses to thecrisis in the form of stimulus packages, apick up in global trade activity and strongdomestic demand.

ChinaDespite the economic downturn, China’seconomy grew over 8.7% in 2009 and the Chinese government is targeting a similar growth rate in 2010.17 At theclose of 2009, the impact of the Chinesegovernment’s stimulus package wasevident, especially when measured by thestock markets: Hong Kong’s Hang SengIndex gained 52%, whilst the ShanghaiComposite Index rose 74%.

Chinese private equity funds also raisedUS$8.7bn of fresh capital in 2009,representing 38.7% of such capital raisedin Asia. For the first time, China-focusedfunds surpassed those with a pan-Asiafocus.

South AsiaThe Indian economy continued to expandin 2009, helped by the governmentstimulus package and a revival indomestic demand. Following July 2009government elections, the capital marketsstrengthened on the back of renewedgovernment commitment and spending on the agriculture and infrastructuresectors. The Indian equity market indexended the year with an 81% increase.18

There was limited private equity activity inPakistan in 2009 as the country continuesto suffer from internal civil unrest.Bangladesh, where CDC is looking toincrease its portfolio continues to growsteadily with GDP growth of about 6%.Listed markets saw a relatively largeincrease in liquidity in 2009.

South East AsiaMany South East Asian economiesrecovered strongly in the second half of2009 and are expected to register positivegrowth for 2010 following the anticipatedrecovery of key export markets.

Opportunities

The Mekong regionCDC is actively looking at fund managersfocusing on the Mekong region,comprising Vietnam, Cambodia and Laos.We believe that CDC can play a majorpart in developing the private sector in theregion by being active in the formativestages of the regional private equityindustry. This is a pioneer role for CDC,similar to that played in the earlydevelopment of the private equity industry in Bangladesh and Pakistan.

Healthcare in IndiaDespite strong improvements in the Indian healthcare sector, there are stillvery large gaps in supply and demand. On the supply side, healthcare deliveryand pharmaceutical companies are stillnot providing enough coverage both interms of access and affordability. With lowcapital available, the healthcare segmentsneed more capital to expand.

CDC’s fund managers are playing anactive role in addressing this deficit. Kotak Private Equity has invested inBharat Serums & Vaccines Limited, a bio-pharmaceutical company catering toIndia’s domestic market as well as globalmarkets. Aureos have backed ApolloHospital Dhaka, the first privately ownedinternational class tertiary medical facilityin Bangladesh, via their South Asia fund.

Education in IndiaBetter education leads to higher earningpotential for future generations,contributing to economic development.19

In low and lower-middle income countriesin Asia, governments’ education spendingranges from 2-4% of GDP, behind that ofdeveloped countries whose averagespend is around 6%.20

Across CDC’s Asian portfolio, several fund managers have made investments in education sector companies and many more are actively looking foropportunities. Actis has invested inAmbow, a personal education and training company in China. Navis has aninvestment in The Institute for Technology& Management, a tertiary and executiveeducation service provider in India.

Indian venture capital and distressedassetsWhilst private equity activity in India hassurged in the past few years, therecontinues to be a gap between the capitalrequirements for early stage companiesand traditional sources of funding. Bysupporting successful venture capital fundmanagers who have a proven track recordof helping start-ups transition into largerenterprises, CDC can promote innovationand entrepreneurship in India.

The distressed asset class in Indiarepresents a further opportunity for CDCto contribute to the development of theprivate sector. India’s credit growth overthe past decade has led to increased non-performing assets (NPAs) on banks’balance sheets – amounting to US$14bnaccording to the Reserve Bank of India at the end of 2009. Distressed debt fundsallow banks to clean up their balancesheets by offloading non performing loansand thereby enable funding of futuregrowth through new lending toentrepreneurs and businesses.

CDC’s presence in Asia

16

8242

30

2526

36

82

24

21

7

Number of companiesConsumergoods &services

35

9832

37

92

45

21

148

49

36

14

Portfolio value (£m)

Industry &materials

ICT*

Microfinance

Financialservices

Healthcare

Energy &utilities

Infrastructure

Agribusiness

Cleanertechnologies

Mining

Largest investment destinations bynumber of companies

India China Indonesia Thailand Pakistan Russia Malaysia

112

17914 89

167

* Information and communication technologies


Evaluations – high level results and analysis

In 2009, CDC conducted evaluations oneight of its fund investments in Asia. Fiveof these evaluations were conducted atmid-point, halfway during the investmentduration of the funds and the remainingthree were final evaluations conducted at the end of the funds’ duration.

The evaluation work included reviews of103 companies in which these funds hadinvested and also assessed the practicesof the four fund managers managingthese eight funds across Asia. Two ofthese fund managers were rated as ‘low’in terms of their ESG management,something that gives CDC cause forconcern.

The results of the evaluations showed that two of the eight funds were rated as ‘successful’ in terms of developmentoutcome, with five rated as ‘satisfactory’and one rated as ‘below expectations’.The fund rated as ‘below expectations’was so assessed as a consequence ofpoor financial and Environment, Socialand Governance (ESG) performance.

In terms of economic performance, onefund was rated as ‘excellent’ with theremainder rated ‘successful’ or‘satisfactory’. The fund rated ‘excellent’was a South Asian regional fund nearingthe end of its term and therefore with fewremaining current investments. Fromevidence gathered by CDC, 13 of the 16companies grew in terms of turnover and14 showed an increase in profitability.

Three of the funds achieved a ‘successful’ESG performance rating and four a‘satisfactory’ rating. This suggests that

CDC’s fund managers in Asia arecompetently handling ESG issues thatarose in the underlying portfoliocompanies. Examples include theprofessionalisation of corporategovernance in one fund in South EastAsia. Governance is an important issue for many Asian countries – of thosecompanies that provided ESGgovernance risk ratings, 15% ofcompanies in Asia were rated as high risk.

24% of Asian portfolio companiescovered in the evaluations hadenvironmental issues and 30% socialissues at the time of the funds’investment. In most of these cases,inadequate health and safety standards,poor environmental management systemsand below-industry standard wages werethe most common issues uncovered byCDC. These issues have since been acted upon.

All the Asian funds evaluated were ratedat least as ‘satisfactory’ when scored forprivate sector development impact. Onefund in particular was pioneering in itsapproach to buy-outs across South EastAsia and its assistance in helping itsportfolio companies expand further intoAsia (into China in one case and Vietnamin another).

The evaluations reviewed CDC’seffectiveness in adding value as aninvestor and the catalytic impact of CDC’scommitment to the funds. One fund wasrated as ‘excellent’ with a further fourclassified as ‘successful’. A total ofUS$950m in commercial capital wasinvested alongside US$380m of CDC’scapital to the funds under evaluation.

Asia continued


One of the best performing funds showeda net IRR of 16% in its final evaluation.The least well performing fund showed a net IRR of 6.8% in its final evaluation.


77% of portfolio companies showedemployment growth with 58,500 newjobs created.

Only 5% of portfolio companiesdecreased their number of workers, with 559 jobs lost.

84% of the portfolio companiesexperienced growth in turnover. Only 11% saw a decrease.

69% of portfolio companiesdemonstrated growth in profitability as measured by EBITDA. 25% saw a decrease.

ESG performance

One fund manager was rated highly intheir ESG management systems. Twowere rated as low and one as medium.

For the 81 portfolio companies that wererated in terms of their ESG managementsystems: > 41% were rated high> 32% were rated satisfactory> 27% were rated poor


US$948m in third party capital was raised by the 8 funds evaluated. CDCcontributed a total of US$391m to thesefunds, 29% of the total capital.

68% of the third party capital invested in these 8 funds was from commercialinvestors as opposed to DFI’s.

Key statistics from 2009 Asian evaluations



Financial performance 2 1 4 1 – – 88%

Economic performance 1 2 5 – – – 100%

ESG performance – 3 4 1 – – 88%

Private sector development – 2 6 – – – 100%


Added value 1 4 3 – – – 100%

Catalytic* 1 4 – 1 – – 83%

Summary of CDC’s evaluation ratings of 8 Asian funds in 2009



There is a larger proportion of the world’s poor in sub-Saharan Africathan any other region with 50% of the population living on less thanUS$1.25 a day. Although the region has experienced average growthrates of 5% over the past decade, the recession has impacted moreseverely this year than last. The amount of uncalled capital amongprivate equity investors has helped catalyse growth in promisingcompanies across the region.

Regional reviews – Sub-Saharan Africa

Review of the past year

Sub-Saharan Africa was late to feel theeffects of the global financial crisis and,amongst developing economies, late toemerge. This is due in particular to adecline in commodity prices, especially oil and mineral resources, which haveseverely affected many African economiesand marked the end of the biggestcommodity boom in decades.21

Across sub-Saharan Africa, the impact ofthe crisis has varied considerably betweendifferent countries. South Africa forinstance has been severely affected,through a 1.8% contraction of its GDPand a cut-back in liquidity. Uganda bycontrast appears to have fared better.Despite receding export demands andslackening capital inflows, the country isstill expected to see growth of upwards of5% between 2008 and 2011. The news isnot all positive; an ILO survey into thecountry has concluded that despite only a moderate macroeconomic shock, low-wage workers in Uganda will be thosemost severely affected by the downturn.22

Across Africa in 2009, CDC’s portfoliocompanies have operated within anenvironment of greatly reduced liquidity.Nonetheless, private equity uncalledcapital has helped companies accessessential finance, both for capitalexpenditure and working capital.

In 2009, CDC committed to two new fundmanagers in Africa. These were managingthe Sierra Investment Fund, the firstprivate equity venture of its kind in Sierra Leone and African DevelopmentPartners Fund 1.

In 2009, CDC maintained an activeprogramme of new commitments withUS$155m committed to a total of fournew funds. CDC’s fund managers made a total of £194m of new investments. CDC currently has 318 portfolio companiesacross sub-Saharan Africa, an increase of57 over the past year. These companiesare spread across 28 countries.

Despite this, 2009 has not been an easyyear in this region. An example of thechallenges can be seen in the crisis in theNigerian banking sector that receivedbroad coverage in 2009. The crisisresulted from easy liquidity from 2006 to2007, inadequate risk management and,in some cases, poor governance. Therapid decline in the oil price at the start of 2009 and the extended slump in theNigerian Stock Exchange exposed poorcredit decisions, although it took decisiveaction by the Central Bank of Nigeria tobring transparency to the sector.



318 companies

2 new fund managers


US$820m domestic taxespaid by the 162 companieswhich reported data

Total turnover of US$23bn

Total profitability of US$6bn

CDC has investments in 28 countries in sub-Saharan Africa


15–25 investments

6–14 investments

1–5 investments

MAURITANIA

MAURITIUS

MOZAMBIQUE

NIGERIA

RWANDA

SENEGAL

SIERRA LEONE

SOUTH AFRICA

SUDAN

TANZANIA

TOGO

UGANDA

ZAMBIA

ZIMBABWE

ANGOLA

BOTSWANA

BURKINA FASO

CAMEROON

CONGO (DEMOCRATICREPUBLIC)

CÔTE D’IVOIRE

DJIBOUTI

GABON

GAMBIA

GHANA

KENYA

LIBERIA

MADAGASCAR

MALAWI

CDC’s investment universe in Africa

Low income

Middle income


Portfolio overview – growth anddevelopment highlights

CDC’s intermediated operating modelenables it to reach a broad range ofinvestee companies across sub-SaharanAfrica. At the end of 2009, CDC had 39 funds managed by 20 fund managersin the region. The number of Africancompanies in CDC’s sub-Saharanportfolio increased from 261 to 318 overthe course of 2009. This includes over 120 SMEs, particularly in the East Africaregion managed by GroFin and BusinessPartners International.

213 or 67% of CDC’s companies in sub-Saharan Africa are based in low incomecountries. This represents a substantialproportion of CDC’s total portfolio inwhich 54% are located in low incomecountries.

CDC is invested in 28 countries acrosssub-Saharan Africa with Kenya, Nigeriaand South Africa having the largestnumber of portfolio companies. CDC is also present in smaller regionaleconomies with portfolio companies inCameroon, Malawi, Mozambique andTogo. Many of the companies in whichCDC is invested also have a stronginterregional presence and offer servicesin countries additional to their mainoperational site.

CDC’s African fund managers haveexecutives based in low income countriesacross Africa, spread across 14 countries.These executives contribute to the spreadof entrepreneurship in sub-Saharan Africathrough their focus on particularinvestment strategies and businesses. By allocating capital to the strongestmanagement teams, CDC’s fund managersare committed to pushing for continuousimprovement and professionalism in thebusinesses in which they operate.

CDC spans many industry sectors in sub-Saharan Africa, with a focus onfinancial services, industry and materialsand the information and communicationstechnologies sectors. In terms of portfoliovalue, CDC’s two largest sectors are againfinancial services and industrials with aportfolio value of £196m and £73mrespectively. CDC also has a significantpresence in energy and utilities, mining,consumer goods and the infrastructuresectors, providing a range of servicesacross the region.

Site visits

In 2009, CDC’s Africa team visitedportfolio companies across Africa. Sitevisits are a means by which CDC canmonitor its investments and understandmore about particular challenges faced in specific countries.

In 2009, CDC’s Africa team visitedinvestments in countries including theDemocratic Republic of Congo (DRC),Kenya, Nigeria, Rwanda, Senegal andUganda. Visits of particular interestincluded trips to remote mining operationsin the DRC and Senegal, financial servicesin Rwanda and small entrepreneurialdevelopments in both Kenya and Uganda.

Portfolio specific challenges

2009 was a challenging year and fundmanagers needed to re-set their prioritiesto ensure that they could devote thenecessary time to support their investeecompanies. Some fund managersstruggled more than others to mobilise the required levels of skill and experienceto influence adequately those portfoliocompanies with particular challenges.

Some of the challenges faced by the portfolio in 2009 were unprecedented.The global financial crisis highlighted the

challenge in managing financialinstitutions. CDC’s African portfolio hasnot been immune. In Nigeria, an audit byNigeria’s central bank revealed riskmanagement and corporate governanceshortcomings in two Nigerian banks inCDC’s portfolio. In order to stabilise thesector, the Nigerian central bank moved to support nine of the 25 banks operatingin the country.

Positive stories also emerged from thefinancial sector in sub-Saharan Africa in 2009. For example CDC invested in DCFU in Uganda and BanqueCommerciale du Rwanda (BCR), both ofwhich proved resilient in 2009 and remainstrongly placed for the future. BCR hastargeted small and medium sizedenterprises (SMEs) and a retail client baseand has developed a strong relationshipwith the non-governmental organisation(NGO) sector. Three of the Nigerian banksin which CDC is invested are also well-positioned for the future.

In South Africa, the contraction in GDPand the general shortage of liquidity inAfrica made both the investment and exitenvironment extremely challenging formuch of 2009. Declining earnings coupledwith high leverage resulted in a largewrite-down of investments in a SouthAfrican logistics company, althoughCDC’s portfolio in South Africa otherwiseremained satisfactory.

Sub-Saharan Africa continued

Local offices in Africa

More than 10 offices

5-10 offices

2-4 offices

One office5

3524

17

1617

21

156

13

12

2

Financial services

Industry &materials

ICT*


Energy &utilities

Microfinance

Mining

Agribusiness

Infrastructure

Healthcare

CleanerTechnologies

5

7373

88

684

31

196

25

69

8* Information and communication technologies

CDC’s presence in sub-Saharan Africa

Number of companies Portfolio value (£m)


Regional trends

Southern Africa Economies across Southern Africa werebadly affected at the start of 2009 by the collapse in commodity prices. Whenthese started to recover in the second half of the year growth re-emerged.However, consumer demand remainsweak, particularly in the South African retail sector.

The main political challenge in SouthernAfrica remains tackling inequalities byimproving the delivery of public services,whilst retaining the confidence of financial markets.

West Africa Politics has added this year to the delayedeffects of the global crisis, with Nigeriarisking a constitutional crisis given theabsence of its president. This risk hasbeen magnified by the devaluation of the Naira over the course of last year.Guinea, Niger and Guinea-Bissau haveexperienced recent coups.

2010 is a year of elections in Côte d’Ivoire,and Togo. The results of these will beimportant in shaping foreign investmentflows into the area. Security in the NigerDelta will continue to be a core issue forNigeria. This stems from poverty andpolitics in the region as more stakeholderspush for a greater share of oil revenues.

Terms of trade have not been badlyaffected in West Africa in 2009. This isthanks largely to a good harvest andbetter oil price budgeting in both Nigeriaand Côte d’Ivoire. Most countries in theregion remain food and oil importers, and have benefited from stabilised pricescompared to 2008.

East Africa As a region, East Africa has been hit quiteseverely by the global financial crisis. In the aftermath, the Ugandan, Tanzanianand Kenyan Shilling were all significantlydevalued against the US dollar. CDC hasa significant presence in East Africa with70 portfolio companies and 7.7% of itsoverall portfolio value held in Kenya,Tanzania and Uganda.

The year was a challenging one fromother perspectives as well. Politicaltension increased in Kenya in the first half of the year and the government ofnational unity is perceived as less effectiveby investors. Rioting also occurred inUganda. A severe drought has impactedon business operating environments,magnified by the effects of poor landmanagement. Land degradation is aparticular problem in the highlands ofKenya, Tanzania and Uganda.

A fund manager’sperspective Tuninvest/Africinvest

There were many challenging aspects to2009. A particular challenge was to meetthe project financing needs of portfoliocompanies, access to which has becomemore difficult and/or expensive in anumber of African countries over the pastyear. An additional problem has been thataccess to bank financing (even very shortterm) became scarcer in many countries.Large distribution companies in particularhave been forced to reduce the size oftheir orders. In turn, this had a negativeimpact on most industrial companieswhich have witnessed a contraction of demand.

The capacity of private equity teams toprovide their investee companies with theneeded strategic guidance and support isa key driver of success during thesedifficult times. Our view is that teamsoperating with a patient ‘hands-on’approach, with an emphasis on true valuecreation, will prevail over those seekingquick returns based on financialscheming. With banks still suffering fromliquidity squeezes, we view this period asan opportunity to tap new markets andsectors emerging from the crisis andmake investments at good entry prices.

On the environmental front, the challengeis to convince portfolio companies of thecontinued importance of addressingenvironmental issues in spite of scarcerresources. The danger is that such issuesmight be treated as secondary in light ofthe problems posed by the financial crisis.

Packing picked flowers Accra Mall, Ghana Logistics operation


Opportunities and sectors in sub-Saharan Africa

CDC continues to seek out investmentopportunities across sub-Saharan Africaand in 2010 will look to focus on thesectors discussed below.

AgribusinessDeveloping the agricultural sector is acrucial ingredient in fostering economicgrowth in developing countries. Moreover,it is a Millennium Development Goal tohalve the proportion of people sufferingfrom hunger between 1990 and 2015.Since over 60% of the population of sub-Saharan Africa lives in rural areas,promoting sustainable agribusiness is vitalto the region’s economic development.

Much of sub-Saharan Africa has idealdynamics for agribusiness with goodtemperature and climate, decent soils and sufficient labour and water to makeintensive production possible. As an asset class, agribusiness is substantiallyunderdeveloped in Africa. Farm efficiencyis just 25% of the global average.Moreover, recent regulatory improvementshave also made investment in Africanagribusiness more attractive to investors.

InfrastructureAfrica has a huge infrastructure deficitcompared with countries outside thecontinent. One in four Africans have no access to electricity and it takes two to three times longer to travel thesame distance in Africa than in Asia.Constructing roads, bridges,telecommunication and powerinfrastructure creates new opportunitiesfor both individuals and businesses.Obiageli Katryn Ezekwesili, the vice-president of the World Bank in Africa

draws the analogy to China: “China’ssuccess story in reducing poverty throughrapid and sustained growth is remarkable.Large investments in infrastructure was akey factor.”23

Fund managers specialising ininfrastructure can bring the expertiseneeded to help to tackle Africa’sinfrastructure deficit. A market-ledapproach, accompanied by strongregulation, will attract private capital to sub-Saharan Africa.

SMEsPromoting the financing of SMEs remainsan important part of CDC’s business.Specialist private equity teams havebecome more skilled in engaging with the SME sector across Africa and more proficient in promoting bestoperational practices.

CDC is currently invested in BusinessPartners International’s Kenya fund whichprovides finance to Kenyan companiesunderserved by traditional financialinstitutions. The fund is a US$14.1m riskcapital fund that seeks to invest betweenUS$50,000 and US$500,000 in promisingSME ventures.

Real EstateCDC also finances real estate, typicallythrough specialist fund managers. Thereis a shortage of long-term finance of first-class facilities across Africa, facilitieswhich can attract further local and foreigncapital inflows. Moreover, by addressingthe shortage of entry level housing anddrawing attention to planning andinfrastructure provision, real estatedevelopment can become a magnet for accelerating the development of a local area.

Key risks and management issues

CDC’s objective is to reach underservedmarkets across sub-Saharan Africa byworking with fund managers who cansuccessfully manage the risks of investingin these challenging markets. Chapter 7describes in more detail the challenges of investing in low income countries andmarkets. One of CDC’s objectives is toattract greater levels of private capital to Africa, a goal strongly promoted bydeveloping a track record of positivecommercial returns.

Standards of corporate governance canpresent a particular difficulty for Africanfund managers and are a common reason for them to screen outunsatisfactory investment opportunities.One measure of corporate governance is Transparency International’s corruptionperception survey.24 This is a ‘survey of surveys’ based on 13 expert analysesof corporate governance and businessintegrity issues worldwide.

For sub-Saharan Africa, the results areparticularly illuminating and exemplifiesthe difficulties investors face. Botswanafinishes in 37th place, an encouragingresult but certainly not the norm. SouthAfrica, Africa’s largest economy, is placedin 55th place in the 2009 survey withGhana located in 69th place. Many smalleconomies fair far worse with Somalia(180th), Sudan (176th) and Chad (175th)the lowest ranked African nations. Ingeneral, larger nations fair better althoughNigeria, the regions second largesteconomy, is in 130th place. Governance is still a major issue across most countrieswithin sub-Saharan Africa.

Sub-Saharan Africa continued

Largest investment destinations by number of companies

Kenya

53

42

12

41

8 7 5

SouthAfrica

Nigeria Tanzania Côted’Ivoire

Ghana DemocraticRepublic of Congo

Rankings of CDC’s largest investmentdestinations in sub-Saharan Africa inTransparency International’s 2009survey (rank out of 180)

Rank Country

162 Democratic Republic of Congo

154 Côte d’Ivoire

146 Kenya

130 Nigeria

126 Tanzania

69 Ghana

55 South Africa


Evaluations – high level results andanalysis

In 2009, CDC conducted evaluations intoten funds investing predominantly in sub-Saharan Africa. Two of these evaluationswere final with the remainder beingconducted roughly halfway through thefunds’ investment periods. The fundscontained a total of 145 companies.These were managed from a variety oflocal offices with investment staff locatedin Cameroon, Côte d’Ivoire, Kenya,Madagascar, Nigeria and South Africa.

In terms of development outcome, five of the funds were rated as ‘successful’overall with four rated as ‘satisfactory’.One fund was rated as ‘excellent’ onfinancial performance whilst four funds weredisappointing, three ‘below expectations’and one ‘unsatisfactory’. The fund rated‘unsatisfactory’ had suffered a completewrite-down of an investment in a logisticscompany which comprised 32% of thefund’s invested capital.

On economic performance rating, sevenfunds were rated as ‘successful’ and theremainder as ‘satisfactory’. 72% ofcompanies in which CDC capital wasinvested had seen an employmentincrease over the investment period. Fourteen companies had seen job losses. 56% of companies with comparable datahad seen an increase in profitability overthe investment period. A total of US$1.2bnin taxes had been paid over the investmentholding period by 61 companies thatreported this data.

ESG performance across the funds wasvaried. One fund was rated as ‘excellent’whilst two funds were rated as ‘below expectations’. CDC’s fund managers were

in general successful at bringing aboutimprovements in their portfoliocompanies. 90% saw improvements post investment although the difficulties of investing in sub-Saharan Africa are also made apparent by the 81% ofcompanies that had ESG issues at thetime of investment. The most commonissues were environmental with 73companies experiencing some difficulties.Typical issues included dealing withwastewater, pollution and recycling.

Two funds were marked as ‘belowexpectations’ on ESG performance. In both cases it was noted that the fundmanager had complied with all therequisite regulations and guidelines, but it was felt that the overall commitment toESG was below the high standards thatCDC expects. CDC is working closelywith the managers of these funds to helpimprove their processes and to ensurethat by the time final evaluations are made the ESG performance will havemarkedly improved.

Private sector development performancewas far more positive. Two funds wererated ‘excellent’ and only one fund wasrated less than ‘satisfactory’. One of thefunds rated ‘excellent’, was a fundinstrumental in professionalising the privateequity market in Africa and managed byAfrican nationals. Moreover, portfoliocompanies have been able to raise furtherexternal financing on the strength of thefund manager’s own investment.

In total US$1.1bn was raised in third party capital by the ten sub-Saharanfunds evaluated by CDC and six of thefunds had or were in the process ofraising successors.


The best performing fund showed a net IRR of 29% in its final evaluation. The least well performing fund showed a net Internal Rule of Return (IRR) of5.7% in its final evaluation.


72% of portfolio companies showedemployment growth with 16,500 newjobs created.

Only 10% of portfolio companiesdecreased their number of workers, with 2,900 jobs lost.

75% of the portfolio companiesexperienced growth in turnover. Only 10% saw a decrease.

56% of portfolio companies demonstratedgrowth in profitability as measured byEBITDA. 33% saw a decrease.

ESG performance

Three fund managers were rated highlyin their ESG management systems. Onewas rated as low and two as medium.

For the 77 portfolio companies that were rated for their ESG managementsystems:> 60% were rated high> 32% were rated satisfactory> 8% were rated poor


US$1.1bn in third party capital wasraised by the 10 funds evaluated. CDCcontributed a total of US$540m to thesefunds, 32% of the total capital.

47% of the third party capital invested in these 10 funds was from commercialinvestors as opposed to DevelopmentFinance Institutions (DFIs).

Key statistics from 2009 sub-Saharanevaluations



Financial performance 1 4 1 3 1 – 60%

Economic performance – 7 3 – – – 100%

ESG performance 1 4 3 2 – – 80%

Private sector development 2 5 2 1 – – 90%


Added value 2 7 1 – – – 100%

Catalytic* 2 3 3 – – – 100%

Summary of CDC’s evaluation ratings of 10 African funds in 2009



CDC’s target is to make 75% of new investments in low incomecountries and to invest a minimum of 50% of capital in sub-SaharanAfrica. CDC still has previous commitments though to two fundsspecifically concentrated on North Africa and nine focused on LatinAmerica. Although CDC is not making further commitments in eitherregion, it closely monitors its existing portfolio in both regions.

Regional reviews – Other regions

Portfolio overview

Both Latin America and North Africa arerelatively more prosperous than sub-Saharan Africa and South Asia. NorthAfrica is exclusively ‘middle income’ onthe World Bank’s poverty definition as areall countries in Latin America except Haitiand Cuba.

Although both regions have been affectedby the global economic crisis, equityinvestment has continued. In North Africa,Actis, Tuninvest and SGAM are CDC’sprimary fund managers. In 2009, Actisinvested US$244m in CIB, Egypt’s leadingprivate sector bank in order to help thebank expand into supplying the retailsector. In Costa Rica, Aureos recentlyinvested US$6.5m in ITS, a remoteinfrastructure management company. The investment will allow the company to invest further in new technology.

CDC’s largest investment destination in Latin America is El Salvador with four companies and a total portfolio value of £24m. CDC is invested in 12 companies in Mexico and nine in Brazil.

CDC is evenly invested across four countries in North Africa with 11 investments in Tunisia, seven in Morocco, six in Algeria and four

in Egypt. In terms of portfolio value, thelargest concentration is in Egypt with a total value of £41m.

Companies in which CDC’s capital isinvested in both regions employ over20,000 people. These people areemployed across a wide range of industry sectors. In North Africa, CDC is invested in five healthcare providers and a further four companies working inthe ICT sector. In Latin America, financialservices and consumer goods are the two sectors with the largest number ofCDC’s portfolio companies with 17 and 12 companies respectively.

US$209m in taxes were paid by the 22 companies that reported data in NorthAfrica. The majority of this amount is paidby a large telecommunications provider in Algeria. US$301m is paid in taxes inLatin America. These taxes contributesignificantly to government revenues,enabling investment in education,healthcare and other basic services.

From the analysis into ESG risk conductedby CDC’s fund managers in 2009, sixinvestments in Latin America and one inNorth Africa have been identified as ofpotentially high risk. CDC will monitorthese investments carefully to ensuredangers are controlled and adequatesystems are in place to mitigate risk.

North Africa



2 funds under management

28 companies

23,000 people employed in25 portfolio companieswhich reported data in 2009


4 countries with investments

Latin America



9 funds under management

57 companies



12 countries withinvestments

6–14 investments1–5 investments

ALGERIA

EGYPT

MOROCCO

TUNISIA

CDC’s fund managers have investments in 12 countries in Latin America

CDC’s fund managers have investments in four countries in North Africa

ARGENTINA

BRAZIL

COLOMBIA

COSTA RICA

ECUADOR

EL SALVADOR

GUATEMALA

HAITI

MEXICO

PANAMA

PERU

ST. LUCIA


Regional trends

North AfricaThe global financial crisis was slow toreach North Africa and despite a decreasein export earnings, the region did recordpositive GDP growth over the year. AcrossNorth Africa, 2010 should be dominatedby the return to growth of trade with theEU, especially for Morocco which ismaking much progress towards a freetrade agreement.

Domestic consumption across the regionhas remained high as has inter-regionaltrade. This has enabled stimuluspackages in Egypt and elsewhere which,whilst increasing budget deficits, haveallowed increased investment in vitalinfrastructure and services to continue.

New regulations in Algeria concerningforeign ownership of companies havemade the country less attractive toinvestors. Sectors that have beenparticularly hard hit in 2009 include the manufacturing and hydrocarbonindustries. By contrast, the Tunisianeconomy has remained strong and byOctober 2009, had seen stock marketincreases of 41% over the course of the year.

In Egypt, the political debate is heavilyinfluenced by uncertainty over who willsucceed President Mubarak, now aged 81.Parliamentary elections this year may leadto social discontent, particularly in largecommunities with high levels ofunemployment. It is possible that thegovernment’s current liberal economicoutlook will be constrained by broadersocial considerations.

CDC made £26m of new investment in the region in 2009.

Latin AmericaProspects for growth remain mixed across Latin America in 2010. Brazil is the region’s biggest success story –government stimulus measures resulted in the stock market returning to nearSeptember 2008 levels by the second halfof 2009. The 2010 Brazilian election willbe crucial to determining the futuredirection of the economy although froman investor’s perspective, it is of low risk.

Mexico’s economy by contrast hascontracted badly in 2009, affected by astrong dependence on the US markets, as well as depressed oil prices and theoutbreak of swine flu. With thegovernment lacking a comprehensivereform agenda, full recovery seems likelyto be protracted.

In Andean South America, prospects foreconomic growth look very promising,especially in Ecuador and Peru. Growthcould be slowed by the severity ofpotential social protest, especially inBolivia where the President is seeking to implement a new constitution.

From the private equity perspective, CDC helped to pioneer the Andeanmarket which is the most underdevelopedin the region. CDC has backed AltraCapital, a pioneering and local fundmanager. The Andean region is well suitedto the modernising role of the private equityindustry which can increase competitivenessand facilitate the professionalisation offamily-run businesses.

A fund manager’sperspectiveAureos, Latin America

The main effect of the 2009 financial crisiswas that it led to a more consciouslydefensive approach to pipeline selection.Aureos focused on deals in sectors thatwere expected to withstand a slow or zero growth environment. We thereforediscarded many investments in sectorssuch as retail or discretionary spending,which would be affected by an economicgrowth decline. Investment efforts wererefocused on businesses providingoutsourcing services and other financialsolutions to local SMEs and multinationals.

Our investment strategy continues to bevery similar, focusing on sectors that areexpected to continue to grow, drivenprimarily by local demand. The variable of a weaker, slower growing globalenvironment is an additional factor takeninto account when investments arescreened. Selective opportunities in IT,outsourcing, financial services, consumergoods, homebuilding, health andeducation continue to be of interest.Opportunities for regional growth andconsolidation add to the attraction of anyopportunities identified in these sectors.

ESG challenges in the year have beentypical of any other year and were notaffected by the extraordinary financial and economic events of 2009. Aureos is actively involved in strengtheninggovernance challenges faced by several of our family-owned businesses seekingto transition to professionally run companies.On the social side we are implementingcorporate culture changes in companieswhich are experiencing a combination ofrapid, international growth, as well as atransition to professionally run firms. Our portfolio companies during this difficultperiod have continued with their outreachprograms demonstrating their directcommitment to the community. Finally, on the environmental side, our Colombiainvestment in the oil and gas servicessector, Petrotiger, has been recognisedlocally for its health, safety, environmentand quality management practices.

Largest investment destinations inLatin America by portfolio value (£m)

El Salvador

24

19

14

56

2

Mexico Brazil Columbia Argentina Costa Rica

Largest investment destinations inNorth Africa by portfolio value (£m)

Egypt

41

28

104

Algeria Tunisia Morocco


Other Regions continued

El-Rashidi El-Mizan (REM),EgyptFrom closed family businessto market leader in theEgyptian confectioneryindustry

El-Rashidi El-Mizan is Egypt’s leadingproducer of Halawa and Tahina – twotraditional staple food products madefrom sesame seeds. The company wasestablished in 1889, whilst its holdingcompany is Middle East Food and Trade(MEF). In 2000, MEF was acquired byBest Foods (before Best Foodssubsequent sale to Unilever) to serve as its entry platform in Egypt. In 2002, CDC’s fund manager Actisacquired 65% of the equity throughordinary shares and an interest freeshareholder loan, in the first managementbuy-out in Egyptian history.

A key aim for Actis was to transform MEFfrom a family business to a corporation:

• Actis’s ESG team conducted anassessment of governance standardsand proposed an action plan to help the business introduce world class bestpractice.

• A strong Board of directors wasassembled, incorporating former Best Foods and Unilever Executives.

• Experienced independent directorswere allocated to specific businessfunctions to coach managers.

• Financial reporting capabilities werestrengthened including mandating thepreparation of monthly dashboards bythe finance department. Actis alsoprovided corporate finance support to the management team whenevaluating acquisitions.

Actis supported MEF in implementingworld-class ESG management systems,particularly in respect to product safetyand quality:

• Appointed a dedicated Actis expert to oversee the development of ESGsystems.

• Assisted in the implementation of theISO management system, the OHSAS18001 Health and Safety Managementsystem and a new Hazard Analysis andCritical Control Points (HACCP) system.

• Established mechanisms to monitorESG systems and report back to theBoard.

• Built a new water recycling system at the main El-Rashidi El-Mizan plant,substantially reducing the quantity of water used.

MEF was sold to Citadel Capital, a Cairobased private equity firm. The salegenerated a cost multiple of 4.4 times oninvestment and an IRR of 35.6%. The highsales price of 410m Egyptian pounds wasattributed to MEF’s excellent marketposition and the quality of the business.By the time of exit MEF was a marketleader, exporting to 25 countries withdouble the production capacity anddouble the product portfolio.

At MEF, Actis was able to encourage core product growth and the successfulintroduction of new value-added products.Production processes were completelyautomated and world-class ESGmanagement systems were introduced.The success of Actis’ investment was suchthat when the Principles for ResponsibleInvestment (UNPRI) initiative released aset of nine examples of how sound ESGprocesses could maximise a company'spotential returns, MEF was amongst those included.

Key data

Investment:1 £5mInvestment period: 2002-2007Sector: Agribusiness – food processingFund manager at exit: ActisEmployment:2 700Cash returned: US$336mCash multiple: 4.4xGross IRR: 35.6%

1 £5m was invested by Actis/CDC. CDC’s investment in Africa 1 Fund is US$350.1m; total fund size is US$350.1m.

2 2006.

“Actis has demonstratedinvaluable support as a value-adding investor in ourbusiness. They have workedalongside myself and theteam to grow the businessaggressively and to adoptinternational best practiceacross all business functions.Thanks to this partnership,REM has now completed itstransition from being a closedfamily business to being adeveloped corporation withinstitutional shareholders.”

Mohamed El-Rashidi, Chairman of El-Rashidi El-Mizan

Manufacturing at REM Example of REM products: Staple foods

Sectors in focus

Chapter

Businesses of all sizes that span every industry sector havetheir role to play in fostering sustainable development andeconomic growth. Successful businesses create employment,generate taxes for domestic governments and offer new servicesand production capacity where it has not previously existed.

In this chapter we will look at a selection of sectors and howthey contribute to economic growth and development.

Alternative investment

In addition to regional funds, CDC is alsocommitted to seven microfinance funds, aspecialist debt fund and a fund focused onglobal infrastructure. The funds, overseenby CDC’s alternatives team, often reachindividuals at the ‘bottom of the pyramid’,those underserved by mainstream privateequity.25 CDC is seeking to increase itsexposure to debt funds.

Microfinance

Microfinance institutions (MFIs) provideaccess to credit to the rural and urbanunbanked in developing countries. CDCtypically commits capital to microfinanceinvestment vehicles (MIVs) whichsubsequently invest in MFIs.

Microfinance promotes microentrepreneurship and enables peoplesubsisting at the ‘bottom of the pyramid’to develop sustainable businesses.Women in particular are traditionallyserved by the microfinance industry.

Debt

Debt funding is an essential part of thecapital base for promising private sectorbusinesses. Moreover debt funds canexpand the depth of the capital markets in areas typically avoided by the privateequity industry. This is in part due to theless risky nature of providing debt finance.

For investors, debt funding providesreturns with a steadier cash flow, which is

particularly important in times whenreturns from equity investments are morevolatile. Over the course of the next fewyears, CDC is looking to increase itsexposure to debt funds.

Infrastructure

Infrastructure spans a range of industries,ranging from electricity generation anddistribution to transport and water services.The case for developing the sector ispowerful. A recent report by the WorldBank’s Africa Development Series Forumhas found that Africa needs aroundUS$93bn a year to address its infrastructureneeds. Infrastructure services in Africa aretwice as expensive as elsewhere, reflectinga lack of competition across the sector.26

The effects of transforming the sector areequally significant. The key finding of theWorld Bank report was that infrastructureis responsible for half of Africa’s recentgrowth and the sector can contributesignificantly more in the future.

Co-investments

CDC has committed approximatelyUS$110m to six co-investments in investeefund portfolio companies. These include acleaner technologies electricity generatorand an Indian telecommunicationsinfrastructure company. Co-investmentsare valuable from a developmentalperspective as they allow a fund managerto close transactions that would nototherwise be completed.

Microfinance


55 MFIs

36,000 employed in MFIs in41 companies reporting data

US$51m taxes paid by the31 companies reporting data

66% of microfinanceborrowers are female

45% of microfinanceborrowers are rural

CDC’s fund managers have investments in microfinance in 28 countries

Investments


Chapter 4: Sectors in focusThis year, CDC focuses on the role played by its portfolio of alternative investments, a label that covers microfinance, debt and infrastructure funds as well as co-investments alongsideCDC’s existing fund managers. The chapter also focuses on theagribusiness, financial services and consumer sectors and showshow each of these can contribute to development.

Microfinance reviewUnder its Investment Policy for 2009-2013, CDC will continue to supportpioneering investment efforts in themicrofinance sector with a focus on lowincome countries in sub-Saharan Africaand South Asia. It will also support, whereappropriate, existing microfinancemanagers with their efforts to raise further funds in CDC’s key geographies.

CDC’s strategy for microfinance has beento invest in greenfield and early expansionequity for commercial MFIs, in so doingcommitting over US$90m to microfinanceequity funds. Over 60% of CDC’smicrofinance portfolio is focused on India.The remainder of the portfolio has a globalorientation although we are targeting anincreasing proportion for sub-SaharanAfrica in the future.

In 2009, CDC collected data on the MFIswhich have received its support. Lok, anMIV based in India, has seen a growth ofover 1.1 million in clientele served by itsMFIs over the past year. Advans, a broad-based greenfield MIV with a focus onAfrica, has seen staff numbers in its MFIsincrease by nearly 400 with almost 30,000new clients receiving loans. ShoreCap, a global MIV, has seen customers of itsMFIs rise by 560,000 in the past year.These achievements reflect the growingglobal impact of the microfinance industry.

CDC has also committed U$30m to amicrofinance local currency debt fund thatdirectly addresses the currency risks MFIsface in relation to foreign debt funding.CDC’s goal is to continue to support themicrofinance sector, with a target ofcommitting up to US$120m in total capitalto MIVs by 2011.

Microfinance remains a commerciallyviable investment opportunity which isstrongly aligned with CDC’s goals of highdevelopment impact. CDC’s investmentsinclude 55 different underlying MFIs, witha total portfolio value of £26m. CDC isinvested in these 55 MFIs through sixmicrofinance equity funds and one localcurrency debt fund. Fifteen of the MFIs in which CDC’s capital is invested arelocated in sub-Saharan Africa; 36 are in Asia, with 17 microfinance institutionssupported by CDC’s capital in India. CDC also supports two microfinanceinstitutions in Latin America, with acombined portfolio value of nearly £1m.New investments by CDC’s fundmanagers in microfinance institutionsamounted to £7m in 2009.

In India, CDC’s microfinance portfolionavigated the financial crisis relatively well.Although liquidity for MFIs was initiallytightened, public banks are now lending toMFIs – recognition of the value of the assetclass. Despite rapid growth in recent years,the percentage of clients in India at risk ofdefaulting on loans has fallen from 2.9% in2005 to 2.2% in 2008. Microfinance in Indiacurrently serves 20 million people. Themarket remains vast though with a potentialpool of 120 million further families eligiblefor funding from MFIs.

In sub-Saharan Africa, microfinance as anasset class lacks a comparable degree ofcommercial recognition and funding. The number of potential customers ishuge: of 300 million economically activepeople in Africa, only 20 million haveaccess to formal financial services.27

Numbers of microfinance borrowers have increased significantly in Africa from 2.7 million in 2003 to 7.9 million in 2008according to data on the MicrofinanceInvestment Exchange (MIX) market.28

Marguerite Robinson, a microfinance specialist,describes the asset class as“small-scale financial servicesfor both credits and depositsthat are provided to peoplewho farm or fish or herd;operate small or micro-enterprises where goods are produced, recycled,repaired, or traded; provideservices; work for wages orcommissions; gain incomefrom renting out small amountsof land, vehicles, draft animals,or machinery and tools; and to other individuals and localgroups in developing countries,in both rural and urban areas”.29

A fund manager’sperspective India Financial Inclusion FundThe financial crisis had an immediateimpact on the availability of debt to MFIs,slowing their growth rates. This forcedMFIs to cut capacity, reduce costs andfocus inwardly on their operationalperformances. Credit quality deteriorated,but the impact was less severe thananticipated and non performing loans werestill under 2% of the portfolio. This providesfurther evidence that the poor and theirenterprises are somewhat insulated fromthe mainstream economy. Despite theslowing down of growth rates, MFIs werestill able to access some debt and equityfunding from commercial investors.

One of the positive outcomes of the crisishas been an unintended impact on the lowincome housing sector. As real estateprices began to fall and housing credit wasbecoming expensive, developers, withlarge stocks of land and slowing demandfrom traditional buyers and speculators,started to focus on developing lowincome housing projects. This also gotvery active support from the government,with increased focus on improving thesupply of housing stock for low incomegroups. Supply of low-cost homes is oneof the big bottlenecks in resolving thehousing problem for the poor in India,whilst the availability of micro-mortgages is the other.

Seizing this opportunity and based on ayear-long analysis we made India’s firstinvestment in a micro-mortgage lender,Micro Housing Finance Corporation. Weexpect this investment to catalyse thisindustry, leading to a virtuous cycle ofsupply of low cost homes and availability ofmicro-mortgages for such home owners.

Number of MIVs by region

1

2

4 5

3

1 Sub-Saharan Africa 17 (31%)2 India 17 (31%)3 China 1 (2%)4 Other Asia 18 (33%)5 Latin America 2 (3%)

Chapter 4 – Sectors in focus 41

Spandana SphoortyFinancial Services Limited,IndiaA microfinance institutiondriving a microfinancerevolution

India, with a population of over one billion,has a greater number of people livingunder the poverty line than any othercountry in the world. Almost 40% of therural population and 20% of the urbanpopulation lives in poverty. Theseindividuals have limited access to financefrom traditional financial institutions andremain largely unbanked. Microfinance,through its provision of micro-loans and its emphasis on micro entrepreneurship,offers a potential way out of poverty.

Spandana Sphoorty is an Indian MFI that operates 1,353 branches spanning 12 provinces in India. The target clienteleis the population segment known as the‘bottom of the pyramid’ – individualsearning up to US$4,000 per annum.Spandana’s client profile of 94% femaleand 55% rural borrowers is evidence of a reach beyond that of more traditionalnational and regional banks.

The micro-loans Spandana offers averageUS$237. The MFI offers a range of loanproducts – from the basic ‘general loan’targeting daily wage labourers and tradersto more specific loans targeting microbusinesses or specific sectors (such asagriculture and dairy). Spandana is alsopioneering new products and services toits clients, recently launching a maternityhospital providing pre and post-natal carefor low-income women.

Lok Capital, as an equity investor inSpandana, has had added operationalvalue since its investment. The team hashelped develop the organisational and

New opportunities and challenges

In both India and sub-Saharan Africa, new microfinance opportunities exist:

IndiaIn India MIVs are exploring the possibilityof financing low-cost housing. The targetclientele for such housing would becustomers earning approximatelyUS$200-500 a month. Other optionsinclude diversifying existing financialproducts into areas of current lowexposure. This includes micro-insurance,healthcare and education.

Some challenges ahead includingregulatory changes to Indian MFIs,particularly with respect to the level offoreign control, will impact on both thecapital mix and investor mix goingforward. Also, the recent growth in India’smicrofinance industry has been rapid andthis growth may prove unsustainable.

Sub-Saharan AfricaMicrofinance is currently centred in twoareas; in East and West Africa, particularlyin Ghana. Microfinance in sub-SaharanAfrica does not receive as muchcommercial investment as other regions.This is largely due to the fact that themajority of MFIs operate as non-governmental organisations (NGOs) and are not commercial. It remains to be seenwhether these can evolve a mentality thatrecognises the advantages of commercialsustainability as seen in Latin America andSouth Asia.

Other challenges include attractingcommercial banks and foreign investorswho to date have mostly provided financeto larger MFIs in Africa. Governance isalso weak across many sub-SaharanMFIs. This is exacerbated by weakregulation and a poor understanding of the commercial microfinance market.Finally, there is often a shortage ofcapable local and expatriate managementtalent on the ground.

governance structure as well as assistingin senior management recruitment. Lokhas also played a key role in developingSpandana’s business model and definingthe company’s growth and financingstrategies. Through an active board seat,Lok continues to add value to Spandanaplaying a pivotal role bridging investorsand management. Spandana has grownto be one of the largest MFIs in Indiaoperating with a very lean cost structureand charging lower rates of interest thanmany other MFIs.

Over the course of 2009, Spandanacontinued to grow its loan book at a rateof 90% year-on-year and its activeborrower base which grew at 70%. The MFI is a profitable institution and in2009 had over 9,000 employees, paidUS$14m in tax and disbursed over threemillion micro-loans.

Spandana Sphoorty is driving therevolution across India to broaden accessto finance to those underserved bytraditional banks. By financing localentrepreneurship, Spandana provides a sustainable route out of poverty.

Key data

Investment:1 US$2.25mInvestment period: August 2007- presentSector: MicrofinanceFund manager: Lok CapitalEmployment:2 9,643Employment growth:3 78%Number of borrowers:2 2.4 millionNumber of branches:2 1,353Portfolio at risk – 30 days:2 0.51%Taxes:2 US$14.3mFemale borrowers:2 94%Rural borrowers:2 55%

1 US$2.25m was invested by Lok I in 2007. CDC’s commitmentto Lok I is US$4m; total fund size is US$22m.

2 As on December 2009.3 December 2008 to December 2009.


Microfinance in Africa Clients of Spandana Sphoorty

Sectors in focus continued

Debt funds

The financial crisis has contributed furtherto the scarcity of debt capital for companiesand infrastructure projects in sub-SaharanAfrica. CDC aims to address this marketfailure by investing in debt funds.

One advantage of debt funds for CDC isthe prospect of stable, long-term returns.CDC also hopes that investment in debtfunds will help to strengthen and deepenthe debt capital markets in Africa resultingin the development of a yield curve.

The provision of debt can play asignificant role in developing the privatesector in emerging markets. Debt financecan be directed more easily towardsunderfunded areas of the economy orassisting banks to expand into newgeographies and markets. Moreover,finance in the form of guarantees allowscapital to be directed into riskier marketswhere private equity is reluctant to invest.Catalysing underdeveloped markets of this sort is a primary reason whydevelopment finance institutions (DFIs)play an important part in private sectordevelopment.

There are, however, obstacles to debtfunds that require careful management. In sub-Saharan Africa in particular, there is currently neither a culture of using debtfunds nor broad awareness of the roledebt funds could play in providing capitalfor businesses and especially small andmedium sized enterprises (SMEs).

CDC’s roleCDC has already invested in several debt funds, including Cordiant Capital’sInternational Finance Participation Trust(IFPT), that supplies syndicated ‘B’ loansshared between the DFI community. Thefund allows DFIs to attract commercialcapital to participate in co-financingprojects through the sale of loanparticipations.

IFPT has a total fund size of US$370mand investments spread over a broadgeography and range of industry sectors.This diversity allows risk to be minimisedand offers the broadest possible scope for further investors to participate instructured, market-priced loans toemerging markets.

Another investment in a debt vehicle is CDC’s US$75m commitment to theGlobal Trade Liquidity Programme (GTLP).The GTLP is designed to help address the shortage of trade finance acrossdeveloping countries. It stands as anexample of how CDC and the broader DFIcommunity has responded to the creditcrisis in a manner that will enable trade to keep flowing.

In developing economies as a whole,private sector lending is under-developedrunning at just 20% of total bankingassets as opposed to 34% in India andover 83% in the United Kingdom. If theright opportunity arises, CDC will seek to invest in debt funds particularly in sub-Saharan Africa where market liquidityis low.

Infrastructure

CDC has committed US$500m to ActisInfrastructure Fund 2 and contributedUS$130m of previously owned assets.The fund, which has an experienced teambased in Singapore, Mumbai and London,seeks to develop transport and powergeneration assets in emerging markets.Over the next few years, CDC will look tothe Actis Infrastructure Fund to be at theforefront of its commitment to narrowingthe infrastructure gap between developedand developing nations.

Songas, one of the assets transferred byCDC to Actis Infrastructure Fund 2, is oneof the largest single investments in CDC’sportfolio. Songas is the principal electricitysupplier to Dar es Salaam in Tanzania. It generates electricity from natural gas,sourced through a 225km pipe from a gasprocessing plant on Songo-Songo island.Electricity produced by Songas is cost-effective, clean and reliable.

A second power company within theportfolio is Umeme. Umeme is Uganda’sprincipal power distribution company. A large part of the power Umemedistributes is now generated fromhydroelectricity.

CDC has also invested in cleanertechnology infrastructure with acommitment of €10m to BerkeleyEnergy’s Renewable Energy Asia Fund(REAF). REAF will support private sectorcompanies aiming to supply the growingdemand for clean energy infrastructure in Asia. It will seek to make equityinvestments in renewable projects with a focus on wind, hydro, biomass and solar power.


Songas in Tanzania Infrastructure development project

Agribusiness and forestryThe majority of the population of thepoorest countries in CDC’s investmentuniverse live in areas where theagribusiness and forestry sectors assumean important role. Consequently thesectors have significant developmentaland environmental potential, in addition to the prospective generation of attractivecommercial returns. CDC is exploringopportunities to increase its investmentsin these sectors and decided to commit to a new sub-Saharan Africa forestry fundat the end of 2009.

Development case for CDCinvolvement in agribusiness

In developing countries, agribusiness andforestry is a vitally important source ofincome and employment. Indeed, in thepoorest countries, the sector creates upto 34% of GDP and maintains as much as 64% of the working population inemployment.30 Agribusiness coversopportunities ranging from crop andlivestock production through toprocessing, storage, distribution and marketing.

Developing agribusiness providesinvestors with the opportunity to fostersustainable growth in developingcountries. In sub-Saharan Africa forinstance, over 60% of the population livein rural areas and most are dependent onagriculture for their livelihoods, oftenthrough subsistence means. Moreover,with the global population predicted toreach nine billion by 2050, demands on the sector are certain to increase. In Africa, this provides a considerableopportunity – a young population,underdeveloped infrastructure, fertile soilsand scope for improving the efficiency ofproduction means agribusiness has vastpotential within the region.

As an industry sector, agribusiness andforestry have been important for CDChistorically although the financial returnshave been mixed.

CDC has observed that investment inhigh-value agricultural goods in areas of fecund natural environments and theproduction and processing of staplegoods for local markets have beensuccessful in the past. Whilst CDC’sinvestments typically focus on commercialagribusiness, subsistence farmers canalso benefit by tapping into theinfrastructure and transportationimprovements necessary for commercialagribusiness to achieve financial success.

CDC is currently invested in two fundsspecific to the agribusiness sector; one is focused on Africa, the other on India. In 2009, CDC decided to commit to asub-Saharan forestry fund in order totarget this specific asset class.

CDC’s current portfolio in agribusinessspans 40 companies and accounts for4.6% of CDC’s portfolio value. The maininvestment destinations include sub-Saharan Africa where CDC is invested in a total of 13 agribusiness ventures, China with eight investments, India withsix investments, and Indonesia andTunisia with three investmentsrespectively. CDC’s portfolio companiesare involved in all parts of the agribusinessfood chain from crop production throughto processing and marketing.

There are currently 114,000 peopleemployed across CDC’s investments in agribusiness. The large number ofemployees is evidence of the high labour intensity typical of the sector.Nonetheless, large scale ventures can be successful, something evident from the US$315m paid in local taxes by the 25 companies reporting such data in 2009.



40 portfolio companies

114,000 employed in 30 companies whichreported data

US$315m taxes paid by the 25 companies whichreported data

Investments

CDC’s fund managers have investments in agribusiness in 18 countries



1

23

4

5 6 1 Sub-Saharan Africa 13 (32%)2 North Africa 5 (13%)3 India 6 (15%)4 China 8 (20%)5 Other Asia 7 (17%)6 Latin America 1 (3%)

Number of companies by region

12

3

4

56 1 Sub-Saharan Africa £25m

2 North Africa £3m3 India £4m4 China £21m5 Other Asia £11m6 Latin America £1m

Portfolio value by region

therefore represented an opportunity toreach low-income, rural populations withfew other opportunities for sustainableeconomic growth.

Managing forestry projects is challengingin Africa. According to the African Forestryand Wildlife Commission, Africa had thehighest frequency in 2006 of forest fires. There is also a shortage of managerialskills. Lastly, many local communitiesdirectly depend on the land forsubsistence livelihoods. To theexperienced fund manager though, suchissues provide opportunities to add to thevalue chain for forestry projects and helpassist the development of local transportinfrastructure and processing, harvestingand marketing potential.

Research produced by Forum for theFuture has indicated that forestry fundsare able to achieve internal rates of returnin the region of 10-13% across the sector.With the necessary commercialbackground therefore, CDC expects aspecialist fund manager to achieve returns at this level and by so doing,attempt to foster the potential of what is a relatively undermanaged resource in many African countries.

The GEF Africa Sustainable Forestry Fund

In early 2010, CDC approved US$50m to a sustainable forestry fund focused onsub-Saharan Africa (‘GASF’). GASF wasthe outcome of a request for proposalsissued by CDC in December 2008. CDCidentifies forestry as a sector which wasshort of capital, but with significantdevelopment impact. Financial prospectslook sound as evidenced by the findingsof a consultancy report which had positedthat lower income countries in Africa had acomparative advantage in the productionof timber. Forestry as an asset-class offersthe prospect of consistent long-termreturns. The timber produced can be usedas both an export commodity and forlocal manufacturing and housinginfrastructure.

Ecological benefits potentially arise as a side-effect of sustainable forestmanagement. Benefits include theprospect of reducing carbon emissions,protection against soil erosion and thepreservation of bio-diversity. The potentialto harness additional capital from carbonsequestration and trading has recentlymade the sector more attractive to investors.

Although the forestry sector hasdeveloped significantly in Asia and theAmericas in recent years, Africa remainedunderrepresented. This is in spite ofconsiderable natural advantages offeredby certain areas of the continent forsustainable forestry. These include highaverage temperatures, decent rainfall,favourable growing conditions andamongst the lowest plantationestablishment and harvesting costs of any region in the world. With CDC’sinvestment policy directed specifically atsub-Saharan Africa, a forestry fund

Challenges and risks

Agribusiness and forestry face specificchallenges that impact the potentialreturns expected from investment acrossthe sector. Challenges specific toagribusiness include inclement and severeweather, vulnerability to crop diseasesand changes in market and dietary trends.Long term climate change will likely havean impact on growing conditions in manyregions and the sector will be forced toconsider new products and innovations.

The international commodity markets in primary products are also currentlyrelatively volatile and many observersexpect this to persist.

Moreover, investments in agribusinessand forestry often assume a politicaldimension due to the sensitivity of thequestion of land ownership in manydeveloping countries. In Africa forinstance, up to 95% of forest land isstate-owned under governmentconcessions, an added complexity when undertaking business in the sector.

A consequence of the recent financialcrisis is a worrying trend of protectionistpolicies being levied by high-incomecountries against developing countries.Despite this, CDC recognises that thesector remains of immensedevelopmental value.


for local businesses and by financinginfrastructure developments for thesurrounding community. Villages in the Kilombero and Ulanga districts are encouraged to participate in thecompany’s operations through a villagecontract scheme. KVTC has also madesignificant donations to local institutions,recently giving TZS28m (US$21,000) to ascheme promoting the establishment of local classrooms.

KVTC completed a state-of-the-artsawmill in 2009 as part of its longstandingaim to process the trees in the sameregion in which they were grown. 150local people were employed during thenine month construction period and thecompleted facility now employs 120people, 70% of whom are local. Theseindividuals have the chance to gainvaluable new forestry processing skillsincluding planing, finger jointing andmoulding; this will provide benefits for the community in the future.

KVTC’s new mill will also process teaklogs bought from local smallholders and outgrowers and some sustainablyharvested natural forest logs. KVTC has made significant progress in fulfillingits aim of becoming a sustainable forestry operation.

Key data

Investment:1 US$25.4mInvestment period: December 1992-

presentSector: Agribusiness – ForestryFund manager: ActisEmployment: 250

1 Total of US$25.4m was invested by CDC and managed by Actis. CDC’s investment in Actis Agribusiness FundUS$92.7m; total fund size is US$92.7m (100% CDC).

financing from Finnfund. Since 1992, a total of US$25.4m has been invested inKVTC by CDC. Some sections of the7,800ha of planted teak are nowsufficiently mature for clear-fell harvestingto be undertaken, supported bycommercial thinning from youngerplantation compartments, which areprocessed in KVTC’s on-site sawmill.

KVTC has been developed and operatesto the highest environmental standardsand industry best practice. The companyconducts extensive biodiversity andtopography surveys prior to undertakingany planting activity. To date less than30% of the land has been planted withthe remainder having been set aside forconservation and environmentalprotection. KVTC has used a ‘mosaic’style plantation scheme across its foursites, so as to ensure that animalmigratory pathways are undisturbed. In addition, the layout maintains bufferzones to protect local waterways and theindigenous evergreen forests. As a resultof its efforts, KVTC attained ISO 14001accreditation in 2004.

KVTC has brought substantial benefits to the local community. It is the largestemployer in the local area with around 250 permanent employees. In addition todirect employment, the company providesan additional 700 jobs through localcontractors and the company’s outgrowerscheme. Through this scheme, KVTCsupports the plantings of small scale teakgrowers and provides technicalassistance and advice until the trees arefully established. The aim is to reach a first harvest after 15 years and generateadditional revenues for the localpopulation.

The company furthers its communityimpact through the support it provides

Forestry investments require long termsupport and input. An example of such aninvestment in CDC’s portfolio is KilomberoValley Teak Company (KVTC), describedin detail below.

KVTC, TanzaniaA sustainable teakplantation and forestrybusiness in rural Tanzania

The establishment of a sustainableforestry business is a challenging taskunder any circumstances, but especiallyso when it is a greenfield project. This was precisely the task undertaken atKilombero Valley Teak Company (KVTC),which first received funding from CDC in 1992 to finance the establishment of a world-class sustainable teak plantationin the Kilombero region of Tanzania. Thebusiness has only recently begun toproduce revenues; its sawmill beganprocessing in 2009.

KVTC is located inland in SouthernTanzania. The region is one of Tanzania’spoorest with few established industriesand a chronic lack of employmentopportunities for the local population.KVTC’s objective of developing a profitableforestry business including primary andprocessing operations has createdconsiderable employment in the area.

CDC invested in KVTC as soleshareholder following a joint feasibilitystudy with the Tanzanian government.Following the feasibility study, KVTC wasgranted title to over 28,000 hectares (ha)of land in the Kilombero and Ulanga valleydistricts. Actis took over management ofCDC’s investment in 2004 and hascompleted subsequent rounds of fundingin the company, including debt and equity


The tree nursery at KVTCManaging teak trees


Financial servicesFinancial institutions represent 19.7% of CDC’s portfolio and span CDC’s entireinvestment universe. The global financialcrisis has impacted financial servicecompanies world-wide. Despite thechallenges faced by the financial servicessector, it is worth remembering why the sector is important in generatingeconomic growth and building a route out of poverty.

Why develop the financial servicessector?

The global financial services sector hasbeen under severe pressure in 2009 as a consequence of the financial crisis andthe resulting scrutiny of capital structuresand lending practices. The crisis has notaffected all banks equally. Many emergingmarket banks followed a more traditionalbanking philosophy and were relativelyunexposed to the ‘toxic assets’ andcapital leverage behind the crisis inAmerican and European banking.

CDC’s fund managers typically invest in regional banks with a local, lower-middleincome customer base. Such institutionsfuel local economic growth by allocatingcapital to people underserved byinternational or, more typically, nationalbanks. Although it is microfinance thattends to focus on the very poorest insociety, studies suggest that thedeepening of the whole financial servicessector leads to higher rates of capitalaccumulation and higher levels of percapita income.

It is envisaged that CDC’s investments in the sector will enable more people tobenefit from access to credit where it waspreviously unavailable. By providing creditfor productive local enterprises andsecure savings and insurance facilities,the financial services industry in emergingmarkets can stimulate poverty reduction.

CDC’s portfolio in banking is typified by itsportfolio in India where many of the banksin which CDC’s capital is invested areregional or even sub-regional. Oneexample is the Catholic Syrian bank inwhich CDC is invested through AIFCapital. Having received equityinvestment, this bank has expanded itsnumber of branches within South India.The overall ethos of the bank, focused on maintaining traditional relationshipsbetween bank and client, has remainedvery much the same. This benefits thebank’s local, often rural, clientele whowish to save and use a bank which theyfeel they know personally and trust. Banksof this type are also more likely to targetclients of the so-called ‘missing middle’underserved by larger banks andmicrofinance institutions.

A second benefit offered by private equityinvestment lies in the field of corporategovernance. Whilst barriers toestablishing a bank are relatively low in much of South Asia, expertise innegotiating and managing the business in an industry dominated by larger nationalbanks is often lacking. Private equityoffers a solution to this problem, typically through the fund manager’srepresentatives serving on the Board of directors of the banks, helping instilgovernance best practices andappropriate checks and balances. These practices can also help the bank’s expansion plans as well.

Financial services is the single largestsector by value in CDC’s portfolio. Sub-Saharan Africa represents 71% of CDC’sportfolio value in financial services with13% in North Africa and 13% in Asia. CDC’s investment in the sector spanstherefore its entire investment universeand although the sector has beenpressurised in 2009, CDC expects that it will continue to prove successful.






CDC’s fund managers have investments in financial services in 30 countries

Investments


Portfolio value by region

1

2

3 4 1 Sub-Saharan Africa £196m2 North Africa £35m3 Asia £37m4 Latin America £10m

Number of companies by region

1

6

2

3

54

1 Sub-Saharan Africa 156 (76%)2 North Africa 3 (1%)3 India 12 (6%)4 China 3 (2%)5 Other Asia 15 (7%)6 Latin America 17 (8%)

A second example of a challenge posedby the financial crisis to the financialsector is exemplified by Nigeria in 2009.Prior to the crisis, many leading Nigerianbanks lent heavily to their national oil andgas sector. When the market turned andshare prices in these companies fell,many Nigerian banks concealed the riskof defaults on these, often large, loans.

The findings of an audit by Nigeria’scentral bank revealed the scale of theproblem and in addition, a trend offavourable loans being offered toassociates of many of the banks’executives. Nine CEOs have beenimplicated and a scandal has cast ashadow over the entire sector of theNigerian economy.

Nigeria’s crisis may have a positiveoutcome. Nigeria recognises thenecessity of a more transparent andbetter managed financial sector. DFIs,through their fund managers, with theirexperience of improving corporategovernance practices will have animportant role to play in engendering such a change.

are opening up to the financial sector. An example of this is Vietnam, where the financial sector now welcomes foreigninvestment. Although foreign investors arenot permitted to obtain majority positions,they are able to acquire significantminority stakes in a manner that is seenelsewhere in Asia.

Current challenges and risks

Globally, the effects of the financial crisiswill continue to be felt at all levels of thefinancial services industry which will bemore heavily scrutinised. Two nations willbe used as cases to illustrate the point.

The first is India which saw high creditgrowth in the period up to 2008 due tolenient lending standards. As an industryportfolio, loans books from Indian banksare comprised roughly as follows; 56%are corporate, 23% retail, 12% agriculturaland 9% small scale industry.32 In the future,there is an increased risk that these assetsface a far greater likelihood of becomingnon-performing.

It is the loans to companies of all sizesthat are likely to suffer most. This is due to the cyclical decline in some Indianbusiness, especially export businesseswhich are affected by protectionism anddecreasing demand overseas. Thisincludes auto-components, jewellery and the textiles sector.

Coupled with an unusually severemonsoon in India, a particularly vulnerablecategory of income group served by theIndian financials sector has been placedunder increasing pressure.

Over the short to medium term, India’sregional banks will also face increasingpressure as the risk of non-performing or delinquent assets increases. Privateequity can help such banks fulfil theirgrowth objectives in the case ofalternative funding not being available.

The impact of the financial crisis in theemerging markets

A significant consequence of the financialcrisis was a broad loss of confidence inhow financial institutions function, theeffects of which will continue to be felt for some time. Insight can be drawn from Foreign Direct Investment (FDI) flows directed into emerging markets.31

These flows increased to both Africa andAsia throughout 2008 and even increased in the quarterly comparison in the firstquarter of 2009. Since then pledged FDIto emerging markets has fallen significantly.

Another consequence of the crisis is an increasing reluctance on the part ofmany international banks to follow themodels of HSBC and Standard Charteredin building their market presence. Thislack of capital for banks will make the roleof private equity increasingly important instimulating growth at financial institutionsby providing capital for growth andexpansion of smaller banks. Maintainingthis capital will be vital for the sector’sfuture development.

Fortunately, there is optimism that fundmanagers will continue to invest infinancial services. The main reason is thatlocal and sub-regional banks value thestrengthened governance that privateequity brings, which in turn serves toattract and instil confidence amongst itslocal clients and grows its customer base.

Improving governance can also attractfurther investment in a bank. An exampleof this is provided by Centurion Bank inIndia which received investment fromCDC’s fund manager, IDFC, in 2006. Afterbuilding its distribution reach, the bankwas merged with HDFC which wanted to strengthen its own retail distributionnetwork, particularly well served byCenturion Bank.

A further reason for optimism across the financial sector is that new markets


“African banks are amongstthe healthier financialcompanies anywhere in theworld, having been relativelyshielded from the toxic assetsthat are now laying waste toU.S. and European financialinstitutions.”

E.B. Kapstein, Foreign Affairs, July/August 2009


ConsumerIncome levels and expenditure indeveloping countries have been risingover the past decade. 16% of CDC’sportfolio is invested in businessesmanaged by entrepreneurs seeking tomeet rising consumer demand. Theprojects in which CDC is invested arevaried, ranging from SMEs to fast movingconsumer good companies (FMCG) toretail developments.

The development case

The consumer sector spans a variety ofdifferent sub-sectors that fall under thegeneric label ‘consumer’. These includeretail businesses (from SMEs to FMCGsto large retail developments) but alsohotels, tourism, restaurants, media and travel.

Income levels and consumer demandhave been increasing in developingnations. Indeed, the number ofhouseholds with a nominal disposableincome of over US$5,000 has doubledfrom 217 million in 2003 to 500 million in2008.33 Even consumers with low incomesoften have discretionary income, aswitnessed by the mobile phone revolutionin Africa where subscribers across thecontinent rose from 36 million in 2003 to 224 million in 2008. Supplying thisdemand presents many interestingopportunities for investors.

Growth in the consumer sector benefits in part from the rapidly rising number ofmiddle class households and youth indeveloping nations. ‘Middle class’ hereshould not be equated though with theimage of the consumer sector in highincome countries. Much consumerexpenditure in emerging markets centreson access to very basic products – soap,textiles, stationery and food.

Investment from fund managers can helplocal companies realise opportunitiesavailable in the consumer sector. Meansof doing this include financing a companyto expand its share of the domesticmarket, extending distribution networksand by helping management to becomemore professional. This in turn increaseslocal production and reduces dependenceon imported commodities. Building up theconsumer sector in this way thereforecreates the conditions for economicgrowth, which in turn reduces poverty.

Moreover, the informal sector can alsobenefit from the impact of developing the formal consumer sector. A retaildevelopment for instance can attract localretailers and SMEs to the vicinity wherethey know consumers will be. Jobs arecreated not just as retail staff within thedevelopment itself but also in the fields of maintenance, security and logistics.

CDC’s portfolio in consumer

The consumer sector is an important onefor CDC with a total portfolio value of£220m and new investments totalling£43m in 2009. The number of companiesindicates that CDC is invested in manysmall-scale consumer businesses as wellas larger projects. An example of a fundmanager specialising in such investmentsis GroFin, discussed on page 50.

CDC’s investments in the consumersector are spread across 28 countries.CDC backs 31 consumer projects inChina, 27 in India and eight in SouthAfrica through its fund managers.

184,000 people are employed in the 94 companies reporting employmentnumbers in the consumer goods andservices industry. There is a heavyinformal side to work in this sector and so one would expect broader economicimpact beyond what can be measuredhere. This is illustrated by CDC’sinvestment in the Accra Mall, alsodiscussed on page 50.






CDC’s fund managers have investments in consumer goods and services in 28 countries

Investments


Below are two examples of investmentopportunities in the consumer sector.

GroFin East AfricaDeveloping the SME sectorin East Africa

CDC’s capital is used to provide growthcapital to SME funds which invest heavilyin the consumer sector. One such fund is GroFin East Africa, which has provideda combination of finance and businesssupport to a total of 48 companies, nearly30% of which are in the wholesale andretail sectors. Other companies whichreceived support include hostels andrestaurants. GroFin’s approach is to workclosely with African entrepreneurs toformalise their businesses and assist themto increase their share of the domesticmarket. This translates into social benefitssuch as job creation, attesting to the beliefthat SMEs can serve as a powerful engineof economic growth.

Two examples of GroFin’s investment inthe consumer sector are the Join HandsAssociation in Rwanda and the NanaHostel in Uganda.

The Join Hands Association is a bakerywith 13 staff located in Kigali. The companysupplies good quality bread to retailresellers. GroFin’s investment of US$50,000in 2008 was matched by a furtherinvestment of the same amount by BanqueCommerciale du Rwanda. In addition to itsprovision of finance, GroFin has workedwith the company’s management toimplement training on hygiene, safe use of equipment and efficient waste disposal.By the end of 2008, the company hadbeen admitted into the association ofKigali bakers, an achievement likely toadd to its success.

Nana Hostel provides safe, clean andmodern accommodation to 1,000 studentsattending Makerere University, the largest

in Kampala. GroFin provided guidance on starting and sustaining this business. It also provided finance to enable both the completion of the initial project and an additional loan for a further three floors.The project has created jobs for 150construction workers and will provide 16 full time jobs within the building uponcompletion. Upon exit, GroFin realised an internal rate of return of 18% upon the first loan and 22% on the second.

Accra Mall, GhanaIncreasing access to goods,providing jobs andgenerating taxes

Accra Mall was officially opened in July2008 by the Actis Africa Real Estate Fundand is Ghana’s first and only Grade-Aretail development. It consists of 19,000square metres of lettable space, over an11 acre site and has parking for 800 cars.Construction of the development took twoyears. At the peak of construction over700 people were employed.

The development is 99% let with 69 retailers, including major banks,pharmacies, department stores and acinema. Investment in shopping centrescan have significant positive social andeconomic impacts, both direct and indirect.

Business activity is increasing andstimulating further growth for the localcommunity through additional job creationand contracts and increased knowledgepassed onto local suppliers. Somebusinesses in the Mall are new to Ghanaand provide access to products whichpreviously were either unavailable locallyor prohibitively expensive. Contracts forcleaning, security and maintenance havebeen awarded to local suppliers, therebyproviding the local community with further employment and income.

Businesses in Accra Mall generated anestimated US$4.3m in sales tax for theGhanaian government in 2008. It isprojected that taxes, rates and fees of US$60m will be accrued from retailtenants over a ten year period.

Actis managed the entire development of the Mall from concept to completion.Actis has developed sustainabilityguidelines for real estate funds andprovided these guidelines to the Mall’sdesigners and builders. The guidelines follow international best practice andinclude measures to increase the energyefficiency of the building. Actis has alsodeveloped comprehensive health andsafety guidelines, specifically designed for real estate investments in emergingmarkets.

Following the initial success of the Accra Mall expansion, there are plans to increase the space within thedevelopment, introducing new companiesto Ghana’s formal retail sector andgenerating further tax revenues for the Ghanaian government.

Key data1

Investment:2 US$16.2mInvestment period: 2006-presentSector: Real Estate Management and

DevelopmentFund manager: Actis, Africa Real EstateEmployment: 900 (direct); 300 (indirect)Turnover: US$4.7mTurnover growth:3 1003%EBITDA: US$2.2mTaxes paid: Tax exempt for 5 years.

US$4.3m in sales tax fromretail tenants3

1 From year-end 2008, except for when stated otherwise.2 US$16.2m has been invested by Actis to date. CDC’s

investment in Actis Africa Real Estate Fund is US$154m. Total fund size is US$154m (100% CDC).

3 2007-08.



Nana Hostel in KampalaJoin Hands Association Bakery

5CDC aims to be a leader inpromoting responsible andsustainable investment inemerging markets. As part ofthis, CDC has commissionedguidance material to help itsfund managers on issues thathave significant bearing. Twosuch initiatives in 2009 includeda climate change study and a study of issues relating togender and gender inequality.

CDC has also updated itsToolkit for fund managers inorder to demonstrate howsuccessful management of ESGissues can add value to growingbusinesses.

Initiatives taken in 2009

Chapter


Climate change

CDC’s responseRecognising that climate change is a pressing and immediate issue in allmarkets, CDC decided to produceguidance to help educate both its fundmanagers and their portfolio companiesabout climate change. The guidance setsout the opportunities presented by climatechange as well as the risks.

To produce its guidance, CDC turned to Forum for the Future for assistance.Forum for the Future is a sustainabledevelopment charity that works with bothbusiness and public sector bodies todevise sustainable strategies and newproducts and services.

The result was CDC’s new climate changeguidance for fund managers. Some of thetools resulting from this survey areexplored overleaf.

Climate change risksClimate change is already starting to changethe competitive environment in whichcompanies operate. A Carbon DisclosureProject report surveying 500 leading firmsacross a range of industries has found thatover 80% believe that climate change willpresent some sort of commercial risk. Thisrisk will in turn transform the competitiveenvironment in which companies operate.

Chapter 5: Initiatives taken in 2009

The types of risk that climate changepresents to businesses vary betweenindustry sectors and locations. Certainthemes can be highlighted to suggesthow climate change can impact lesseconomically developed countries.

Physical risks – The most frequentlystated example is the increased risk ofextreme weather. The World Bank hasproduced a list of countries most at risk of climate disaster:

• Drought – Malawi, Ethiopia, Bangladesh• Flood – Bangladesh, China, India• Storm – Philippines, Bangladesh,

Madagascar• Coastal flooding – low-lying islands,

Vietnam, Egypt• Agriculture – Sudan, Senegal, Zimbabwe

All the countries listed here except China,Egypt and the Philippines are low incomecountries, which makes them especiallyvulnerable due to a lack of a budgetarycapacity to respond.

Operating costs – These will rise.Businesses might experience effects suchas disruption to their supply chain andissues relating to water availability.

Regulatory risks – New regulation willhave impact on businesses. This will be influenced by consumer and politicalpressure, as well as demands for innovation and new products.

Opportunities arising out of climatechangeClimate change is not just a risk tobusinesses. Proactive management canalso exploit opportunities for corporategrowth arising from the new circumstances.

Innovative product design – Opportunitiesmay arise for new product lines that cantake advantage of a changed competitiveenvironment. Consumer preference mayswitch to low carbon products.

New markets – New markets can open up as a result of climate change. Oneexample is the clean energy market whichis expected to grow from US$77bn in2007 to over US$254bn in 2017.34

“In order to increase adaptivecapacity to meet thesechallenges, developmentagencies need to continue tosupport developing countriesin the principles of goodeconomic policy. This willrequire processes to integrate climate issues intoeconomic planning and thebudget process.”

Source: DFID (2004).35

CDC aims to be a leader in promoting responsible and sustainableinitiatives in the businesses backed by its fund managers. In 2009,CDC commissioned guidance material to help its fund managers onboth climate change and issues relating to gender. The updated toolkitwill provide fund managers with an improved set of tools and frameworksto address challenges at all stages of the investment process.

Decision tree to assess climate change risk

Does the organisationhave significantemissions?

Low climate riskClimate change impactsare low risk for thisinvestment

Medium climate riskEnsure appropriate riskmonitoring in place, withinterim assessment

High climate riskDetailed assessment tounderstand mitigating actionsand management risk

Are the organisation’soperations,markets or supplychains based in a locationparticularly vulnerable toclimate change?

Will mitigating activitiesrequire substantialinvestment (financial ormanagerial), upfront orover a long period of time?

Is high value at stake if thewrong decision is made?

Yes

Yes

Yes

Yes

No

No

No Yes

No

No

Is there an immediatethreat based upon currentclimate changeconventions?

Could climate changesignificantly impactbusiness value for thisorganisation/project?

High regulatory riskAdditional reportingrequirements in line withIFC recommendations

Chapter 5 – Initiatives taken in 2009 53

Carbon creditsCarbon markets may provide potentialsavings for companies whose productscan result in greenhouse gas reductions.Under the Clean DevelopmentMechanism (CDM), countries can meetemissions reductions targets by tradingcredits. These credits are called CertifiedEmissions Reductions (CERs).

The guidance materialThe material produced for CDC by Forumfor the Future provides five tools to enablethe risks of greenhouse gas emissions(GHG) to be determined, monitored andeffectively reported. By following analysesof this type, fund managers will be able to assess and implement suitablereduction targets.

Tool One: Questions for fund managers toask of investee companies – This isdesigned to help fund managers considerthe risks and opportunities that mayimpact on a particular company as aresult of climate change. It also considerswhether a company should report toinvestors on the nature of applicableclimate change risks.

Tool Two: Monitoring and reporting – This provides an illustration of how a fundmanager can report the risks of climatechange to CDC. It also suggests furthertools a fund manager can use to calculatea company’s emissions in tonnes ofcarbon per year. Above 100,000 tonnescarbon dioxide equivalent is to beregarded as high and should be closelymonitored. CDC recognises the value ofthe Carbon Disclosure Project (CDP)reporting standards in conjunction withInternational Standards Organisation (ISO)14064/5 series for assessing tonnes ofcarbon produced per year.

Tool Three: Sector risks and opportunities– Whilst all sectors are at risk from climate change, some sectors are morevulnerable than others. Moreover, differentopportunities for business developmentexist in different industry sectors. This tooldiscusses and categorises each industrysector by the type of dangers andopportunities arising in each.

Tool 4: Assessing location risk andopportunity – Similarly to industry groups,different regions and countries will also be affected by climate change in differentways. This tool guides a fund manager inthinking through the potential impacts ofgeography on both the company as wellas its supply chain.

Tool 5: Creating opportunities through the carbon market – This tool attempts to demystify the carbon market andpresent fund managers with an idea ofhow the carbon market works and how to seek funding.

The guidance document produced forCDC aims to raise relevant issues relatedto climate change and advise on how theinvestment industry should react. The fulltext is available on CDC’s website.

Next stepsIn 2010, CDC will work with its fundmanagers and assess which portfoliocompanies are likely to be those producingmore than 100,000 tonnes in carbonequivalent emissions per annum. Havingidentified high risk investments, CDC willhelp fund managers begin to reducecarbon emissions in portfolio companies.

CDC will also increase awareness of newbusiness opportunities that might resultfrom climate change and assist fundmanagers where possible with opportunitiespresented by the carbon market.

Dalmia Cement, IndiaEnergy efficiency deliversemissions and cost savingsfor Dalmia Cement, India

India is the second largest producer of cement in the world (after China).Cement production is an energy intensiveprocess, contributing 5% to total globalgreenhouse gas emissions. The cementsector in China and India is growingrapidly and greenhouse gas emissionsfrom the sector are predicted to rise.

Dalmia Cement is a leading cementproducer in South India, with a currentcapacity of 6.5 million tonnes of cementper year. In order to drive down emissionsfrom its operations Dalmia has worked toimprove the energy efficiency of itsproduction processes:

• In 2009, their Dalmiapuram unit hasbecome self reliant in power, with 25%of the energy (16.5 MW) supplied by awind farm;

• Across their operations Dalmia hasreduced power consumption per tonne of cement;

• Increasing the percentage of fly ashused in manufacturing decreaseslimestone calcinations, so reducingprocess emissions.

These initiatives have led to lower costs,whilst making Dalmia one of the cleanestcement producers in India, whenmeasured by emissions per tonne ofproduction. Dalmia was the recipient ofthe Greentech Environmental ExcellenceAward in 2008 in recognition of theseachievements.

Coal mining is a heavy carbon emitter Songas – a CDC-backed gas powerstation in Tanzania

Electricity transmission


Gender equality

The need for changeCDC recognises that most of the poorestpeople in the world are women, in partbecause of the gender discrimination theyface. Women in developing countries aredisproportionately under-presented informal employment. When employed,women often get paid less for the samejobs compared to men. Frequently,women’s wages go directly to a husbandor father.

Available data shows an increasingfeminisation of poverty.36 Women earn one third less than men with the averagewage gap in 2008 being 17%. Eight out often women workers are considered to bein vulnerable employment in sub-SaharanAfrica and South Asia.37

A few country specific examples canfurther illustrate some of the difficultieswomen face. In South Africa, women facemajor barriers in accessing finance – aftertwo years of operation, only 5% of clientsof a black economic empowerment equity

fund of a major bank in South Africa werewomen. In Uganda, women control only 9% of the available credit, declining to 1% in rural areas. In Bangladesh, womenremain marginalised in the formal bankingsector – their share of the formal creditmarket is a meagre 1.8%.

DFI collaboration in commissioning of gender studyIt is recognised that best practiceguidelines on gender issues in theemerging markets are underdeveloped.This presented CDC with an opportunityto gain a clearer understanding of genderissues across CDC’s portfolio and also toact as an industry leader in providing bestpractice guidelines to direct investors andfund managers. CDC therefore decided toconduct a gender study jointly with otherDevelopment Finance Institutions (DFIs) to establish practical guidelines to informinvestors in the emerging markets. A parallel objective was to establish a practical tool to inform portfoliocompanies of measures that could betaken to improve their gender as well as business performance.

FMO (the Dutch DFI), the InternationalFinance Corporation (IFC), Norfund (theNorwegian DFI) and CDC jointlycommissioned the study and awarded the contract to a gender specialistconsultancy firm, Gender at Work. The study involved a large number ofinterviews with fund managers in the DFIs’ respective portfolios as well as withportfolio companies in which the DFIswere invested. The end result comprised a set of best practice guidelines andpolicies that portfolio companies canimplement in the workplace and in theirsupply chains.

Gender study key findingsNo one gender equality policy blueprintwill fit all companies and projects. Thesize of the company and the sector inwhich it operates will determine to a largeextent what kinds of gender equalityconsiderations would be applicable.

Local cultural contexts and practices andnational legislative frameworks showsignificant differences. For example, in Indonesia, women have traditionallydominated the small informal businesssector. In Tanzania, clerical oradministrative positions are more typical.This shapes what gender equalityconsiderations can be easily supportedand promoted and what issues will beharder to tackle. While women areemployed across a wide range ofcompanies and sectors only very few of these have an explicit gender policyand do not gather any gender related data or information beyond the number of women and men employed.

The business case for gender equalityEmpirical studies have demonstrated thatgender equality and equal opportunitymake sound economic sense. The recentGlobal Reporting Initiative/IFC reportshows that many investors believe thatwomen’s empowerment is a keycharacteristic of well-managed, forward-thinking companies that are capable ofcreating sustainable shareholder valueover the long term.38

In addition, a positive correlation appearsto exist between gender equality practicesand company performance. There isevidence that having women in executivepositions and on the board can indeed

Initiatives taken in 2009 continued

“We take another steptowards globalising socialprogress when we championgender equality as a matter of rights and social justice, as well as efficiency and goodbusiness sense.”

Juan Somavía, International LabourOrganization (ILO) Director-General

Governance Workplace Supply chain Social andEnvironmental ImpactAssessment

MaximumGender equality iscompany KeyPerformance Indicator

Recruitment of womenfor non-traditional jobs

Company outsources towomen’s enterprises(>30% women owned)

Company hires outsidegender risk assessmentspecialist

MediumAppointed genderequality representative

Recruitment panelsinclude men and women

Procurement policies andprocedures are gender-sensitive

Company identifies,avoids, reduces andmitigates gender risks

Minimum Company obeys relevantnational laws

Company obeys relevantnational laws



UnsatisfactoryNo company position ongender equality policiesand procedures

Violation of nationallegislation or the ILO corelabour standards

Violation of nationallegislation or the ILO corelabour standards

No identification ofgender related risks

Detrimental

Company violatesnational legislation, withimpact on femaleworkforce

Forced overtime, sexualcoercion, physical abuseof women

Forced overtime, sexualcoercion, physical abuseof women

Encouragement of sexworkers bystaff/contractors

To be excludedRepressive political,social or cultural normstowards women

Forced female labour;widespread sexualcoercion

Forced female labour;widespread sexualcoercion

Encouragement of tradein sex workers by staff/contractors

Gender equality considerations in projects and portfolio companies (condensed example)

Chapter 5 – Initiatives taken in 2009 55

contribute to stronger financialperformance and that the better a company is at promoting women, the better it tends to rank in terms of profitability.39

Complete gender equality in theworkplace is an ideal that is difficult to attain in most industries in emergingmarkets. Microfinance, for instance,specifically targets female run smallbusinesses. Heavy industry by contrasttypically employs a largely male workforceand it is unrealistic to imagine that thissituation can or should change. However,it remains possible to reach genderpositive outcomes in which women canobtain greater opportunities on corporateboards and across a company’s supplychain and operations.

Implications for CDC and next stepsAs a result of the study and its findingsCDC identified several opportunities toimprove gender positive outcomes in itsportfolio. CDC’s revised Toolkit for FundManagers will contain a section withgender policy guidelines for portfoliocompanies across their supply chains,workplace environments and corporate governance structures.

This comprehensive set of sound andeasily implementable principles and toolscovers matters such as board diversityand gender equality in the workplace,gender-responsive social andenvironmental sustainability policies. It also illustrates how to ensure broadgender inclusive supply chains therebyraising competition and ultimatelyrewarding female entrepreneurs andportfolio companies alike.

Fund manager training sessions will buildon the Toolkit and include modules ongender positive outcomes and ways inwhich such opportunities and challengescan be addressed. The training willthereby complement and build a morepractical understanding of ways in whichfund managers can capture genderrelated opportunities in their companies.

Lastly, CDC maintains dialogue with itsfund managers to identify where ESGtraining sessions would be valuable.Gender risks and opportunities will nowbe included in this assessment includingreputational risks, risks related toattracting and retaining talent, risksrelated to innovation and the impact oftheir investments in communities. This will inform and direct CDC’s trainingefforts toward those fund managers andportfolio companies where it can makethe greatest difference.

“Gender equality exists whenboth women and men areable to share equally in thedistribution of power andinfluence; have equalopportunities, rights andobligations in the public andprivate spheres, including interms of work or income-generation; have equalaccess to quality educationand capacity-buildingopportunities; have equalpossibility to develop their fullpotential; have equal accessto resources and serviceswithin families, communitiesand society at large; and aretreated equally in laws andpolicies. It does not meanthat women and men are the same, but that their rights, responsibilities andopportunities do not dependon their sex.”

UNDP Gender Guidance for National Aids Responses40

Female workers in a Ghanaian SMEFemale and male workers in a textile manufacturing business

The new Toolkit makes a number ofupdates and improvements to itspredecessor. In particular these include:

• the business case for ESG includingcost savings, effective brandmanagement and gaining access tonew markets in more detail andillustrating this with case studies from CDC’s portfolio;

• the business case for ESG includingrisk management, cost savings, brandenhancement and access to newmarkets;

• elements of good corporategovernance;

• more extensive guidance on goodcorporate governance and ESGmanagement systems for fundmanagers as well as for portfoliocompanies;

• more detailed due diligence questionsthat can be asked for each ESG area;

• more detailed definitions of risk ratingsfor each area of ESG and how theseshould be awarded;

• guidance on appropriate monitoringand reporting;

• sector specific due diligence check-listsfor fund managers that invest in highrisk sectors including agribusiness,energy and utilities, infrastructure,industrials and mining;

• brief guidance on ESG matters fordifferent types of fund including debtfunds, small and medium sizedenterprises (SMEs) funds andmicrofinance;

• guidance on relevant international ESGstandards and conventions and mapsshowing where they do not apply. This is intended to increase awarenessof the risks in such countries; and

• sections with guidance on climatechange related matters and gender.This material builds upon the results of CDC’s Climate Change and GenderStudies, previously discussed in this chapter.

The document also gives guidance to the international conventions of mostrelevance to fund managers, including the IFC performance standards, ILOconventions and corporate governancestandards.

The full Toolkit will be placed on CDC’swebsite and CDC will be following aprogramme of educating fund managersin 2010. This is a good example of thevalue CDC can add to the investmentprocess and to its fund managers.

Initiatives taken in 2009 continued

Updated CDC Toolkit for fund managers

In 2009, CDC commissioned theconsulting firm Rosencrantz & Co toupdate its Toolkit for fund managers. The document builds upon CDC’sprevious Toolkit and advises fundmanagers of how sound ESG policies canadd value to their investments. Theseimprovements can be realised in anumber of forms, not least cost savings,product innovation, effective brandmanagement, new market access as well as how best to manage ESG risks.

The Toolkit takes fund managers throughhow ESG is best addressed at all stagesof the investment process. It discusseshow to assess an investment forenvironmental risk, dangers relating tolabour rights and health and safety as wellas governance risks. The Toolkit goes onto examine how to produce an action planfor ESG improvements and illustrates howbest to report for investors such as CDC.


CDC’s updated Toolkit for fund managers: ESG management systems for private equity fund managers

Initial screening

Duediligence

Investmentdecision

Investment agreement

Investmentmonitoring Exit

> ESG policies> International

standards

> Investment proposition in line with ESG policies, guidelines and exclusions?> See CDC’s Investment Code on ESG Initial screening

> Assess new investment from ESG perspectives > ESG risk ratings and quality of management systems

> Risk ratings> Management

systemsDue diligence

> Investment paper to address key ESG matters > Action plan for improvements with timeline and cost estimates

Appendices with specific guidance

> Standards – International reference standards and conventions on ESG

> Templates – Reporting templates and examples > Business case – the business case for ESG > Climate Change – Risks and opportunities (carbon finance,

etc.) should be carefully considered> Gender – Non-discrimination and sound maternity policies are

a win-win for businesses and women

> Investment paper> Action planInvestment decision

> Agree on ESG action plan with investee management> Include ESG clauses in legal agreements

> Clauses forinvestmentagreement

Investment agreement

> Check compliance and monitor progress> Report to Board and investors > Publicise sound ESG management through annual reports and website

> Monitoring> ReportingInvestment monitoring

> Consider ESG developments under new ownership > Review investment strategy in light of changing regulations, markets,

technology

> Exit guidance

Exit

> Industry sectors – Guidance for high ESG risks > SMEs – For smaller companies, costly ESG improvements

have to be carefully prioritised > Debt – Lenders can screen borrowers on ESG criteria. Equator

Principles reference standard > Microfinance – Apply relevant exclusion list and monitor

women borrowers, repayments, etc.

Tools

6External perspectives on CDC’s systems,processes and performance are of greatimportance to CDC. Independent partiesare a source of objectivity, validation andconstructive criticism. In 2009, CDCcommitted itself for the first time to an external audit of its processes forimplementing the Investment Code.Furthermore, seven out of the 20 fundevaluations in 2009 were undertaken by an external third party.

This chapter presents independentlywritten statements from these twoexternal parties and also discusses acomplementary approach to measuringthe development impact of CDC’sinvestments.

External perspectivesChapter


Independent evaluations

The added value of an externalperspective

In 2009, seven of the 20 development impact evaluations were outsourced to external consultants in order to enhance the evaluation process. Following acompetitive tender process, CDC choseTriple Value Strategy Consulting (TripleValue) for this process. The firm isexperienced in performing evaluations indeveloping markets and works closelywith Professor Ethan Kapstein of INSEAD.

The rationale for using independentexternal evaluators was to lend greaterobjectivity and transparency to theevaluation process. This is an approach in line with international best practiceamongst companies seeking tounderstand the development effects of investment in developing economies. The IFC’s Independent Evaluation Groupsuggests that approximately half of thetotal number of evaluations ofdevelopment impact should beoutsourced to an external evaluator.Following this precedent, from 2010,approximately half of CDC’s evaluationswill be outsourced.

In order that the evaluations wereperformed in a manner consistent withCDC’s own evaluations, the external

evaluator applied CDC’s own methodologyand template to the evaluations whichthey performed. They applied their owneconometric input/output model on fourof CDC’s funds to understand better thewider and less direct effects of CDC’sinvestments. An analysis of this processand the light it throws on the developmentimpact of CDC’s investments is discussedlater in this section.

Triple Value has also contributed to thisreport by suggesting enhancements toCDC’s monitoring and evaluation process.Their perspective is presented later in this chapter.

The challenge of measuringdevelopment impact

As an intermediated investor, CDC has tobe realistic about what data it can gatherannually from underlying portfoliocompanies. Each year, CDC requests itsfund managers to provide economic datafor each portfolio company and an ESGreport that explores the environmental,social and governance risks particular tothat company. In addition, CDC expectsserious incidents such as a fatality at a portfolio company, major fraud or an event with severe environmentalconsequences to be reported to CDC as soon as they are discovered. This ispart of CDC’s monitoring as illustrated by the diagram below.

Fund evaluations, however, capture the development effects of CDC’sinvestments over a longer period of time. Since CDC’s prime role is to drive development, measurement of longer term development impact iscrucial. Moreover, evaluations of this sortare better able to allow comparisons intothe impact of CDC’s capital across a spectrum of sectors and regions.Evaluations can also impact upon howCDC thinks about its strategy and futurein terms of markets, risks, returns anddevelopment impact.

Evaluations therefore serve as the linkbetween the monitoring data that iscollected annually and more qualitativejudgements about the longer term impact of CDC’s investment.

Moreover, the understanding which CDCseeks from its evaluations includes theextent to which CDC’s capital contributedto poverty alleviation and macro-economicgrowth. An understanding of this sortrequires clearer focus upon the nature of the fund than is possible from the data provided by typical annualmonitoring reports.

Key objectives for CDC

• Appraise whether CDC’s investments are good for development• Use information collected as a management tool to improve

investment and business practices over time

Inputs

• CDC invests capital with fund managers in poor countries

• Third party capital

Outputs

• CDC’s fund managersinvest in commerciallyviable and responsiblymanaged companies

Outcomes

• Profitable and growingbusinesses

• Jobs and tax revenues• Increased availability

of products and services• Increased availability

of commercial finance in poor countries

Impact

• Poverty alleviation• Economic growth• Efficient capital markets

in poor countries

CDC’s monitoring and evaluation system captures development effects over time

Assessments: Prior to investment

Monitoring: Quarterly, biannual and/or annual reviews of key performance indicators: quantitative and qualitative

Evaluations: Verification of existing performance information and contextual considerations by CDC and external consultants

In 2009, CDC employed a specialist consultancy firm to performseven of the 20 fund development impact evaluations and to provide anexternal perspective on CDC’s evaluation process. The value addedby external consultants and how this has complemented CDC’s ownmonitoring and evaluation work is discussed in the pages that follow.

Chapter 6: External perspectives

Chapter 6 – External perspectives 59

Comparison of evaluation ratings: CDC compared to Triple Value (Development outcome – % distribution)

80

60

40

20

0Excellent Successful Satisfactory Below Unsatisfactory Poor

expectations

23%

57%

29%

62%

15%

Triple Value (7 evaluations) CDC (13 evaluations)

An external party, Triple Value hasevaluated the performance of seven fundsand also added a new component: anassessment of the socio-economic impactof a fund.

Triple Value: Our insights into CDC’sevaluation process

Triple Value’s work for CDCIn 2009, Triple Value evaluated theperformance of seven funds on behalf ofCDC. Four evaluations concerned mid-term evaluations of African funds whilethree evaluations were final evaluations ofAsian funds. As described earlier in thisreport, our evaluation approach consistedof a combination of CDC’s evaluationmethodology and Triple Value’s Socio-Economic Impact Assessment (SEIA) model.

Each fund evaluation was based on ananalysis of relevant information anddocuments and a judgement of a fund’sperformance. Subsequently, interviewswere conducted with people involved inthe fund (including CDC staff, fundmanagers and representatives of portfoliocompanies). In addition, site visits to localfund management offices and portfoliocompanies were organised.

In total, Triple Value visited eight fundmanagement offices and 14 portfoliocompanies in six African countries. As

almost all Asian investments had beenexited a long time ago, no visits weremade in Asia. These evaluations werecompleted based on desk research and in-depth interviews with fundmanagement and CDC staff.

The value add of an external viewThe purpose of an external evaluationexercise is threefold.

Firstly, it provides an external judgement ofa fund’s performance and thus enhancesthe independence of the evaluation.Secondly, it tests the effectiveness androbustness of CDC’s evaluationmethodology. And thirdly, externalevaluations enable CDC to compare theresults with those of internally performedevaluations and judges whether thesesuffer from internal bias.

Main findingsOut of the seven funds evaluated by TripleValue, six were considered to have asatisfactory or better development outcome.And CDC’s effectiveness was rated atleast satisfactory for all seven funds.

As the ratings of the 13 internalevaluations show very similar ratios (85%of funds have a satisfactory or betterdevelopment outcome and 100% rateCDC’s effectiveness as more thansatisfactory), this suggests that CDC’sevaluation methodology serves as aframework to assess a fund’sperformance in an objective way.

While working with CDC’s methodology,we found that it is a thorough approach toperform an evaluation. Naturally, we alsocame across some aspects where wethink that the methodology needs to bemodified or sharpened and CDC iscurrently working on this.

ConclusionWe think that external evaluationscontribute to a transparent andaccountable fund evaluation process. By producing external evaluations side by side with those produced internally, a strong combination is built based on in-depth knowledge of the fund’s detailsand an outside perspective on fundperformance and CDC investmentdecisions. The assessment of the widersocio-economic impact of a fund providesinformation on the development impact ofsupply chains that was not previouslyavailable, although it does not include allaspects of development.

Compared to CDC staff who live with thefunds every day, for external evaluators itcan be a challenge to acquire sufficientknowledge of a fund’s details in order toform a robust opinion on its performance.However, by working closely with CDCstaff and fund managers this issue issubstantially alleviated. Moreover, startingwith a completely fresh mind has theadvantage that new insights can beidentified. Evaluating CDC’s owneffectiveness is naturally more objectivelydone by an outsider.

Given the different character anddynamics of internal and externalevaluations and the strong combinationthey make towards an overall evaluationapproach, we agree with CDC thatoutsourcing approximately half of its fundevaluations contributes to a strongapproach.

An external perspective onmeasurement of CDC’sdevelopment impact


Other approaches toassessing and quantifyingdevelopment impactThe measurement of development impactis an evolving science. CDC strives to bean early adopter of new techniques. Oneapproach that was tried for the first time in 2009 is the Socio-Economic ImpactAssessment (SEIA) model.

CDC’s assessment of developmentimpact

CDC’s evaluation methodology tends togive rather qualitative outputs particularlyin relation to the ‘private sectordevelopment’ and ‘added value’dimensions of the assessment. CDC is therefore keen to explore morequantitative approaches. Even moreimportant is to get a better understandingof the indirect impact of CDC’sinvestments and trickle down effects into the rest of the economy.

An overview of the SEIA model

The SEIA model is designed to estimatethe full development impact of investmentin a particular company on the entireeconomy. The model does this byestimating the effects outside thecompany itself in terms of number of jobscreated, salaries paid and amount oftaxes paid elsewhere in the economy as a result of the investment in the investeecompany. The main outputs of the modelare estimates of:

• direct, indirect and (household) inducedeconomic activity (economic multipliers);

• direct, indirect and induced incomes orvalue added generated (taxes, salaries);and

• direct, indirect and induced jobs created (job multipliers).

Direct, indirect and induced impact Direct impact refers to the profits, taxesand jobs created directly in the portfoliocompanies. Indirect impact is thebackward link to profits, taxes and jobsgenerated by the portfolio companies’suppliers. It is important to note that this is only backward linking. Forward linkagesto wholesale and retail trade sectors arenot captured by this approach, but maybe significant. Induced impact includes the profits, taxes and jobs created when employees go out and spend theirincreased incomes on consumer goodsand services.

The four steps of applying the SEIA modelThe SEIA model builds on input-outputtables (I/O tables). These tablessummarise financial transfers of an entirecountry’s economy between stakeholdersthrough which inputs (consumption) areconverted into outputs (incomes). The I/Otables are constructed for each country or region and are based on data in theinternational Global Trade Analysis Project (GTAP) database that covers 57 economic sectors.

The second step after the I/O tables havebeen constructed is to map the turnoverof all the portfolio companies onto theappropriate economic sector. Doing soillustrates how the company turnover isre-spent throughout the economy. Eachround of re-spending delivers incomes to households (in the form of salaries),companies (in the form of profits) andgovernment (in the form of taxes).

The third step is to translate theseeconomic outputs into number of jobscreated in the economy by usingemployment data from the variouscountries or regions. For reasons ofcomparison, all employment results arefinally scaled back to represent onlyformal employment. This is a veryconservative approach, given that mostemployment in developing countries is in the informal sector.

Finally, the turnover re-spending, taxrevenue figures and number of jobscreated are aggregated from the differentregions to estimate the overall impact ofthe investment on the larger economy.

CDC funds and the SEIA model

Fund One illustrated in the below table is a large pan-African fund managed by anexperienced fund manager. The SEIAmodel indicates that for each US$1 insalaries, profits and taxes the economyderives an additional US$2.6 (the totalvalue added multiplier). Also, for eachemployee in this fund’s portfoliocompanies an additional 5.3 jobs aresupported in the economy as a whole.

The SEIA model has been applied to threeother CDC fund evaluations in 2009. Thisprovides an opportunity for comparison of development impact and multipliersacross different types of funds,geographies and sectors:

Fund Two is another relatively large pan-African fund with an experiencedfund manager. It concentrates on largercompanies in low-income countriesthrough which broad-based economicdevelopment has been achieved.

Fund Three is a smaller South Asian fundwith a very experienced fund manager. It is almost entirely focused on lowincome countries and close to half theportfolio companies are small andmedium sized enterprises (SMEs).

Fund Four is a very small African SMEfund with a very large number ofcompanies managed by an experiencedfund manager.

Type of impact Household income Profits and savings Tax revenues Total value added Formal employment

Direct US$70m US$21m US$49m US$140m 2,971

Indirect US$58m US$19m US$34m US$111m 7,823

Induced US$57m US$20m US$33m US$110m 5,507

Total US$185m US$60m US$116m US$361m 15,851

Multiplier 2.6 2.9 2.4 2.6 5.3

Example: Development impact measures of a fund using the SEIA model

External perspectives continued


Comparison of results

It is important to bear in mind that a smallsample of funds like the one used in thisexample can give only indicative results.Nevertheless a discussion and comparisonof the results can be useful to generatehypotheses and questions for furtherinvestigation.

The graph below shows the multipliers foreach of the four funds under four impactmeasures – household income, profitsand savings, tax revenues and formalemployment. Immediately apparent arethe differences in multipliers for the fourfunds across household income, profitsand jobs. The tax revenue multipliersdisplay more consistency across the four funds.

Household income

Fund Three has the lowest multiplier effectand is concentrated in the telecoms andcapital goods sectors in South Asia. FundOne has the highest multiplier of the fourfunds and contrasts greatly with FundThree in that it is mostly invested in themining, financial and energy sectors in Africa. One explanation for thisdifference could be the rural versus urbansetting of the various sectors. Mining andenergy investments are generally locatedin more rural settings where other jobopportunities are scarce and most of theincome generated will be spent locally.This is likely to give rise to a strongmultiplier while the telecoms and capitalgoods sectors are mostly located in urbanareas where there might be more joboptions available and possibly also alower multiplier.

Profits and savings

While Fund Three comes out with thelowest multiplier also on this dimensionFund Two exhibits the highest multiplier.Similar to Fund One it is an African fund,but it differs in that it is heavily invested inthe financial services, metals and energysectors. A partial explanation for thisdifference might stem from how the modeltreats forward linkages. The telecoms andcapital goods sectors in Fund Three havea stronger forward linkage to wholesaleand retail trades than the sectorsrepresented by Fund One. The model,however, does not capture these effectswhich may result in a lower multiplier inthis example.

Formal employment and comparisonswith informal jobs

Fund One stands out from the rest on thisdimension. The three other funds arecomparable in performance. However,there is no significant difference betweenFund One and the other funds In terms of sector focus, company size or size of funds.

The key difference between Fund Oneand the other funds is in its strongerpresence in middle-income countries.This might be an important explanatoryfactor as the multiplier effects might behigher in these environments because of stronger linkages between markets and sectors.

Overall conclusions

The results in the table below are onlyindicative and involve many assumptionsas discussed on the previous page. Theydo, however, provide an insight into theless visible economic effects of the fundon the wider economy.

Although the results cannot becomprehensively benchmarked againstother funds, this may be possible in futureyears as this approach is furtherdeveloped and applied to more funds in CDC’s portfolio. It might at that point be possible to draw more generalconclusions to inform CDC’s thinking on how it can best support developmentin emerging markets.

Lastly, the SEIA model is but oneapproach to measuring developmentimpact. There are other approaches thatcould be equally or more insightful. CDCremains open to learning about andexploring any such options.

2.21.91.5

2.62.2

3.1

1.5

2.9 2.62.3 2.02.4 2.32.6 2.6

5.3

Household income Profits and savings Tax revenues Formal employment

Fund Two Fund Three Fund FourFund One

Development impact of four CDC funds using the SEIA model, illustrating multiplier effect



maintenance of local roads. Through suchinitiatives the company seeks to maintainits image and increase awareness of itsproducts.

Brookside’s management systems havegained the internationally-recognised ISO9000 certification and the company hasworked broadly with Kenyan authorities to establish new environmental standardsfor the national dairy industry. It has alsoenabled an international expansion.Brookside now has fully-fledgedoperations in Tanzania and Uganda andexports as far afield as the Middle East.

Brookside’s success and proven ability toexpand has prompted Aureos to make afurther investment of more than US$18mthrough its current Africa Fund. Thisadditional capital has helped Brookside to acquire Spinknit dairy and thus createKenya’s largest dairy company in terms of milk intake volume and profitability.Aureos’ continuing belief in Brookside is testament to how the company hascontinued to grow and also implementever more sophisticated ESG policies.

Key data

Investment:1 US$1.2mInvestment period: 1998-2006Sector: Agribusiness – AgroprocessingFund manager: AureosEmployment:2 2,500IRR: 21%

1 US$1.2m was invested by Aureos. CDC’s investment inAureos Acacia Fund was US$5.1m; total fund size wasUS$19.1m.

2 2009.

hours of milking. As a result, up to150,000 Kenyans are now included in Brookside’s value chain as farmers,suppliers, transporters, retailers or distributors.

Secondly, Brookside’s distributionnetwork shows similar innovation. Thecompany includes local kiosks to sell milkin addition to traditional retail outlets suchas supermarkets, mini markets andgeneral stores. Kiosks are mostly locatedin remote regions or areas previouslyunderserved by traditional retailers. For example, many of the 18,000 kiosksthroughout Nairobi are located within the city’s slums.

Thirdly, Brookside has been able to trainfarmers in dairy methodology andincrease their ability to supportthemselves. The company has putfarmers in touch with local andinternational dairy experts to facilitate thediffusion of new practices and techniquesinto their supply base, allowing for greaterefficiency and larger milk yields. Inaddition, Brookside has provided accessto credit facilities that have enabledfarmers to buy new equipment as well as semen to improve the genetic base of their livestock. To complement this,Brookside has sponsored a breedersshow and sale which is now one of themajor dates on Kenya’s agriculturalcalendar.

Brookside Dairy has also demonstratedconsiderable leadership through itsEnvironment, Social and Governance(ESG) initiatives. The company hassuccessfully initiated local tree-plantingprogrammes and improved wastewatermanagement within local communities. It has also invested in an educationalcampaign focused on nutrition and thebenefits of milk for a balanced diet. In addition, Brookside has funded theconstruction of schools and the

Brookside Dairy, KenyaIntegration of poorcommunities through aninnovative sourcing anddistribution network

Kenya is a low income East African nationwhose GDP per capita was aroundUS$810 in 2008. 20% of Kenya’spopulation live below the US$1.25 a daypoverty line and in areas with little accessto basic services and supplies, somethingoften taken for granted in more developedeconomies. The majority of Kenyans live in rural areas that are often isolated andhave little chance to sell their produce tonational suppliers. Brookside Dairy,through its sourcing and distributionnetwork, has made a substantialcontribution to addressing both of theseproblems in Kenya’s dairy industry.

Aureos first invested US$1.2m inBrookside in 1998 through the AcaciaFund to expand Brookside’s capacity and help the business diversify into theproduction of dairy products such asyoghurt and butter. The investment wassuccessful and yielded a 21% InternalRate of Return (IRR) to the fund manager.

Amongst Brookside’s various contributions to the Kenyan dairy sector,three factors in particular stand out. Firstand most impressive has been Brookside’sability to integrate rural economies into itssourcing and supply network. In 2004,Brookside’s milk was sourced fromapproximately 65,000 farmers, most ofwhom were neither commercial farmersnor members of farming co-operatives.The company’s catchment area in Kenyanow ranges across the country from theEastern Province to the Central Provinceand the Rift Valley. Company policyensures that all milk collected is tested forquality and reaches the dairy within three

Part of the manufacturing process Livestock parade at Brookside Dairy


East Africa Gold Mines(EAGM), TanzaniaEstablishing the Tanzaniangold industry

Today, Tanzania is Africa’s third largestgold producer. This representsspectacular growth since 1999 whenTanzania had only a minimal amount ofgold production. In 2007 gold exportstotalled US$763m and the gold miningindustry has become recognised as ofimmense value to the Tanzaniangovernment and to local regions. EAGMwas a pioneering mine in the North Mararegion of the country which contributedsignificantly to the development of theTanzanian mining industry.

African Lion, CDC’s fund manager,invested in EAGM in 1999, just as thecountry was opening up to foreign miners.The Lion team was instrumental inestablishing EAGM’s operations. TheNorth Mara mine was developedsubstantially between 1999 and 2003 with discoveries made of as much as 2.1 million ounces of gold reserves. Thenumber employed at the mine increasedby 385 over the period. To date, the minehas generated an estimated US$29m intaxes and royalties for the Tanzaniangovernment.

To complement the mine’s economicsuccesses, EAGM’s Managing DirectorGeoff Stewart was rigorous inimplementing best practice in all areas of ESG at the company. In addition toresolving a tenure dispute with localartisanal miners, EAGM assisted with the

construction of local schools, hospitalsand infrastructure. Stewart also took thelead role in managing a resettlementprogramme which was necessary for thesite’s future development. Stewart’shandling of the social impact of EAGM’soperations was universally considered tobe of a high standard. In recognition of hisefforts, Stewart was made an honorarylocal chieftain by the community.

The future of the mining site remainspositive, with gold resources being asgreat as four million ounces. If productionat the site increases, the mining activitywill generate further income for theTanzanian government. Furthermore, with its strong record of successful ESGmanagement, EAGM has set abenchmark for responsible foreign-backed investment in Tanzanian natural resources.

Key data

Investment:1 US$5.3mInvestment period: 1999-2003Sector: Gold miningFund manager: African LionEmployment:2 400Employment growth:3 385Turnover growth:2 >US$200mAmount of proven resource: 4 millionounces goldCapital raised: US$110mTaxes to present: US$29m

1 US$5.3m was invested by African Lion, CDC’s investment in African Lion is US$9m; total fund size is US$33.8m.

2 2003.3 1999-2003.

Site overview of EAGM The crushing facilities


Audit of CDC’s processesto implement its InvestmentCode on ESG

Background

Through its Investment Code, CDC promotesresponsible business practices with respectto the environment, social matters andgovernance (ESG) in its investments throughfinancial intermediaries in poor countries.CDC uses the Investment Code at allstages of its investment process to workwith fund managers in the application ofresponsible investment practices on ESG.

CDC uses an intermediated investmentmodel, investing in funds, primarily privateequity funds managed by third parties.The fund managers typically have localoffices in emerging markets, whereinvestments in local portfolio companiesare made. This approach to developmentfinance has a number of advantages:

• CDC’s investments in funds encouragesinvestment from third parties, oftencommercial institutional investors;

• CDC supports the emergence of newfund managers in emerging marketsand in this way promotes more effectivecapital markets and local capacitybuilding for responsible investment and responsible business practices;

• CDC benefits from local knowledge and experience in the identification and management of investmentopportunities; and

• CDC’s limited resources are leveragedand can impact a much higher numberof people than would be possible usinga direct investment model.

For the purpose of establishing processesto implement the Investment Code withfund managers and portfolio companies,the intermediated model poses certainsignificant challenges:

• we require our fund managers tooperate in line with an investment code,which is identical or is substantiallysimilar to CDC’s Investment Code. The fund managers are in turn generallyresponsible for ensuring that theirportfolio companies adhere toresponsible business principles andpractices. Through the intermediatedinvestment model, CDC is one stepremoved from portfolio companies andhas limited ability to control whathappens on an ongoing basis. CDCaccordingly is not in a position to checkcompliance with all standards atportfolio companies but relies on itsfund managers to do so; and

• CDC’s fund managers in turn may notalways be in a position to exercisecontrol or significant influence over theirportfolio companies.

It therefore follows that CDC’s process to implement the Investment Code musttake into account the different roles thateach agent plays in the intermediatedmodel. CDC’s role is to establish theInvestment Code and perform thorough due diligence checks to assess whetherpotential fund managers are committed to implementing the Investment Code.CDC also provides training and support to fund managers on how to implementsound ESG management systems andencourages them to work towardscontinuous improvements as set out in the Investment Code.

CDC aims to have a seat on the advisoryor governance boards of the funds inwhich it invests and be an activeparticipant, ensuring ESG receives seniorsupport as appropriate. CDC also carriesout monitoring and evaluation proceduresto gather information on theimplementation of the Investment Code.This can be fed into dialogue with fundmanagers on necessary improvements aswell as future funding decision making.The fund managers’ role is to adopt theInvestment Code and implement it in theirown investment activities. They have aresponsibility to educate the managementof portfolio companies about theInvestment Code and encourage them inturn to implement it. The fund managersalso commit to reporting procedures toCDC. Finally, where the fund manager hassignificant influence, the management ofportfolio companies themselves adopteither the Investment Code or analternative but substantially similar codeand are responsible for implementing ESGimprovements and managing ESG risks.CDC’s processes for implementing theInvestment Code have been put in placein this context to create effectivecommunication and management of rolesand responsibilities in this intermediatedinvestment model.

The process to implement theInvestment Code

CDC’s process for implementation of the Investment Code is embedded in the investment cycle.

• Due diligence on the ESGmanagement capability of fundmanagers in the context of the inherentESG risks of their investment strategies;


Exhibit 1: Implementation process for CDC’s investment code

Due diligence InvestmentInvestment monitoring and mid-point evaluations

Final evaluations

• Quality of fund manager’sESG management systems

• Risk level of sectors coveredby fund manager’s investmentstrategy

• If follow-up fund, ESGperformance of existingportfolio companies

• Investmentagreement withfund manager:CDC’s standardside letter or otherequivalentsatisfactory legalagreement

• Annual ESG reports• Mid-point evaluations• Case studies• Any serious issues involving

portfolio companies: loss oflife, material effect on theenvironment or materialbreach of law

• Final evaluationreport

Key information

• Post due diligence report: ESG manager

• Investment paper: Investment Committee (IC)followed by Board, ifappropriate

• If fund managerproposes a differentinvestmentagreement fromCDC’s standardSide Letter: ESGmanager and legal counsel toagree it is ofequivalent standard

• Monitoring reports:> ESG manager> IC

• Serious issues:> ESG manager and legal

counsel> Chief Operating Officer> Board

• Case studies:> ESG manager> Communications director

• Same procedureas for mid-pointevaluation reports

Sign-off

Portfolio directorInvestment team, ESG manager, ESG & Monitoring and Evaluation (M&E) advisor, legal counsel, finance team

ResponsibleSupport


• Investment, whereby CDC’s InvestmentCommittee and/or Board sign off thatthe investment is appropriate from anESG perspective, and the fundmanagers commit to applying theInvestment Code;

• Investment monitoring and mid-pointevaluations which create a cycle ofreporting, investigation and reviewthroughout CDC’s period of investmentto improve performance and encouragecompliance and corrective actions, aswell as inform new funding decisions to existing fund managers; and

• Final evaluations which allow alllessons to be captured and used toinform future funding decisions and toimprove performance and encouragecompliance and corrective actions.

Stage 1: Due diligence

As part of the due diligence work for allnew investments, CDC assesses theability and willingness of fund managersto implement responsible businesspractices in their portfolio companies. To demonstrate this, fund managers areexpected to have or to institute ESGmanagement systems as described in section 4 of the Investment Code (see Appendix 1).

CDC has an ESG Toolkit for FundManagers which is used by CDC’sinvestment teams during due diligence.This includes, for example questions toassess the ESG management systems of fund managers. If other DFIs are alsoinvesting with a fund manager, CDCcoordinates its due diligence on ESGmatters with them.

Where CDC already has an investmentrelationship with a fund manager, CDC’sdue diligence for investments in asuccessor fund is informed by how wellthe fund manager has implementedCDC’s Investment Code for existinginvestments. If the fund manager alreadyhas portfolio companies in high-risksectors, CDC’s due diligence includes a visit to a sample of these companies to assess how the fund manager’s ESGmanagement systems have worked inpractice. CDC’s ESG Manager supportsthe investment team on due diligence offund managers that plan to invest in highrisk sectors.

CDC produces a post-due diligencereport which identifies any shortcomingsin the fund manager’s ESG managementsystems and recommends improvements.

The ESG Manager signs off the relevantsections of the post-due diligence reportbefore this report is included in the Boardinvestment paper in the cases whereBoard approval is required. TheInvestment Committee signs-off on theBoard investment paper before this paperis transmitted for approval by the Board.

Stage 2: Investment

As part of the investment agreement orside letter with CDC, fund managers arerequired to commit to an investment codeidentical or substantially similar to CDC’sInvestment Code (see Appendix 1). Thisincludes a commitment to employmanagement systems which effectivelyidentify and address ESG risks in portfoliocompanies and to work with portfoliocompanies to manage such risks andbring about improvements in businesspractices. Fund managers are alsorequired to commit to reporting annually to CDC on ESG matters.

CDC may occasionally commit to a fundat a later stage than other DevelopmentFinance Institutions (DFIs) by which timethe fund may have developed its ownESG practices in accordance with therequirements of those DFIs. This may be acceptable provided that therequirements make explicit reference to:

• responsible investment practices of thefund managers and portfolio companies(in line with the Investment Code);

• improvements over time with targetsand time frames, with the IFC’sPerformance Standards and EHSGuidelines as benchmarks for suchimprovements for portfolio companiesin high-risk sectors;

and include:

• an exclusion list which covers the areaswhere CDC will not invest;

• an annual ESG reporting requirement in a format satisfactory to CDC; and

• a requirement to inform CDC as soon as possible about any instance involvingportfolio companies which result in loss of life, material effect on theenvironment or material breach of law.

If necessary, CDC’s investment team helpsfund managers establish and maintain ESGmanagement systems in line with thesectors that fund managers plan to investin. CDC pays special attention to supportfund managers planning to invest insectors with significant risks from an ESGperspective, particularly fund managersthat have not yet developed robust ESGmanagement systems.

Stage 3: Investment monitoring andmid-point evaluations

Monitoring of fund managers’implementation of the Investment Codeduring the investment period is principallythrough participation in fund advisory orgovernance boards and the annual ESGreports that fund managers prepare forCDC. Portfolio directors at CDC arerequired to compile and present bi-annualmonitoring reports on the fund managersfor whom they are responsible, whichinclude a section on ESG matters. Thesereports are discussed by the CDCinvestment team and ESG manager inCDC’s bi-annual monitoring meeting.

CDC provides a reporting template forannual ESG reports to fund managers,which requires inherent ESG risk ratingsand a quality assessment of ESGmanagement systems to be provided for each portfolio company in the fund, as well as any ESG issues, realisedimprovements and future targets. The portfolio director is responsible forreviewing and acting upon annual ESGreports, escalating issues if necessary. Forhigh risk investments, on-site verificationsby CDC will sometimes be necessary.

If there is an instance involving a portfoliocompany that results in loss of life,material effect on the environment, ormaterial breach of law, CDC expects to learn about this immediately from therelevant fund manager. This is a newrequirement in the Investment Code witheffect from 1 January 2009. CDC isworking with fund managers to ensurethat all serious incidents are reported. TheCDC portfolio director responsible for thatfund follows-up with the fund manager ascorrective actions are undertaken toensure that adequate measures are beingimplemented in a timely manner. The ESGManager is consulted, legal counsel issought and the COO, Chief ExecutiveOfficer (CEO) and the Board are informed.CDC follows-up with the fund manageruntil there are sufficient assurances thatthe situation has been dealt with in asatisfactory manner to minimise risks of recurrence.

CDC has the most influence with a fundmanager when raising a successor fund.This is typically just before the end of theinvestment period for their current fund,which is usually five years after firstclosing and approximately the halfwaypoint of the duration of a fund.

This is when CDC conducts a mid-pointevaluation. Some evaluations are carriedout by CDC staff and some areoutsourced to a third party consultant. Forevaluations conducted by CDC staff, theBoard’s Best Practice and DevelopmentCommittee (BPDC) oversees theindependence of evaluation conclusionsand performance ratings. The BPDC alsoreviews and challenges evaluationsconducted by the third party consultant.However, evaluation ratings remain theresponsibility of the third party consultantfor reporting purposes.

ESG performance is one of thedimensions in CDC’s evaluationframework. The objective is to take stockof how well a fund has performed on ESGmatters, identify any shortcomings andwork with the fund manager to bringabout improvements as appropriate forthe remainder of the duration of the fundas well as for successor funds.

The mid-point evaluation includes areview of the ESG management systemsof the fund manager, its internalresponsibilities, processes and controls


and any specialised external technicalsupport used by the fund manager toidentify and mitigate ESG risks and bringabout improvements.

Through site visits to a selection ofportfolio companies, the mid-pointevaluation also reviews how well fundmanagers’ ESG management systemshave worked in practice. Their duediligence and monitoring processesshould assess and if necessary improvethe ESG performance of portfoliocompanies. Site visits focus on high-risksectors and portfolio companies whereissues and/or significant improvementshave been identified.

The evaluation report requires adescription of ESG performance as seenby the evaluation team and a performancerating for ESG. This rating is based on asix-point scale ranging from ‘poor’ to‘excellent’ and takes into account theESG management systems of the fundmanager and the ESG performance of theunderlying portfolio companies. Reportsto CDC are reviewed by the investmentand ESG teams, interviews are carried out and site visits are undertaken.

The mid-point evaluation feeds into CDC’s due diligence work and informsinvestment decisions for investments in successor funds with these fundmanagers. It is also used in dialogue withfund managers about any issues identifiedor opportunities for improvements.

CDC’s monitoring work continues asdescribed after the mid-point evaluation.The monitoring for the remainder of theinvestment duration is informed by themid-point evaluation report as to whatimprovements may need to beundertaken during the remainder of thefund’s duration. Any follow-up actionsshould be noted in fund managers’ annualESG reports and in CDC’s bi-annualinternal monitoring reports.

Stage 4: Final evaluations

At the end of a fund’s life, typically 10 years after first closing, a finalevaluation is undertaken as to how thefund has performed as compared toexpectations and targets at the time ofCDC’s investment.

The findings from the mid-term evaluationand ESG matters reported through annualESG reports are followed-up in the finalevaluation. Improvements on ESG overthe investment period are noted in thefinal evaluation report, as well as anyissues that occurred and how the fundmanager and portfolio companyaddressed such issues, with particularattention to high-risk sectors. The fund asa whole is given a final evaluation ratingfor ESG performance, using the samecriteria and ratings scale as that used in the mid-point evaluation.

The findings from final evaluations, like the findings from mid-point evaluations,inform CDC’s due diligence andinvestment decision for follow-up funds.

ESG knowledge management

To support the Investment Codeimplementation processes and forreporting processes, CDC has establisheda knowledge management system. The key ESG information generated ateach stage of CDC’s process is enteredinto this system, including:

• annual ESG reports from fundmanagers;

• bi-annual monitoring reports prepared by CDC portfolio directors;

• case studies;• evaluation reports; and• instances involving portfolio companies

which result in loss of life, material effecton the environment, or material breachof law.

From these sources, aggregateinformation is compiled for CDC’sDevelopment Review. This information iscompiled for the portfolio as a whole, aswell as by region and major industry sector.

Lessons learned from the ESGperformance of CDC’s investments arealso used as inputs into CDC’s investmentstrategy. In setting investment strategyCDC considers the cumulative effects of its investments to minimise adverseeffects, maximise development impact and promote synergies acrossCDC’s portfolio.

Climate change

The Investment Code specifically commitsCDC to supporting the reduction ofgreenhouse gas (GHG) emissions41 in its investments. CDC’s role should beunderstood within the context of the 1994UN Convention on Climate Change andthe associated 2005 Kyoto Protocol. TheUN Framework Convention excludes thedeveloping countries where CDC investsfrom mandatory GHG reduction targets,but requires them to monitor and reporton GHG emissions and allows them to participate in international carbontrading schemes.

CDC is in the process of identifying majorrisks and opportunities associated withclimate change across different sectorsand geographies where its fund managersinvest. High risk companies will beidentified as CDC’s fund managers makeinvestments, as will companies in sectorswith positive climate change contributions.

Reports to BPDC, the Board and DFID

Finally the implementation processincludes reporting mechanisms.

Throughout the year CDC managementprovides the Board with ESG updates.Aggregated ESG findings from theprevious year are also provided in the firstquarter each year. The Department forInternational Development (DFID) receivesthe same aggregated information on aquarterly basis, with any commerciallysensitive or confidential informationextracted. The reporting to the Board andDFID together with the DevelopmentReview provides the following information:

• a summary of the annual ESG reportsreceived from fund managers andfindings from the evaluation reportscompleted over the previous year;

• summary information about fundmanagers with portfolio companies in sectors with significant ESG risks and their performance;

• summary information on any seriousESG issues during the previous yearand how they were addressed to CDC’ssatisfaction;

• observed trends on ESG performanceamong fund managers and portfoliocompanies; and

• new developments in international bestpractice standards and any proposedupdates to CDC’s Investment Code.

Each quarter, CDC reviews the evaluationreports that have been completed duringthat quarter, approving ratings forevaluations conducted by CDC staff and external consultants. The full Boardreceives summaries of completed and approved evaluation reports.Management provides a summary ofcompleted evaluations and aggregateoutcome ratings each quarter to DFIDwith any commercially sensitive orconfidential information extracted.

Any instance involving portfoliocompanies which result in loss of life,material effect on the environment, ormaterial breach of law and how theseinstances were dealt with is reported toCDC’s Board at each meeting. At thequarterly meetings with DFID, the Chair of CDC’s Board and CDC managementprovide an assurance that the InvestmentCode is being implemented appropriatelyand any serious issues have been dealtwith adequately.



Transition

CDC’s Investment Code came into effecton 1 January 2009 and any new fundsinvested in from this date have beenrequired to sign up to it. An effort totransition funds signed up to the previousBusiness Principles to the InvestmentCode has been carried out throughout2009. This has occasionally beenchallenging as fund managers cannot be required to change the terms of theirinvestment agreements with CDC.However, some managers of existingfunds have agreed to sign up to the newInvestment Code and most others havegiven goodwill commitments to CDC tocomply with the most significant newrequirements: to inform CDC as soon as possible of any incidents at portfoliocompanies which result in loss of life,material effect on the environment, or material breach of law.

CDC continues to encourage fundmanagers to comply with the requirementto report annually on ESG matters.Another significant change with theInvestment Code is an explicitrequirement that high risk portfoliocompanies work over time to implementthe IFC’s Performance Standards onSocial and Environmental Sustainabilityand the associated general and industryspecific Environmental, Health and Safety(EHS) Guidelines. CDC’s previous policiesimplicitly had the same requirement: thatportfolio companies implement all relevantWorld Bank standards.

Furthermore, the Investment Code has a greater focus on good corporategovernance and makes some changes to which businesses and activities areexcluded from investments with CDC’s capital.

There are a number of older assets, so-called legacy assets. The oldestinvestment in these assets was made as early as 1957. These legacy assetscomprise in total 16 companies andconstitute 3.9% of CDC’s committedcapital (defined as outstanding legalcommitments plus portfolio value). These assets signed up to the ESGstandards applicable at the time. Whilefulfilling those obligations, they are notsigned up to the Investment Code nor are they legally obliged to do so. There is therefore only a marginal benefit inattempting to implement change inrelation to the Investment Code for these assets.

Improvement actions planned andunder way

The implementation of the InvestmentCode is a process of continuousimprovement. As CDC works with fundmanagers through the investment cycle,responding to questions and changes tothe operating environment and carryingout evaluations a number of newinitiatives and improvements will beintroduced. Many are already under wayas detailed here.

Guidance

CDC has undertaken a comprehensiveoverhaul of the ESG Toolkit for FundManagers, based on the new InvestmentCode, which will be published and sent to fund managers in the first half of 2010.Improvements include:

• the business case for ESG;• more guidance on good corporate

governance and ESG managementsystems for fund managers andportfolio companies;

• more detailed due diligence questionsfor each ESG area;

• more detailed definitions of risk ratingsfor each area of ESG ;

• guidance on appropriate monitoringand reporting;

• sector specific due diligence check-listsfor fund managers that invest in highrisk sectors;

• brief guidance on ESG matters for debtfunds, SME funds and microfinance;

• guidance on relevant international ESG standards and conventions; and

• sections with guidance on climatechange related matters and gender.

Additionally, in 2010, CDC will publishguidance documents for fund managerson how to manage risks and opportunitiesassociated with climate change and onwhat we expect in terms of management of gender issues. CDC will also seek to promote strategies for portfoliocompanies to participate in internationalcarbon trading schemes, as an incentivefor them to reduce their GHG emissionsor to expand operations that offset suchemissions, e.g. reforestation or use ofrenewable energy.

CDC will also provide further guidance on how to rate ESG performance forevaluations and for ratings of quality of the ESG management systems ofportfolio companies, to facilitateevaluations and assessment and promotefurther consistency.

Additional guidance will also be given toCDC investment teams on how tointerpret and assess fund managers’ ESGreports and ratings.

Training

All professional staff at CDC havereceived ESG training. Over the course of 2010 the programme of training will be increased including the introduction of assessments to establish theeffectiveness of training. Training will also be provided to fund managers withthe roll-out of the revised Toolkit on ESG for Fund Managers.

Process improvements

CDC is planning a number ofimprovements to the process forimplementing the Investment Code,including:

• establishing a system to track ESG risk ratings for each investment madeby fund managers, to allow CDC tomonitor high risk assets more closely.This will include special considerationfor assets with significant GHGemissions42;

• a requirement for fund managers toconfirm to CDC that they have obtainedportfolio companies’ sign up to theInvestment Code, where they havecontrol or significant influence;

• improving retention of evidence duringmonitoring site visits and evaluations;

• fostering a more systematic approachto the follow up of issues and correctiveactions in the documentation producedby CDC and fund managers;

• tailoring the implementation approachfor microfinance institutions, banks anddebt funds, recognising that certainrequirements may not be feasible dueto the high number of transactions andthe further distance from the finalrecipient of financing;

• rolling out a programme to train fundmanagers on ESG matters, assisted by the new Toolkit on ESG for FundManagers, the Climate ChangeGuidance document and the GenderStudy; and

• reporting to the Board and DFIDincludes fund managers with portfoliocompanies in sectors with significantESG risks and their performance. Goingforward this will also include portfoliocompanies with high GHG emissions.

CDC will continue to identify processimprovements as part of its ongoingactivities. Areas for future considerationinclude assessing the benefit of guidelinesthat CDC investment teams can useduring site visits to assess the reliability of data provided to CDC and the quality of ESG management systems in furtherdetail, to complement the informationreceived from fund managers. Theapproach to final evaluations will also be revised to maximise ESG informationavailable for portfolio companies fromwhich the fund has exited.


Independent assurancereport to CDC Group plc

Scope KPMG LLP was engaged by CDC Groupplc (‘CDC’) to provide limited assuranceover CDC’s description of its processes toimplement its Investment Code in pages64 to 67 of the CDC Development Review2009 (‘the Development Review’).

Responsibilities The preparation, maintenance andintegrity of CDC’s Development Review,including the pages over which weprovide this opinion, are the soleresponsibility of the directors of CDC.

Our responsibility is to express ourconclusions in relation to the above scope and in accordance with the terms of our engagement letter dated 26 January 2010.

This report is made solely to CDC in accordance with the terms of ourengagement. Our work has beenundertaken so that we might state to CDC those matters we have been engagedto state in this report and for no otherpurpose. To the fullest extent permitted by law, we do not accept or assumeresponsibility to anyone other than CDCfor our work, for this report, or for theconclusions we have reached.

Which assurance standards andcriteria did we use? We conducted our work in accordancewith International Standard on AssuranceEngagements 3000 (ISAE 3000):Assurance engagements other than Auditsor reviews of Historical information, issuedby the International Auditing andAccounting Standards Board.

We conducted our engagement incompliance with the requirements of theIFAC Code of Ethics for ProfessionalAccountants, which requires, among otherrequirements, that the members of theassurance team (practitioners) as well asthe assurance firm (assurance provider)be independent of the assurance client.The IFAC Code also includes detailedrequirements for practitioners regardingintegrity, objectivity, professionalcompetence and due care, confidentialityand professional behaviour. KPMG LLPhas systems and processes in place tomonitor compliance with the IFAC Codeand to prevent conflicts regardingindependence.

Section five of CDC’s Investment Code,as set out in Appendix 1 (pages 80 to 84)of the Development Review, describesCDC’s responsibilities and managementsystem for implementing the InvestmentCode, and we have used that descriptionas the basis of our evaluation.

What did we do to reach ourconclusions?We planned and performed our work to obtain all the evidence, information and explanations that we considerednecessary to understand and reviewCDC’s processes to implement itsInvestment Code. Our work included the following procedures and evidence-gathering activities:

• interviews with the CEO, Boardmembers, senior management, andrelevant staff at CDC to assess theapproach to handling material issues,controls in place, incentives andpenalties, and escalation procedures;

• interviews with 12 out of 16 investmentprofessionals to discuss their roles inimplementing the Investment Code andthe activities they carried out as part ofscreening, due diligence, monitoringand evaluation procedures of selectedfunds and portfolio companies;

• interviews with the ESG team todiscuss work plans, training, internalcontrols and guidance documents;

• examination of the documentationproduced at different points in theinvestment lifecycle, for a risk-basedselection of funds (21 funds out of 134funds);

• examination of internal and externaldocumentation includingcorrespondence, minutes of meetings,reports and presentations relating to the implementation of the Investment Code;

• examination of training and guidancedocumentation, including the Toolkit for fund managers, and attended aninternal training session for CDC staff;and

• examination of other relevant sectionsof the Development Review to evaluatewhether any disclosures areinconsistent with our findings.

Inherent limitations As outlined on page 8 and 9 of theDevelopment Review, CDC operates as a fund of funds in the Private Equityindustry, in which relationships aregenerally trust-based and therefore thenature and number of checks betweenparties may vary significantly. As CDC is one step removed from the companieswhich ultimately receive its funds, CDC is inherently limited in its ability to performcompliance checks of these companies’performance against minimumrequirements of the Investment Code.

Emphasis of matter Our work covered the design of theprocesses for implementation of theInvestment Code and the extent to whichthose processes have been implementedin relation to a selection of funds. Ourwork did not include an assessment ortest of adherence of individual funds andportfolio companies to all the principles of the Investment Code.

In the course of our work we noted thatCDC’s processes have been evolving overtime. Therefore whilst CDC has madeefforts to apply additional reportingrequirements to older funds this has not always been possible or appropriate,for example, in the case of legacy assetsas described on page 67.

All of our work was carried out at CDC,not at fund managers or portfoliocompanies, and included examination of evaluation reports carried out by CDCand Triple Value.

We also draw your attention to theprocess improvements planned by CDCin their description of the implementationof the Investment Code.

Our conclusion Based on the scope of our engagementand the work described above, nothinghas come to our attention to suggest thatCDC’s description on pages 64 to 67 of the processes to implement theInvestment Code is not fairly stated.

Vincent NeatePartner

For and on behalf of KPMG LLPChartered AccountantsRegistered Auditors8 Salisbury SquareLondonEC4Y 8BB23 April 2010


CDC adds value to its fund managers, portfolio companiesand markets in several ways. Through its investments,CDC can reach markets and sectors with poor access tofinance. CDC can, in this way, help to build local capitalmarkets and also act as a stimulus to encourage thirdparties to invest alongside it. Using the knowledge CDCgains, it can also provide support and training for its fundmanagers and contribute to broader international debate.

It is the additional effects that CDC can bring to the marketplace that differentiates its capital from that of commercial investors.

Adding value in emerging markets

Chapter


CDC adds value to its fund managers, portfolio companies andmarkets in several ways. We reach markets and sectors which havepoor access to finance, help build local capital markets, providesupport and training, share knowledge, pursue alignment onstandards in international forums and mobilise third party capital.

Chapter 7: Adding value in emerging markets

Reaching markets and sectors withpoor access to finance

As part of its mandate, CDC has pursuedinvestments in certain funds with higherrisk profiles in return for longer-termmarket building potential. These fundsspecialise in start-up, early-stage andsmall and medium-sized enterprises(SMEs) businesses, which are areas oftenunderserved by poorly developed localcapital markets.

As an illustration, 74% of third partycapital invested at the end of 2008 inAureos’ funds (an SME-specialist fundmanager) was supplied by DevelopmentFinance Institutions (DFIs) other thanCDC. CDC has historically played apioneering role in establishing SME funds.It established a series of single countryfunds in Africa in the 1990s which, in part,paved the way for the establishment ofthe private equity industry in Africa.Moreover, Aureos, CDC’s second largestfund manager, was spun out of CDC andhas continued its commitment to the SMEsector in developing markets. Since 2004,CDC has invested in other SME fundmanagers as well. These include Avigo in India and GroFin and Business PartnersInternational in Africa. These funds arecurrently invested in well over 200 SMEs.

CDC is starting to complementinvestment in equity funds by a movementtowards debt capital. Debt financingis often supplied through financial

intermediaries and is especially targetedat SMEs, infrastructure projects and linesof credit to banks.

This approach will allow CDC to investfurther in countries where equity markets are not well established. In low incomecountries, in Africa in particular, locallonger-term debt financing is largelyabsent. By risk sharing with local bankinginstitutions CDC can assist in thedevelopment of the credit market. Debtfunds are discussed in more depth inchapter 4.

Building local capital markets and localinvestment capacity

CDC’s success depends on selecting fund managers with adequate experience and a compelling investment strategy. Inparticular, CDC seeks fund managers who:

• act in line with CDC’s focus on thepoorest countries;

• have a record of successfulinvestments in commercially viable andpromising companies; and

• maintain a strong commitment to theprinciples of responsible investment.

CDC mostly invests in funds with locally-based fund managers, who are also often first time managers. By so doing,the objective is to help establish anddevelop local financial markets andinvestment capacity.

Locally based managersAlmost all CDC’s fund managers are locallybased. All except four have local officeswithin the environment in which they areinvesting.43 This provides CDC with insightsfrom across the entirety of its investmentuniverse. Examples of office locations forCDC’s fund managers include Accra,Colombo, Lagos, Nairobi, Johannesburgand Karachi as well as regional officeslocated throughout India and China.

In total, CDC’s fund managers haveoffices in 37 developing countries. AmongCDC’s 65 fund managers there are localoffices in 14 countries in sub-SaharanAfrica and 14 in Asia. There are localoffices in four countries in North Africaand seven countries in Latin America. In terms of countries, 18 fund managershave offices in India, 11 fund managershave offices in South Africa and another11 fund managers have offices in Chinaand South Africa respectively. Somecountries are covered by just one localoffice. An example of this is ManoCapwhich manages the Sierra InvestmentFund from within Sierra Leone.

CDC’s added value

65 fundmanagers

134fundsCDCDFID

Ongoingdialogue on

effectiveness

Internationalcollaboration

Other investors

794portfolio

companies

Fund managercapacitybuilding

Knowledge sharing

Third partycapitalmobilisation

Outcomes

Development impact

•

•

•••

Employment in portfolio companies and the wider economyIncreased tax revenues to domestic governmentsIncreased awareness of ESGIncreased sustainability of businessesIndirect and trickle down effects into local economies

Knowledge sharing Alignment of reporting

and information

Initiatives and support

Additional investments

Chapter 7 – Adding value in emerging markets 71

Site VisitsCDC conducts site visits, to monitor itsportfolio and learn more about the impactof its investments. One company visited in 2009 was Banro, a start-up mine in theDemocratic Republic of Congo.

First time fund managers58% of CDC’s fund managers aremanaging private equity funds for the firsttime, introducing risk capital to allow localbusinesses to realise their expansionpotential. Historical examples includeAureos, which pioneered SMEinvestments in East Africa in the late1990s, African Capital Alliance, whichmanaged the first private equity fund inNigeria and GroFin and BusinessPartners, which are still largely alone inproviding capital for very small companiesthroughout Southern and East Africa.

CDC continues to back first time fundmanagers and in 2009 invested with RaboEquity Advisers in India, as well asDevelopment Partners International andManoCap in Africa. Supporting such firsttime managers is often considered to bevery risky by commercial investors butCDC’s willingness to engage with newfund managers is an importantcontribution to the development ofstronger capital markets in developingcountries. CDC works closely with its firsttime fund managers to ensure that theyuse CDC’s capital and that from otherinvestors to implement the higheststandards possible.

In many cases, CDC plays an importantrole in attracting new investors to funds byworking actively with fund managers tohelp them raise capital. CDC can be seenas a ‘stamp of approval’ for new fundmanagers in emerging markets,reassuring and attracting other investors.

Banro Corporation,Democratic Republic of Congo (DRC)A start-up mine that hasreceived local and NGOsupport

Banro is a gold exploration companyfocused on exploring and developingmining rights in the gold belt of easternDRC. It is listed in both Toronto and NewYork. The company owns the gold miningproduction licences of four projects alongthe Twangiza-Namoya gold belt in easternDRC. In 2009, the DRC governmentstated, “that all aspects of the company’sMining Convention and its mining licences respecting the company’s wholly-owned gold projects in the DRC are inaccordance with Congolese law”. In addition, the Deputy Prime Minister of the DRC and the official in charge ofreconstruction, said: “We congratulateBanro on its professional approach andlook forward to working together andsupporting them on all projects to achieve a win/win for all stakeholders.”

The DRC is one of Africa’s poorest nationswith 60% of the population living belowthe US$1.25 a day poverty line. It is also a difficult investment environment, ranking158th on Transparency International’stransparency index, an indication of thechallenges of doing business there. Actisclassifies its investment in Banro ashaving high inherent Environment, Socialand Governance (ESG) risk in what is arural and often unstable region.

As the Twangiza site progresses towardsbecoming operational, Banro has workedhard to ensure that its adverse environmentaland social impact is minimised. Banro hasconducted a socio-economic study ofeverybody involved in the project and iscurrently implementing a resettlement actionplan for one local community. The plan, which

has been drawn up according to World Bankstandards, includes 150% compensationfor all property lost through relocation.

Banro also aims to be a model forcorporate and social responsibility byshowing a long-term commitment to the communities in which it operates.Although still an exploration, rather than a mining operation and therefore not yetgenerating any revenues, Banro has setup the Banro Foundation to help localcommunities improve their economicsituation. The Banro Foundation spentapproximately US$0.8m in 2008 onprojects including schools, a clinic and a water distribution system. The BanroFoundation has created panels ofcommunity members that decide, at alocal level, which projects will be financed.

Community relations are important toBanro and are something that thecompany has worked hard to develop.The non-government organisation (NGO),CARE commented: “Banro is anappropriate partner for CARE as it hasdemonstrated a serious commitment tocommunity development through theactivities of its Foundation and its successin creating capacity-building jobs andopportunities for local Congolese.”

Key data

Investment:1 US$18mInvestment period: 2005-presentSector: Mining (gold)Fund manager: ActisEmployment:2 1,409Turnover:2 Yet to commence productionResource (measured, indicated & inferred):11 million ounces gold

1 US$14m was invested by Actis Africa Fund 2. CDC’sinvestment in Actis Africa Fund 2 is US$330m; total fund size is US$355m. US$4m was invested by the CanadaInvestment Fund for Africa (CIFA), which is also managed byActis. CDC’s investment in CIFA is US$20m; total fund size is US$211m.

2 2008.

View of area around Banro mining site A secondary school constructed with funds from theBanro Foundation


Reaching underserved marketsPart of CDC’s mandate is to addressmarket failure in emerging markets. Onemeans of measuring this is to look at acountry’s credit rating, a measure of howlikely a country is to default on a loan.Countries with a low credit rating aregenerally less attractive to investors andtherefore prone to lack the capital neededfor entrepreneurs. Measuring CDC’sportfolio against countries’ access to creditis not an easy task. CDC has compared itsportfolio from the end of 2009 against twocommonly available measures.

The first is Standard & Poor’s estimates of the credit rating for individual countries.The second is a ranking for ease ofaccessing credit as presented by the WorldBank’s ‘Ease of Doing Business’ survey. Themethodology behind this process is stillevolving but the results do provide insightinto the distribution of CDC’s portfolio.

The results from these two analysesshowed similar results. Out of thecountries with investment grade ratingsapproximately 15% of CDC’s portfoliocompanies were located in countries withthe best investment grade. According tothe results based on Standard & Poor’scountry credit rating, approximately 28%of CDC’s capital is invested in companieswithin countries beneath the investmentgrade credit ratings. 23% of companiesare in countries which are ungraded andthe vast majority of these can also beassumed to have extremely unstablelending markets.

A comparable 29% of CDC’s portfoliocompanies were located in the bottom60% of countries as ranked in the ‘Easeof Doing Business’ survey. It is in thesecountries that access to credit is mostdifficult and where it is likely that fewestcommercial investors will invest. Ascountries ranked at this end of the scaleare typically low income, greater levels of CDC’s capital should be invested herein the future.

Support and training for fund managers

One component of the value added byCDC is the training provided to fundmanagers, most of whom are locallybased in their respective markets. One such training opportunity arose inSeptember 2009, when new InternationalPrivate Equity and Venture CapitalValuation (IPEV) guidelines wereintroduced. The guidelines wereintroduced to respond to a desire forgreater commonality across private equityin its valuation methods and for moreconsistency between the InternationalFinancial Reporting Standards (IFRS) and United States’ Generally AcceptedAccounting Principles (US GAAP).

Training for fund managers in Africaand AsiaThe introduction of the new guidelinesallowed CDC to interact closely with itsfund managers to discuss the merits ofthe IPEV approach. CDC’s finance teamsubsequently held meetings with 14 fundmanagers, in Africa and Asia, to discussthe new guidelines. Fund managers whohave met CDC’s finance team includeAureos, BPI, Horizon, I&P, Tuninvest andVantage in Africa and BTS, IDFC, IndiaValue Fund Advisers, Kotak andVentureEast in Asia.

Comprehensive coverage of topicsSeveral additional but related topics were also discussed during the trainingsessions. The meetings allowed CDC to raise specific issues regarding fundreporting in order to improve fundmanager’s standards in line with bestinternational practice.

Fund managers were also able to discussthe expectations that investors such asCDC and others have of their fund reportsand valuations. CDC was also able to gainfurther insight into how the new guidelinescan be best implemented.

Beyond the IPEV guidelines, the trainingcovered other areas of relevance to fundmanagers, including:

• domiciles of holding companies; • best practice reporting for mezzanine

funds;• other international accounting

standards and conflicts with IPEVguidelines on debt; and

• reporting in two currencies whereinvestments are made in a localcurrency that is not the fund currency.

The training conducted on the IPEVvaluation guidelines was a valuableopportunity for CDC to address and helpraise its fund managers’ skills in thisparticular area. The training also improvedtheir ability to manage relationships withother investors.

Matters like these can be challenging tofund managers in CDC’s markets. Thedialogue with fund managers and theconcerns raised provided valuablefeedback for CDC and ideas for which itmight need to provide additional support.

Adding value in emerging markets continued

A-rated

Number of portfolio companies by Standard & Poor’s investment grade

Source: Standard and Poor’s (www.standardandpoors.com/home/en/us)*Many ungraded countries will be C-rated

121269

219

5

180

Largest countries (number of companies)

B-rated butinvestment grade

B-rated beneathinvestment grade

C-rated

Ungraded*

China (112), Malaysia (8),Botswana (1)

India (167), South Africa(42),Thailand (17)

Kenya (53), Nigeria (41),Costa Rica (14)

Ecuador (1) and Ukraine (4)

Tanzania (12), Côted’Ivoire (8), DRC (5)

Top 20%

Number of portfolio companies by World Bank ease of getting credit ranking

Source: ‘Ease of Doing Business’ survey –www.doingbusiness.org/EconomyRankings

115345

134

64

30106

Largest countries (number of companies)

Second 20%

Third 20%

Lower 20%

Bottom 20%

India (167), China (112),Costa Rica (13)

Nigeria (41), Thailand (14),Tanzania (12)

Côte d’Ivoire (8),Senegal (5), DRC (5)

Regional

Kenya (53), South Africa(42), Malaysia (8)

Indonesia (17), Ghana (7),Algeria (7)


Sierra Investment Fund,Sierra LeoneA pioneering fund in anemerging post conflictcountry

In November 2009, CDC became the firstDFI to make a private equity commitmentfocused solely on Sierra Leone since theend of the country’s civil war in 2002.CDC committed US$5m to SierraInvestment Fund, which makesinvestments in small and medium sizedenterprises in the West African nation. The fund, which is the first of its kind in Sierra Leone, is managed by locally based manager, ManoCap.

CDC’s investment will provide financialbacking to entrepreneurs in Sierra Leone,stimulating economic growth andstrengthening the burgeoning privatesector in the country. The country hasmade significant economic and politicalprogress since the end of the civil war andits democratic government is keen toattract foreign investment. The countryhas until recently largely been ignored byinvestors because of its history of violentconflict, its poor infrastructure and ashortage of managerial skills.

Economic growth in Sierra Leone hasbeen strong, averaging about 7% annuallyover the past five years, despite a chroniclack of access to credit. While SierraLeone has been reliant on donor funding,CDC’s commitment to private sectorinvestment will encourage entrepreneurialtalent to establish and grow businesses,which in turn will increase employmentand reduce poverty.

ManoCap had already made severalinvestments in Sierra Leone including inSplash (the country’s first mobile paymentcompany) and Ice Ice Baby (IIB), asupplier of clean flaked ice to fishermenand other consumers in Freetown, SierraLeone’s capital. Ali Khalil, OperationsManager at IIB, commented on theimprovements seen in recent months atthe company: “IIB gives me courage toadd more effort to the job because when I first started the equipment broke downfrequently but since major investmentshave taken place we now have twogenerators instead of one and thebusiness is starting to grow.”

DFID has a long history of supportingSierra Leone and is its largest donor,contributing around £48m in aid last year.Gareth Thomas, Minister of State at DFIDsaid: “Sierra Leone is moving forward.This landmark investment by CDC istestament to Sierra Leone’s progress andwill ultimately benefit people living inextreme poverty by creating employment,improving services and driving forwardeconomic growth.”

Key data

Population: 6 millionAverage per capita income: US$300 p.a.Average life expectancy: 49Gross national income: US$1.4bnHuman development index: last out of177 countries based on 2005 dataEase of doing business: 148 out of 182based on World Bank 2010 indicatorsAverage GDP growth: 7% over past 5 years

Third party capital mobilisation

One of CDC’s objectives is to mobilisethird party capital investment in emergingmarkets by demonstrating the benefits ofsuccessful investment to other capitalproviders. In this way, CDC can act as a ‘stamp of approval’ for new fundmanagers in emerging markets,reassuring and attracting other investors.

Since 2004, CDC has committed morethan US$5bn to 65 fund managers.Alongside CDC’s commitments, otherinvestors have committed a total ofUS$24.3bn to these 65 fund managers.Capital from other DFIs accounts for only US$2.3bn of this figure.

New methodology for estimating thirdparty capital mobilisationThe CDC Board and the UK government’sDepartment for International Development(DFID) agreed that from 1 January 2009CDC should follow a new methodologywhen assessing the extent to which thirdparty capital raised by a fund is due to the presence of CDC.

The new methodology applies to all fundmanagers and recognises that CDC canonly influence investors committingcapital at the same time or after CDC. In addition, it is recognised that CDC’scapital is likely to have had most impact in mobilising capital for first time funds as opposed to later funds with the same manager.

Some of the beneficiaries of investment by the Sierra Investment Project


Commitment of third party capital at fundclosings prior to the one in which CDCparticipates does not qualify for inclusionin CDC’s estimate of capital mobilised.Commitments by other investors in thesame fund closing as CDC or insubsequent closings count towardsmobilisation and are subject to a so-called tapering factor.

The tapering factor applied will depend on whether it is a first, second or asubsequent fund as follows: first timefunds have no tapering, Fund 2s aretapered by 25%, Fund 3s are tapered by50% and Fund 4s onwards are tapered by75% so that only 25% of investment byothers counts as mobilisation.

The tapering factor is applied to reflect thegrowing importance of the fund manager’s own track record as subsequent funds are raised. Mobilisation is then calculatedas the ratio of qualifying tapered thirdparty capital committed to a fund toCDC’s commitment.

The target mobilisation rate as agreed withDFID using the new methodology is at least200% third party mobilisation of CDC’scommitted capital on a three year rollingbasis. Over the three year rolling basis from2007 to 2009, CDC achieved a figure of278% capital mobilisation. CDC’s totalcommitment was US$1,505m over thisperiod. Based on CDC’s new methodologyfor measuring third party capitalmobilisation the third party capitaldeemed attributable to CDC’s presencewas US$4,187m.

Example

Shorecap II – CDC played a key role inthe creation of Shorecap II, a microfinancefund and was an investor at first close.CDC was involved from the earliestdiscussions and was able to establishappropriate levels of personal fundmanager commitments and a workablemanagement fee structure. CDC’s

engagement was important in keepinginvestor representatives off the fundmanager’s investment committee. Thispreserves the independence of the fundmanagement from its investors.

(Total fund $51m; CDC $10m; others $46m)

Insights from evaluationsCDC’s evaluation work in 2009 providesfurther details on CDC’s role in investingalongside the capital of others.

The amount of capital invested alongsideCDC varies significantly amongst the 20 funds evaluated. Third party capitalstands at US$2.45bn compared to CDC’sown commitments of US$1.03bn. CDC’scapital thus represents 30% of the totalcommitted amount. Of the US$2.45bncapital committed by third parties, 18%was committed by other DFIs. Other DFIsinvested alongside CDC in 12 of the20 funds which were evaluated.

Seven of the 20 funds evaluated raised a total of third party capital in excess ofUS$100m. Three of these funds were inAfrica, two in China and one in South EastAsia. The final fund to raise more thanUS$100m in third party capital was aspecialist debt fund. The two SME fundsevaluated raised less than US$10m inprivate capital between them. Thisillustrates the difficulties faced in raisingcapital for such strategies.

Nine of the fund managers evaluated had been successful in raising successorfunds. CDC invested in all except one of these successor funds. A total ofUS$3.4bn in capital has been committed tothese funds with CDC’s capital representing17% of the total. This suggests thatCDC’s capital is not required to the sameextent in successor funds and that a corepart of CDC’s work is to maximise capitalfor first and second funds.

CDC will encourage the fundmanagers of investee fundsand the companies in which it directly invests to operate in ways that, in addition togenerating financial returnsthat meet the expectations of investors, provide otherinputs into the private sectorand community at large.These will include, by way of example, employment,infrastructure benefits, socialand environmental benefits,application of businessprinciples and goodgovernance (through theapplication of the InvestmentCode and the creation ofancillary support businesses).

Excerpt from Investment Policy

Total capital committed to CDC’sfund managers (US$m)

1

2

3 1 CDC US$5.3bn2 Other DFIs US$2.3bn3 Commercial

investors US$19.3bn


2007 2008 2009

1,200

265

2,170

662817

578

Third party capital mobilised (US$m)

CDC commitment Mobilised capital


International collaboration

International collaboration with otherstakeholders in emerging markets isessential for CDC for three reasons:

• to share our experience and insightswith others and learn from theirknowledge;

• to reduce overlapping efforts andrepetition of work; and

• to increase the efficiency andeffectiveness of our developmentimpact.

For these reasons CDC pursues broadinternational collaboration and outreachacross many channels. In 2009, inaddition to our ongoing work with all the European DFIs (EDFI), CDCcommissioned a study together with FMO(the Dutch DFI), IFC and Norfund (theNorwegian DFI) to investigate how toencourage gender positive outcomes in our investments.

Gender studyCollaboration in commissioning of gender studyThe gender study was commissioned inthe autumn of 2009. The intention was toprovide practical guidance for the DFIs’investment teams and fund managers on how to address gender matters ininvestee companies. Specific efforts weremade to generate actionable andpragmatic recommendations which wouldbenefit the investee companies as well as their employees.

The study outlined gender-related risksand opportunities in selected regions,countries and sectors in which the DFIsare invested directly as well as indirectlythrough funds. The study provided aselection of best practice case studieswhere companies and fund managershave applied some of the recommendedapproaches in the study. Further details of the study are discussed on pages 54and 55.

Integration of findings across theparticipating DFIs and beyondThe key outcomes and recommendationsof the study have now been incorporatedinto CDC’s revised Toolkit for fundmanagers and will also be integrated intoCDC’s ESG training sessions with fundmanagers from 2010 onwards.

In addition, the findings of the report willbe presented to the ESG representativesof the broader EDFI community in early2010 with a view to achieving furtherharmonisation and alignment ofperspectives among the DFIs.

EDFI and current collaborationinitiativesThe EDFI Working Group onHarmonisation of Environmental andSocial Standards was established in 2006.Initially set up as a short-term effort toproduce standards for co-financedinvestments, the outcome and thedialogue was deemed so successful thatthe working group has continued to meet.In particular, the ongoing harmonisation of reporting formats, exclusion lists,standards and alignment on other matterswas considered valuable, not only for DFIs but also for funds and investeecompanies. The DFI members now meetevery six months to discuss current issuesand challenges as well as to exchangeinformation and lessons learned.

Achievements in 2009In 2009 another step towards greaterharmonisation was achieved when allEDFI members on 9 May 2009 signed the ‘EDFI Principles on ResponsibleFinancing’, a declaration on environmentaland social principles to be followed by all members when co-financing projects.EDFI members have already startedimplementing the declaration and haveput into action a sound basis for the

management of environmental and social risks which was endorsed by all member institutions.

Current initiativesThe EDFI meeting in Helsinki inSeptember 2009 identified 11 themes to be addressed by dedicated workinggroups during the six month periodleading up to the next meeting. The themes covered a broad array of topics including:

• agreement on DFI internal practices(definition of SMEs, exclusion lists,investment fund categorisation,transparency);

• specific ESG risks and topicalknowledge (climate change adaptation,corporation governance, gendermatters);

• client reporting harmonisation; and• an aligned EDFI perspective on the

updating of the International FinanceCorporation’s (IFC) PerformanceStandards.

EDFI London meeting in 2010 The latest bi-annual gathering for the EDFIWorking Group on Harmonisation ofEnvironmental and Social Standards tookplace in April 2010 in London and wasorganised by CDC. The outcomes of the 11 working groups were presented toall the participants. Further opportunitiesfor alignment were also discussedincluding joint training of fund managersand sharing of training and other material.Finally, the priorities and strategicdirection for the next period wasdiscussed and specific working groupsassigned to each of the agreed topics.

EDFI member states

AWS – Austria

BIO – Belgium

CDC – UK

COFIDES – Spain

DEG – Germany

FINNFUND – Finland

FMO – The Netherlands

IFU – Denmark

NORFUND – Norway

OeEB – Austria

PROPARCO – France

SBI-BMI – Belgium

Sifem – Switzerland

SIMEST – Italy

SOFID – Portugal

SWEDFUND – Sweden


UNPRI and the principlesThe United Nations Principles forResponsible Investment (UNPRI) is aninitiative to promote the incorporation ofESG issues into mainstream investmentdecision-making and ownership practices.There are six principles that are voluntaryand aspirational in nature and cover ESGissues and related policies and practices.It also includes disclosure of informationon ESG issues, collaboration andreporting on progress in implementing the principles.

The intention is that the application of theprinciples will contribute to demonstratingthe business case behind ESG sensitiveinvestment – thereby illustrating bothbetter long-term financial returns and theopportunity to align the objectives ofinstitutional investors and those of societyat large.

UNPRI signatoriesUNPRI signatories form part of a networkwith opportunities to pool resources andinfluence, lower the costs and increasethe effectiveness of research and activeownership practices with regard toresponsible investment. The initiative alsosupports investors in working together toaddress systemic problems that, ifremedied, may then lead to more stable,accountable and profitable marketconditions overall. In total there are 592current signatories, which can be dividedinto three groups:

• asset owners:organisations representing end-assetowners who hold long-term retirementsavings, insurance and other assets;

• investment managers:investment management companiesserving an institutional and/or retailmarket and managing assets as a third-party provider; and

• professional service partners: organisations offering products orservices to asset owners and/orinvestment managers.

CDC’s involvement and rationaleCDC is actively involved in two workinggroups, the Emerging Markets and thePrivate Equity Working Groups. CDC cancontribute from 60 years of presence inemerging markets and hopes to learnfrom the experiences of others. In addition,our fund managers should benefit fromthird capital raised from fellow UNPRIsignatories, something that should resultin more stringent incorporation, disclosureand implementation of internationallyapproved ESG principles.

The portfolio companies will also be ableto benefit as investments originating fromUNPRI signatories will give access to anetwork that can provide support andexperience towards implementing soundESG policy whilst also supportingincreased financial returns. Perhaps mostimportantly however is the opportunitythat the UNPRI provides to participate inand drive a global ESG discussion withsignatories with more than US$18 trillionof assets in 36 countries.

Other EngagementsAfrican Venture Capital Association(AVCA) AVCA is a Johannesburg-based not-for-profit entity founded to promote, developand stimulate private equity and venturecapital in Africa. AVCA is committed topromoting high ethical standards ofbusiness conduct and professionalcompetence in the private equity andventure capital industries. CDC’s supportof AVCA further strengthens thedevelopment of local financial marketsthrough AVCA’s training offerings inprivate equity broadly, as well as morespecific offerings in valuation andstakeholder management.

Royal African Society (RAS) RAS is one of Britain’s foremost societiesfocusing on Africa, with a history goingback more than 100 years. Its in-depthknowledge, long-term engagement andbroad membership base makes it animportant meeting place for all partiesinterested in African emerging markets,investors and non-investors alike. RASaims to foster a better understanding of Africa in the UK and throughout theworld and to disseminate knowledge and insight to make a positive differenceto Africa’s development.

CDC regards its corporate membershipand sponsorship of RAS as a vital channelto reach a broader community ofinfluencers, investors and providers ofthird party capital. The variousconferences and other events takingplace at RAS bring about a betterunderstanding of the respective marketsand what it takes to succeed, bothcommercially and from a developmentimpact perspective.

Sig

nato

ries

250

0

AUM

The large number of UNPRI signatories and assets undermanagement (AUM) provides an excellent opportunity to learnfrom and contribute to discussions on responsible investing

Apr 06

100 135

263362

305

447

Oct 06 Apr 07 Oct 07 Apr 08 Oct 08

531637

Apr 09 Oct 09

500

750

AU

M (U

S$b

n)

5

0

10

15

20


Signatories


Emerging markets challenges –investing for commercial returns

Emerging markets can provide impressivereturns but there are also significant risksinvolved which deter many investors.CDC draws on more than 60 years of investing in these markets with arespectable commercial track record and broad exposure across a wide rangeof sectors and countries. This sectionexamines CDC’s experience andhighlights some of the most significantchallenges and measures that an investor can take to manage these risks and increase the probability of a successful investment.

Emerging markets and investmentfundamentalsWhile emerging markets are different todeveloped markets, the fundamentals forinvestors are broadly the same. Investorsin emerging markets should:

• conduct thorough due diligence on potential investments;

• take a long term perspective; • manage risk as appropriate for

the portfolio; • never compromise on standards; and • always seek to import best practices

where they are needed.

Notable differences between emergingmarkets and othersDespite the lasting validity of theseprinciples there are also importantdifferences. Investors in developedeconomies are generally able to rely onimpartial, expedient and non-corruptjudicial institutions to settle disputes,breaches of contractual obligations andother legal matters. This is often not thecase in emerging markets where a judicialprocess can take more than 10 years tocomplete, corruption may be manifestand impartiality is not always guaranteed.Furthermore, the availability and accuracyof information about markets, companiesand individuals often leaves investors lessinformed than in developed economies.

The range and extent of risks also differsignificantly depending on the countryand the sector of investment. In somecountries macroeconomic factors such as infrastructure, monetary policy andregulatory environment may presentformidable challenges to the businesscommunity. Many emerging markets alsoface substantial political risk. There canalso be large differences between differentsectors and the risks they present.Construction, for example, is a sector that involves large investments and isheavily dependent on public permits and certificates which may induce corrupt practices.

Select key lessons learntWhile the risks are many and marketinformation often leaves much to bedesired, much can be learned from CDC’s and other DFIs’ decades ofexperience in these markets. Some ofCDC’s key lessons learnt relate to investorapproach, fact finding and structurearound the investment.

Investor approachInvestors must expect risk and have atolerance for it. This does not mean takingunnecessary risks, but rather managingthem better and devoting more effort todoing so throughout the lifecycle of theinvestment including during due diligence.

A long term perspective is essential asemerging markets on an individual basiscan be very volatile. Should an investor nothave the stamina to remain invested for along time and outlast possible troughs itmight impact the return on the investment.

A pioneering mentality and a willingnessto approach the unknown is required toconfront these challenging businessenvironments. Lack of data, poorinfrastructure, short supply of skilled locallabour and other constraints requireinnovative approaches and perseverance.

Fact findingLocal knowledge, independent sources of information and local presence areneeded throughout the life of theinvestment.

Extensive research is required in earlystages. This applies equally to markets,companies and key individuals runningthe business.

StructureCorruption and lack of transparency areserious issues in many emerging markets.Great attention to detail in governancearrangements is therefore required alongwith robust and clear legal agreements.Equally important is clear communicationon transparency of information, definitionsof roles and responsibilities and reporting obligations.

The adoption of ESG best practices canyield significant commercial and non-commercial benefits and is often a keydifferentiator in emerging markets. It canenhance community relations, strengthenbrand and attract and retain talent. It isalso a vital consideration in sectors withhigher ESG risks such as extractiveindustries, construction andmanufacturing. A diversified portfolioacross sectors and countries is even moreimportant in emerging markets as theseare often subject to stronger influence of macroeconomic and political factors.

The successful investor will be the onewho understands, respects and acts upon these principles of investing inemerging markets.

CDC’s results, which over the last five years have out-performed the market, demonstrate that investing inthese markets can be both highlydevelopmental and financially successful.

Investor approach > Tolerance for risk> Long term perspective> Pioneering mentality

Fact finding> Local knowledge and presence> Background research and checks

Structure> Corruption and governance> Best practice approach to ESG> Diversified portfolio

Key considerations for investments in emerging markets

Increased probability of successful investment


One example of a challenging investmentis Alexander Forbes whose transformationafter a poor corporate governance event, prior to Actis’ investment, is described below.

Alexander Forbes, South AfricaRebuilding the reputation of a leading investment andinsurance intermediary

In 2007, CDC’s fund manager Actisinvested more than US$96m in AlexanderForbes, a diversified financial servicescompany specialising in risk services,financial services and investmentsolutions. The company holds a dominantposition within the South Africanmarketplace.

Between 1996 and 2004, AlexanderForbes had become involved in thepractice of bulking. This involved thecompany grouping together the currentaccounts of around 1,700 pension funds in order to negotiate better interest rates.Without disclosing the practice to clients,Alexander Forbes was itself receivingincome due to this ‘bulking’, which upondiscovery clients felt should have beenpassed on to them. After a FinancialServices Board (FSB) investigation,Alexander Forbes discontinued thescheme in 2004 and paid ZAR368m(c.US$50m) back to clients and a further ZAR12m (c.US$1.6m) to the FSB consumer education fund. Beforemaking its investment in Alexander

Forbes, Actis conducted detailed duediligence on the issues arising from theprevious practice of ‘bulking’.

It was Actis’s conclusion that the matterhad been satisfactorily and professionallyresolved by Alexander Forbes. Actis wasalso fully supportive of an AlexanderForbes initiative around the time of duediligence that the business practices ofeach of its operations should be assessedby independent auditors. The audithighlighted several practices that fell short of international best practice, which Alexander Forbes duly addressed.Moreover, the Board was made aware ofcertain breakdowns in internal controls.As a result, a risk manager was appointedand a risk and compliance unit created.Risk management has subsequentlybecome one of the CEO’s main goals.

Since Actis’s investment, AlexanderForbes has also focused on Broad-BasedBlack Economic Empowerment and hasachieved an impressive level 3 rating.This, accompanied by the company’simproved environmental managementsystems, has helped to restore AlexanderForbes’s international reputation. For acompany of Alexander Forbes’international standing, reputation is vital;Actis’s investment and input has playedan important role in the process of restoring the company’s credibility.

Key data

Investment:1 US$96mInvestment period: July 2007-presentSector: Financial servicesFund manager: ActisEmployment:2 3,541Turnover:3 ZAR4.782mTurnover growth:3 ZAR344mEBITDA:3 ZAR1.178mEBITDA growth:3 ZAR1mTaxes paid:3 ZAR166m

1 US$52m was invested by Actis Africa Fund 2. CDC’sinvestment in Actis Africa 2 Fund is US$330m; total fund size is US$355m. US$32m was invested by the CanadaInvestment Fund for Africa (CIFA), which is also managed by Actis. CDC’s investment in CIFA is US$20m; total fund size is US$211m. US$12m was invested by the Actis AfricaEmpowerment Fund. CDC’s investment in the Actis AfricaEmpowerment Fund is US$50m; total fund size is US$50m.

2 2008.3 12 months to 31 March 2009.

Other banks in which CDC is invested: Banque Commerciale du Rwanda (BCR)

Other banks in which CDC is invested: Equity Bank, Kenya

Appendix

CDC’s mission is to generate wealth in emerging markets, particularly in poorer countries, by providing capital for investment insustainable and responsibly managed private sector businesses.

CDC invests in the creation and growth of commercially viable private businesses in poor countries. Commercially sustainablebusinesses, supported by CDC, play a vital part in economic development: they employ and train people, pay taxes, invest in researchand development, and build and operate infrastructure and services. This contributes to economic growth, which benefits poor people.CDC also mobilises private investment in these markets both directly and by demonstrating profitable investments.

Sustainable private sector development requires responsible business management of environmental, social and governance (“ESG”)matters. This Investment Code defines CDC’s principles, objectives, policies and management systems for sustainable and responsible investment with respect to ESG.1 It also includes an Exclusion List, which specifies businesses and activities in which CDCwill not invest.2

1. Principles

CDC, and the businesses in which its capital is invested, will:

• comply with all applicable laws;• as appropriate, minimise adverse impacts and enhance positive effects on the environment, workers, and all stakeholders;• commit to continuous improvements with respect to management of the environment, social matters and governance;• work over time to apply relevant international best practice standards,3 with appropriate targets and timetables for achieving them;

and• employ management systems which effectively address ESG risks and realise ESG opportunities as a fundamental part of a

company’s value.

2. Objectives and policies

2a. The environment

Objectives

• To minimise adverse impacts and enhance positive effects on the environment, as relevant and appropriate, from the businesses in which CDC’s capital is invested.

• To encourage the businesses in which CDC’s capital is invested to make efficient use of natural resources and to protect theenvironment wherever possible.

• To support the reduction of greenhouse gas emissions which contribute to climate change from the businesses in which CDC’scapital is invested.4

Policy

Businesses in which CDC’s capital is invested will:

• operate in compliance with applicable local and national laws (as a minimum);• assess the environmental impact of their operations as follows:

> identify potential risks and appropriate mitigating measures through an environmental impact assessment where businessoperations could involve loss of biodiversity or habitat, emission of significant quantities of greenhouse gases, severe degradationof water or air quality, substantial solid waste or other significant negative environmental impacts;5 and

> consider the potential for positive environmental impacts from business activities; and• take appropriate actions to mitigate environmental risks, ameliorate environmental damage, and enhance positive effects as follows:

> where an activity is assessed to present significant environmental risks, work over time to apply the relevant IFC policies andguidelines,6 if these are more stringent than local legislation, with appropriate targets and timetable for improvements; and

> as appropriate, work over time towards international environmental best practice standards.7


1 CDC’s Investment Code is compatible with the 2006 International Finance Corporation (“IFC”) Policy and Performance Standards on Social and Environmental Sustainability (“IFC Performance Standards”).See www.ifc.org/ifcext/enviro.nsf/Content/PerformanceStandards. A Fund Manager that follows the IFC Performance Standards fulfils the requirements on the Environment and Social Matters set out in thisInvestment Code. The Investment Code is also compatible with the 2007 agreement for common environmental and social standards among the European Development Finance Institutions (“EDFI RomeConsensus”).

2 CDC’s Exclusion List is compatible with those of the IFC and the EDFI Rome Consensus.3 As referenced in this Investment Code and as may develop over time.4 In line with the 1994 United Nation Framework Convention on Climate Change and the associated 2005 Kyoto Protocol (“UN Framework Convention”), see www.unfccc.int/2860.php as may be amended

from time to time.

AppendixCDC’s Investment Code

Appendix 81

2b. Social matters2b.i. Labour and working conditions

Objectives

• To require the businesses in which CDC’s capital is invested to treat all their employees and contractors fairly and to respect theirdignity, well-being and diversity.

• To encourage the businesses in which CDC’s capital is invested to work over time towards full compliance with the InternationalLabour Organization (“ILO”) Fundamental Conventions8 and with the United Nations (“UN”) Universal Declaration of Human Rights.9

Policy


• comply with applicable local and national laws (as a minimum);• not employ or make use of forced labour of any kind;• not employ or make use of harmful child labour;10

• pay wages which meet or exceed industry or legal national minima;• treat their employees fairly in terms of recruitment, progression, terms and conditions of work and representation, irrespective of

gender, race, colour, disability, political opinion, sexual orientation, age, religion, social or ethnic origin, or HIV status;• allow consultative work-place structures and associations which provide employees with an opportunity to present their views to

management; and• for remote operations involving the relocation of employees for extended periods of time, ensure that such employees have access

to adequate housing and basic services.

2b.ii. Health and safety

Objectives

• To attain safe and healthy working conditions for employees and contractors of the businesses in which CDC’s capital is invested.• To safeguard the health and safety of all those affected by the businesses in which CDC’s capital is invested.

Policy


• comply with applicable local and national laws (as a minimum);• assess the health and safety risks arising from work activities; and• take appropriate actions to eliminate or reduce risks to health and safety as follows:

> where an activity is assessed to present significant health and safety risks,11 work over time to apply the relevant IFC policies andguidelines,12 if these are more stringent than local legislation, with appropriate targets and timetable for improvements; and

> as appropriate, work over time towards international best practice standards for health and safety.13

5 Activities with potential significant adverse environmental impacts that are diverse, irreversible or unprecedented; mindful of potential cumulative, secondary or synergistic impacts that may occur as aconsequence.

6 The IFC Performance Standards and the 2007 IFC Environmental, Health and Safety Guidelines (“IFC EHS Guidelines”), as may be amended from time to time and adopted by CDC. IFC EHS Guidelinesinclude general guidelines and industry sector guidelines for forestry, agribusiness/food production (including fisheries), general manufacturing, oil and gas, infrastructure, chemicals (including pharmaceuticals), mining and power. See www.ifc.org/ifcext/enviro.nsf/Content/PerformanceStandards and www.ifc.org/ifcext/policyreview.nsf/Content/EHSGuidelinesUpdate.

7 Including the range of internationally certifiable environmental standards issued by the International Organization for Standardization (“ISO”), the ISO 14000 series, notably including standards forenvironmental management systems (ISO 14001) and greenhouse gas emissions (ISO 14064-65), as may be amended from time to time. See www.iso.org.

8 The ILO Fundamental Conventions are the Conventions on Freedom of Association and Collective Bargaining; Forced Labour; Child Labour; and Non-Discrimination, as may be amended from time to time. See www.ilo.org/ilolex/english/docs/declworld.htm for the texts of these Conventions and a list of the countries that have ratified each of them.

9 See www.un.org/Overview/rights.html.10 As defined by the ILO C138 Minimum Age Convention from 1973 and the ILO C182 Worst Forms of Child Labour Convention from 1999. See www.ilo.org/ilolex/english/docs/declworld.htm11 Activities that could have a severe health or safety impact for workers or affected communities.12 The IFC Performance Standards and the IFC EHS Guidelines, as may be amended from time to time and adopted by CDC. See www.ifc.org/ifcext/enviro.nsf/Content/ PerformanceStandards and

www.ifc.org/ifcext/policyreview.nsf/Content/ EHSGuidelinesUpdate.13 Including OHSAS 18001, the international occupational health and safety management system specification, and industry specific international good practice standards related to the safety of product use,

e.g. the international Good Manufacturing Practice (“GMP”) standards for food and pharmaceutical products promoted by the World Health Organization (“WHO”), see www.who.org.


2b.iii. Other social matters

Objectives

• To be objective, consistent and fair with all stakeholders of the businesses in which CDC’s capital is invested.• To recognise and, as appropriate, promote the social development impact from the businesses in which CDC’s capital is invested.

Policies


• take account of their impact on employees, contractors, the local community and all others affected by their operations as follows:> identify potential adverse effects and appropriate mitigating measures through a social impact assessment in cases involving

resettlement, critical cultural heritage, indigenous peoples, non-local labour or other issues where the negative impact could besignificant;14 and

> consider social development contributions; and• take appropriate actions to mitigate risks, ameliorate negative impacts, and enhance positive effects.15

2c. Governance: Business integrity and good corporate governance

Objectives

• To ensure that CDC, and the businesses in which CDC’s capital is invested, exhibit honesty, integrity, fairness, diligence and respectin all business dealings.

• To enhance the good reputation of CDC.• To promote international best practice in relation to corporate governance in the businesses in which CDC’s capital is invested.16

Policy

CDC, and the businesses in which CDC’s capital is invested, will:

• comply with all applicable laws and promote international best practice,17 including those laws and international best practicestandards intended to prevent extortion, bribery and financial crime;

• uphold high standards of business integrity and honesty;• deal with regulators in an open and co-operative manner;• prohibit all employees from making or receiving gifts of substance in the course of business;• prohibit the making of payments as improper inducement to confer preferential treatment;• prohibit contributions to political parties or political candidates, where these could constitute conflicts of interest;• properly record, report and review financial and tax information;18

• promote transparency and accountability grounded in sound business ethics;• use information received from its partners only in the best interests of the business relationship and not for personal financial gain

by any employee;• clearly define responsibilities, procedures and controls with appropriate checks and balances in company management

structures; and• use effective systems of internal control and risk management covering all significant issues, including environmental, social and

ethical issues.

14 Activities with potential significant adverse social impacts that are diverse, irreversible or unprecedented.15 As relevant, by applying IFC Performance Standards on Land Acquisition and Involuntary Resettlement; Indigenous Peoples; and Cultural Heritage; as may be amended from time to time and adopted by CDC.

See www.ifc.org/ifcext/enviro.nsf/Content/PerformanceStandards.16 Including the 2004 Organisation for Economic Cooperation and Development (“OECD”) Principles of Corporate Governance, as may be amended from time to time. See www.oecd.org.17 Including the 2005 UN Anti-Corruption Convention, see www.unodc.org/unodc/en/treaties/CAC/index.html; the 1997 OECD Anti-Bribery Convention, see www.oecd.org; and, as relevant, the 2005

Extractive Industries Transparency Initiative (“EITI”), see www.eitransparency.org; as may be amended from time to time.18 CDC promotes the International Financial Reporting Standards (“IFRS”) issued by the International Accounting Standards Board (“IASB”), see www.iasb.org; and the International Private Equity and Venture

Capital Valuation Guidelines (“IPEVC”), see www.privateequityvaluation.com.

Appendix 83

3. Exclusions

CDC’s capital will not be invested in the following businesses or activities:

• production of or trade in any product or activity deemed illegal under applicable local or national laws or regulations, or banned byglobal conventions and agreements, such as certain:> hazardous chemicals, pesticides and wastes;19

> ozone depleting substances;20 and> endangered or protected wildlife or wildlife products;21

• production of or trade in arms, i.e., weapons, munitions or nuclear products, primarily designed or primarily designated for militarypurposes; or

• production of, use of or trade in unbonded asbestos fibres.22

CDC’s capital will not be invested in businesses for which the following activities or products are, or are intended to be, a significantsource of revenue:

• gambling;• pornography; or• tobacco or tobacco related products.23

4. Management systems for CDC’s fund managers24

In order to implement CDC’s Investment Code effectively, CDC requires its Fund Managers to enter into a formal agreement pursuantto which each Fund Manager commits to an investment undertaking similar in substance to sections 1 – 4 of this Investment Code.25

Where Fund Managers have effective control or significant influence over portfolio companies,26 CDC requires its Fund Managers toprocure that such portfolio companies sign an undertaking confirming that they will operate in line with sections 1 – 3 of this Investment Code.

CDC also requires its Fund Managers to establish and maintain ESG management systems27 which:

• assess the impact of all new investments on ESG matters as an integral part of the investment appraisal process;• give new investments a risk rating on ESG issues to determine the appropriate level of management and monitoring;• if an investment is made despite identified shortcomings in relation to ESG issues, or if any issues would arise during the investment

period, assist the portfolio company concerned to develop an action plan to address such issues, with appropriate targets andtimetable for improvements;

• encourage the managers of portfolio companies to work towards continuous improvements in these areas, with targets forimprovements as appropriate;

• encourage the managers of portfolio companies to adopt and implement policies relating to ESG matters, particularly wherebusinesses entail significant risks;

• monitor portfolio companies’ performance on ESG matters and their progress towards relevant action plans and targets forimprovements;

• monitor and record incidents involving portfolio companies that result in loss of life, material effect on the environment, or materialbreach of law, and promote appropriate corrective actions; and

• consider sections 1 – 3 of this Investment Code in all investment and divestment activities.

19 Including those specified in the 2004 Stockholm Convention on Persistent Organic Pollutants (“POPs”), see www.pops.int; the 2004 Rotterdam Convention on the Prior Informed Consent Procedure forCertain Hazardous Chemicals and Pesticides in International Trade, see www.pic.int; and the 1992 Basel Convention on the Control of Transboundary Movements of Hazardous Wastes and their Disposal,see www.basel.int; as may be amended from time to time.

20 As covered in the 1999 Montreal Protocol on Substances that Deplete the Ozone Layer, see www.ozone.unep.org, as may be amended from time to time.21 As covered in the 1975 Convention on International Trade in Endangered Species or Wild Flora and Fauna (“CITES”), see www.cites.org, as may be amended from time to time.22 This does not apply to purchase and use of bonded asbestos cement sheeting where the asbestos content is less than 20%.23 Except, in the case of tobacco production only, with an appropriate timeframe for phase-out.24 For the purposes of the Investment Code, “Fund Manager” means (i) investment fund managers managing capital on behalf of CDC; (ii) financial institutions managing and/or investing capital on behalf of

CDC; and (iii) other intermediated institutions managing and/or investing capital on behalf of CDC.25 By side letter or equivalent agreement.26 A Fund Manager will be deemed to have significant influence over a portfolio company where its fund has (i) an ownership interest in the portfolio company in excess of 20%, which is presumed to be a level

that allows for participation in the financial and operating policies of a portfolio company (if the percentage is lower but gives rise to the same participation, this will also meet the definition of significantinfluence); or (ii) board representation to a level that allows for participation in determining the financial and operating policies of the portfolio company; or (iii) rights to influence the financial and operatingpolicy decisions of the portfolio company pursuant to a shareholders’ or similar agreement.

27 Further guidance on ESG management systems and assessments is provided in CDC’s Toolkit for Fund Managers, see www.cdcgroup.com. Guidance on environmental and social management systems andassessments is provided in IFC Performance Standard 1, see www.ifc.org/ifcext/enviro.nsf/Content/ PerformanceStandards. ISO 14001 is a certifiable international standard to help organisations minimisehow their operations negatively affect the environment, see www.iso.org.


To demonstrate the implementation of this Investment Code, CDC requires its Fund Managers to:

• report annually on the implementation of their ESG management systems and on the performance of portfolio companies againstsections 1 – 3 of this Investment Code in a format acceptable to CDC;28

• set targets for improvements where appropriate; and• as soon as possible inform CDC about incidents involving portfolio companies that result in loss of life, material effect on the

environment, or material breach of law, and any corrective actions taken.

5. Management systems for CDC

CDC will:

• assist its Fund Managers as appropriate to establish and maintain ESG management systems;• monitor the implementation of the Investment Code through its Fund Managers’ annual reports, with verifications as appropriate;• evaluate its Fund Managers’ implementation of the Investment Code periodically, using internal and external sources as appropriate,

usually:> at the end of a fund’s investment period or the half-way point of the duration of a fund, which would typically be five years after a

standard fund has commenced; and> at the end of the duration of a fund, which would typically be 10 years after a standard fund has commenced;

• in instances where CDC invests directly and independently, establish and maintain ESG management systems substantially similarto those described above for its Fund Managers;

• consider the cumulative effects of CDC’s investments with respect to the Investment Code and:> minimise adverse effects;> maximise development impact; and> promote synergies;

• identify major risks and opportunities associated with climate change in investments and potential investments made by its FundManagers and proactively promote through those Fund Managers the application of international best practice standards in thereduction of emissions of greenhouse gases;29

• incorporate lessons learned into CDC’s future investment strategy;• keep up-to-date on new developments with respect to relevant international agreements and best practice standards; and• review this Investment Code periodically to ensure its continuing suitability and effectiveness.

28 A suggested format for ESG reporting is available on CDC’s website, while other reporting formats could be acceptable. See www.cdcgroup.com.29 In line with the UN Framework Convention, as may be amended from time to time, and including IFC Performance Standards, IFC EHS Guidelines, and ISO 14064-65, as may be amended from time to time

and adopted by CDC. See www.unfccc.int/2860.php, www.ifc.org/ifcext/enviro.nsf/Content/PerformanceStandards, www.ifc.org/ifcext/policyreview.nsf/Content/EHSGuidelinesUpdate and www.iso.org.

Footnotes 85

Footnotes

Introduction and Chapter 11. Low income countries are defined by CDC in accordance with the World Bank’s 2006 categorisation as those countries with Gross

National Income (GNI) below US$905 per annum.2. Middle income countries are defined by CDC in accordance with the World Bank’s 2006 categorisation as those countries with

Gross National Income (GNI) between US$905 and US$11,115 per annum.3. OECD, www.oecd.org.4. UNODC, www.unodc.org/unodc/en/treaties/CAC/index.html.5. Including those specified in the 2004 Stockholm Convention on Persistent Organic Pollutants (POPs), see www.pops.int; the 2004

Rotterdam Convention on the Prior Informed Consent Procedure for Certain Hazardous Chemicals and Pesticides in InternationalTrade, see www.pic.int; and the 1992 Basel Convention on the Control of Transboundary Movements of Hazardous Wastes andtheir Disposal, see www.basel.int; as may be amended from time to time.

6. As covered in the 1999 Montreal Protocol on Substances that Deplete the Ozone Layer, see www.ozone.unep.org, as may beamended from time to time.

7. As covered in the 1975 Convention on International Trade in Endangered Species or Wild Flora and Fauna (CITES), seewww.cites.org, as may be amended from time to time.

Chapter 28. ‘Voices of the Poor’, The World Bank (2009). www.worldbank.org.9. Sub-Saharan Africans Rank the Millennium Development Goals. Tortara, R. (2009), Gallup Inc.10. The Eurostat definition has been used in the benchmarks against EU 15 fatality rates: The incidence rate = (number of fatal

accidents at work that occurred during the year/number of persons in employment in the reference population) x 100,000. A fatalaccident at work is a discrete occurrence in the course of work with physical or mental harm, leading to death within one year ofthe accident. It excludes accidents on the way to or from work, occurrences having only a medical origin, and occupationaldiseases. To adjust for differences between the Member States in the distribution of workforce across the risk branches, astandardisation is made giving each branch the same weight at national level as in the European Union total.

Chapter 3 (Asia)11. Annual Deal Round Up 2009. www.vccedge.com; 12. Reserve Bank of India, www.rbi.org.in. 13. Article ‘Worryingly fragile’, The Economist, 13 November 2009.14. ‘Global Employment Trends’, January 2010 publication, as appeared on www.ilo.org.15. IFC ‘2008 Annual Report: Creating Opportunities’.16. Alternative Assets Network ‘Asia Private Equity Review Jan 2010’ www.altassets.com.17. ‘China’s Yuan may struggle to meet 3% inflation target’, 6 March 2010, Bloomberg News, www.bloomberg.com.18. Article ‘Sensex adds 81 per cent in 2009’, as appeared on www.indianexpress.com.19. www.kaizenpe.com.20. UNESCO, www.unesco.com.

Chapter 3 (Africa)21. ‘What kind of fiscal stimulus for Africa’, The World Bank, www.worldbank.org.22. ‘A Rapid Impact Assessment of the Global Economic Crisis on Uganda’, The International Labour Organization, www.ilo.org.23. ‘New Financiers are Narrowing Africa’s Infrastructure Deficit’, The World Bank, www.worldbank.org. 24. Transparency International, www.transparency.org/policy_research/surveys_indices/cpi/2009.

Chapter 4 (Alternative investment)25. The ‘bottom of the pyramid’ is a common reference for the largest, and poorest socio-economic group. In global terms, it applies to

be on US$2 a day, typically in developing countries.26. ‘Africa’s Infrastructure. A time for transformation’; The World Bank, www.worldbank.org.27. ‘Microfinance in Africa, State-of-the-sector report’; CARE www.care.org.28. Microfinance Investment Exchange, www.mixmarket.org.29. Robinson, Marguerite S, ‘Microfinance: the Paradigm Shift from Credit Delivery to Sustainable Financial Intermediation’, in Mwangi

S Kimenyi, Robert C Wieland and J D Von Pischke (eds), 1998, ‘Strategic Issues in Microfinance’, Ashgate Publishing: Aldershot.


Chapter 4 (Agribusiness)30. ‘2008 Annual Report: Creating Opportunities’. International Finance Corporation, www.ifc.org.

Chapter 4 (Financials)31. ‘World Investment Report’ (2008); UNCTAD, www.unctad.org.32. ‘Non-performing assets for banking industry to rise’, Crisil Rating, 2009.

Chapter 4 (Consumer)33. ‘Special Report: Developing world to overtake advanced economies in 2013’ (2009); www.euromonitor.com.

Chapter 534. ‘Clean Energy Trends 2008’; Clean Edge www.cleanedge.com.35. ‘The impact of climate change on pro-poor growth’; Department for International Development, www.dfid.org.36. International Labour Conference, 98th Session, 2009 Report VI, Gender equality at the heart of decent work.37. UNIFEM (2009) www.unifem.org.38. ‘Embedding Gender in Sustainability Reporting – A Practitioner’s Guide’, 2009; document produced by the Global Reporting

Initiative on the International Finance Corporation.39. Catalyst, 2007. The Bottom Line: Corporate Performance and Women Representation on Boards. McKinsey & Company. 2007.

Women Matter: Gender diversity, a corporate performance driver. Deszõ, Cristian L., and David Gaddis Ross. 2008.40. ‘UNDP Gender Guidance for National Aids Responses’; UNDP, www.undp.org.

Chapter 641. Gases which contribute to climate change, such as carbon dioxide and methane.42. As defined by IFC’s Performance Standards and IFC/World Bank EHS Guidelines, and as may be amended from time to time and

adopted by CDC. The significance of a business contribution to GHG varies between industry sectors. A common threshold is100,000 tons CO2 equivalent per year for the aggregate emissions of direct sources and indirect sources associated withpurchased energy for own consumption. This or similar thresholds will apply to such industry sectors or activities as energy,transport, heavy industry, agriculture, forestry, and waste management in order to help promote awareness and reductions ofemissions. Estimation methodologies are provided by the Intergovernmental Panel on Climate Change (IPCC), various internationalorganisations, and relevant country agencies.

Chapter 743. Excluding the seven microfinance fund managers.

Data disclaimer 87

Whilst we have used our reasonableefforts to ensure the accuracy of dataused in this report, certain data has notbeen audited or independently verified.Most of the data has been provided to usby our fund managers. Fund managersand portfolio companies have reviewedthe case studies specifically about them.

Data on employment and taxes paid hasbeen received from many but not all ofCDC’s portfolio companies. We havereceived this data from the fund managerswho have invested our capital (and thecapital of others) in these businesses.Data may be from different points in timebut was requested to relate as closely toyear end 2008 as possible. Employmentdata may sometimes include contractworkers and other non-permanentworkers. Tax data mostly refers tocorporate taxes paid in 2008 by CDC’sportfolio companies.

Data on employment and taxes paid, aswith all other data, in this report save foraudited financial data, should be read asindicative of magnitude rather than exactfigures. We have therefore rounded alldata in a conservative manner. We haveavoided extrapolations, which wouldshow estimated data for CDC’s entireportfolio, in order to keep quoted figuresas close as possible to the information wehave received from our fund managers.

Apart from tax data and unless otherwisestated the financial data and valuationscontained in this report relate to the yearended 31 December 2009.

Any errors or omissions are regrettablebut, as with any report based on extensivedata received from third parties indeveloping countries, difficult to avoidentirely. CDC will continue to seek toimprove its efforts to ensure data qualityand enrich its knowledge managementsystems in future.

Data disclaimer

✉ Feedback

CDC welcomes all feedback on this report and is seekingopportunities to improve the standard of its publications. A feedback form is published online to facilitate this. Please see www.cdcgroup.com

Alternatively, feel free to contact CDC by email [email protected]. Contacts for CDC’s ESG andcommunications team are also available from the website.


ILO International LabourOrganization

IPEV International Private Equity andVenture Capital Valuation

IRR Internal Rate of ReturnISO International Standards

OrganisationMFI Microfinance InstitutionsMIV Microfinance Investment

VehiclesMIX Microfinance Investment

ExchangeMNO Mobile Network OperatorMSCI Morgan Stanley Composite

IndexNGO Non-Governmental

OrganisationNorfund The Norwegian DFINPA Non-performing assetsOECD Organisation for Economic

Cooperation and DevelopmentOHSAS Occupational Health and

Safety Advisory ServicesRAS Royal African SocietySEIA Socio-Economic Impact

AssessmentSME Small and Medium Sized

EnterprisesTTFC Truong Thanh Furniture

CorporationTZS Tanzanian ShillingUNCTAD United Nations Conference on

Trade and DevelopmentUNDP United Nations Development

ProgramUNPRI United Nations Principles for

Responsible InvestmentUS GAAP United States’ Generally

Accepted Accounting PrinciplesWWf World Wildlife FundZAR South African Rand

DesignRare Corporate Design.

PhotographsAll photographs originate from CDC’slibrary of photographs of investeecompanies. They are either supplied by fund managers or were taken by CDC staff on site visits.

Designed and printed in the UK using only CarbonNeutral® Companies.

Printed on FSC certified paper, and using ISO14001 certified EnvironmentalManagement System. 100% of the inks used are vegetable oil based. 95% of presschemicals are recycled for further use and on average 99% of any waste associated with this production will be recycled. This document is printed on Revive Pure WhiteUncoated, a fully recycled paper containing 100% post consumer waste certified by the Forest Stewardship Council. The pulp is bleached using an Elemental Chlorine Free (ECF) process.

Below is a list of acronyms that occur inthe report. It is not intended to beexhaustive, but does show some of theacronyms that occur frequently.

AVCA African Venture CapitalAssociation

BCR Banque Commerciale du RwandaBPDC Best Practice and

Development CommitteeCDM Clean Development MechanismCDP Carbon Disclosure ProjectCEO Chief Executive OfficerCER Certified Emissions ReductionsCOO Chief Operating OfficerDFI Development Finance InstitutionDFID Department for International

DevelopmentDRC Democratic Republic of CongoEBITDA Earning before interest, tax,

debt and amortisationEDFI European Development

Finance InstitutionsEHS Environment, Health and

SafetyESG Environment, Social and

GovernanceFDI Foreign Direct InvestmentFMCG Fast Moving Consumer GoodsFMO The Dutch DFIFSB Financial Services BoardGDP Gross Domestic ProductGHG Greenhouse GasGTAP Global Trade Analysis ProjectGTLP Global Trade Liquidity ProgramIC Investment CommitteeIFC International Finance CorporationIFPT International Finance

Participation TrustIFRS International Financial

Reporting Standards

Acronyms and additional information

Chapter 8 – SME Investments 89

Fund managers

Global

Actis www.act.is

Aureoswww.aureos.com

Cordiant Capitalwww.cordiantcap.com

Minlam Asset Managementwww.minlam.com

Shorecap Internationalwww.shorecap.net

Africa

Adlevo Capitalwww.adlevocapital.com

Advanced Finance and Investment Groupwww.afigfunds.com

African Capital Alliancewww.aca-web.com

African Lionwww.afl.co.za

Business Partnerswww.businesspartners.co.za

Citigroup Venture Capital Internationalwww.citigroupai.com

Development Partners Internationalwww.dpi-lip.com

ECP Africawww.ecpinvestment.com

Ethos Private Equitywww.ethos.org.za

GroFinwww.grofin.com

Horizon Equitywww.horizonequity.co.za

Helios Investment Partnerswww.heliosinvestment.com

I&P Managementwww.ip-mngt.com

ManoCapwww.manocap.com

Medu Capitalwww.meducapital.co.za

Société Générale Asset Managementwww.sgam-ai.com

Sphere Holdingswww.sphereholdings.co.za

Travant Capitalwww.travantcapital.com

Tuninvestwww.tuninvest.com

Vantage Capitalwww.vantagecapital.co.za

Microfinance

Access Holdingwww.accessholding.com

Advanswww.advansgroup.com

Berkeley Partnerswww.berkeley-energy.com

Caspian Capital Partnerswww.caspianadvisors.com

Catalyst Microfinance Investorswww.catalyst-microfinance.com

Global Environment Fundwww.globalenvironmentfund.com

Global Trade Liquidity Programmewww.ifc.org

Asia

AIF Capitalwww.aifcapital.com

Centras Capital Partnerswww.centrascapital.com

JS Private Equitywww.js.com

Kendall Courtwww.kendallcourt.com

Lombard Investmentswww.lombardinvestments.com

Navis Capital Partnerswww.naviscapital.com

Saratoga Capitalwww.saratogacapital.com

India

Ambit Pragma Ventureswww.ambitpragma.com

Ascent Capitalwww.ascentcapital.in

Avigo Capital Partnerswww.avigocorp.com

Baring Private Equity Partners Indiawww.bpeindia.com

BTS Investment Advisorswww.btsadvisors.com

ICICI Venturewww.iciciventure.com

IDFC Private Equitywww.idfcpe.com

India Value Fund Adviserswww.ivfa.com

Kotak Mahindra Groupwww.kotak.com

Lok Capitalwww.lokcapital.com

New Silk Route Advisorswww.nsrpartners.com

Rabo Equity Partnerswww.raboprivateequity.nl

Ventureastwww.ventureast.com

China

Capital Todaywww.capitaltoday.com

CDH Investmentswww.cdhfund.com

CITIC Capitalwww.citiccapital.com

CMIA Capital Partnerswww.cmia.com

FountainVest Partners (Asia)www.fountainvest.com

Keytone Capital Partners

Legend Holdingswww.legendcapital.com.cn

Qiming Venture Partnerswww.qimingventures.com

Tripod Capital Internationalwww.tripodcapital.com

Latin America

Advent International Corporationwww.adventinternational.com

Altra Investmentswww.altrainvestments.com

Nexxus Capitalwww.nexxuscapital.com

Patria Banco De Negocioswww.bancopatria.com.br

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