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Institutional Investor Profile: Richard Laing, Chief Executive, CDC Group03/08/2005. Source: AltAssets. 
Richard Laing on CDC's mission and on how to invest successfully in Asia and Africa. Laing has almost 25 years of experience in the emerging markets. He says that investing in the poorest countries of the world is not just good developmentally but also makes sense financially.  CDC Group is an emerging markets fund of funds manager. It invests in poor countries, with a particular focus on sub-Saharan Africa and South Asia.
CDC has assets of £1.2bn under management and always looks for new investment opportunities. To date, the firm has made commitments to 42 funds. The size of commitments per fund ranges widely, from $4m to $350m.
The roots of CDC go back to 1948, when the firm was founded by the UK government. Its mission has always been to invest in profitable businesses, initially in Africa, the Caribbean and the Far East and later in the countries of the emerging Commonwealth - hence the name, the Commonwealth Development Corporation. In 1969 CDC's geography was extended to include developing countries outside the Commonwealth. Since the current government came to power, CDC has restructured itself as a plc and spun out Actis as a privately controlled fund manager, in fulfilment of the Prime Minister's commitment to transform CDC into a public private partnership.
In 2004 we began to operate as an independent fund of funds manager, still addressing our overall objectives of putting our capital to work in private sector businesses, but choosing to do so as an LP in private equity funds. We are still investing and re-investing the capital received from the government in previous years and have not yet sought to raise our own capital.
What is your investment strategy?
'Our investment strategy is unique in that we are dedicated to being an LP in a discrete part of the emerging markets scene. What we have in common with other LPs is that we actively seek top-quartile funds, but those funds have to operate in our target markets. We want to generate wealth in poorer countries by providing capital for investment in the private sector. Our aim is to get the best returns from each of the funds in which we invest - that is the ultimate confirmation that the underlying businesses are sustainable and profitable. Part of our strategy is to encourage other investors to invest alongside us. If we cannot prove that we can make good returns in those countries, other investors will not go there.
Besides our Africa and South Asia-specific funds, we also invest in sector-specific funds such as energy and micro-finance. Energy represents over a third of our portfolio and is primarily done through our 100% owned subsidiary, Globeleq, which is the leading power generation company in the emerging markets.
Our main fund manager is Actis, which was spun out of CDC in 2004. We are investors in all of the Actis funds for Africa, South Asia and Latin America. They also manage our investment in Globeleq. We have also invested in SME funds in Central America in 2002 and funds in West, East and Southern Africa in 2003, all of them run by Aureos, another manager spun out from CDC.
CDC's recent commitments to Africa-specific funds include a $20m commitment to the Canada Investment Fund for Africa, a $50m commitment to the Actis Africa Empowerment Fund to invest in black empowered businesses in South Africa, a $15m commitment to the Emerging Markets Partnerships' second Africa fund aimed at larger businesses, a $5m commitment to the African Lion early stage mining fund and a $3m commitment to Grofin, an early stage fund focusing on small enterprises in East Africa, which was endorsed by Tony Blair in his capacity as chairman of the Commission for Africa.'
India is one of your core geographic areas. Would you continue to invest in the country if private sector investor interest were to increase?
'India is key to CDC and provides many opportunities for successful and profitable investments. We keep a very close eye on private equity developments in the country. If it all goes very well and the funds we are reviewing become oversubscribed, we may let others take our place. However, I do not think this will be an issue in India for a long time, because there are still many funds needing our support.'
Do you do any direct investments?
'Not at the moment, but we have already looked at some co-investment opportunities and will definitely do them in the future.'
How do you select GPs?
'In the cases of Actis and Aureos it was easy - we know them well because they used to be part of our organisation. Our research and our experience help us make investment decisions. We know the markets and we are known in the markets, which means new fund managers approach us if we have not already approached them.
Our due diligence is very similar to that carried out by other fund of funds managers. We have our checklist, meet the teams and investee companies, do thorough reference checks and use our research data. Our due diligence teams include people like Anne-Maree Byworth and Brian Lim who have substantial experience of carrying out due diligence in mature markets.'
What are the qualities of a good GP?
'In the emerging markets it is especially important to have experience. We prefer GPs who are based in our target geographies and know the countries well. There is no substitute for being on the ground. Other qualities we look for are team stability and deal-sourcing skills.'
What would put you off investing with a GP?
'As the markets we are in are difficult, transparency is particularly important to us. If we find that any data provided are incorrect, we stay away from the investment.'
What are the main challenges for investors in the regions in which you are investing?
'One of the main issues we have been facing is that there are very few funds around in which we could invest. Let me give you an example: if you invest in European buy-outs you may have some 500 funds to choose from, while in Africa there may only be ten.
Exits are still difficult to achieve in the emerging markets. Both IPOs and trade sales are possible and happen regularly, but we would like to see the environment for exits improve. Currently there are only few stock markets in Africa with the requisite liquidity. Their number and size need to increase.
Poor infrastructure causes problems to funds and their portfolio companies, and it therefore makes our job more difficult. Africa and South Asia need reliable power, water and telecommunications systems, good roads and efficient ports. We are very active in this area and are looking for funds with a focus on infrastructure.
The lack of skills and management experience is another issue, as is the lack of consistent reporting and book-keeping.
On the positive side, governments these days are invariably keen to encourage inward investment.'
What are the main challenges for your firm?
'Basically, we are taking a Western model and applying it to the emerging markets. We have to test continuously whether this private equity model is right for the countries and adapt it accordingly. Neither GPs nor LPs should accept the status quo.'
Would you look at first-time funds?
'In the markets in which we operate you cannot afford to ignore first-time funds. We regard it as part of our mission to support quality first-time managers because an increase in the number of funds is important for economic growth. More funds will hopefully attract more investors.
With first-time funds as with all other funds we have to get our judgement right. While we will look at any first-time fund, we prefer those where the teams have already worked together elsewhere. We have to be satisfied that the team will be there over the lifetime of the fund.
Currently about a quarter of our portfolio is made up of first-time funds.'
Do you think the G8 conference has had an impact on what you do?
'We are happy with what has been decided. However, whether all those things will be implemented is another question. It is too early to say whether the G8 conference was a success. We need to see actions first.'
When you are working to attract more investors, which prejudices do you have to overcome?
'Often people know the regions we are active in only through the media. They see and hear about corruption, poverty and instability. It puts them off investing. We work on getting beyond those generalisations and talk about how different the regions - in Africa, for example - are. Just because a few states or countries are high risk for investors, not all of them are.'
What advice would you give to private equity investors?
'Go to the emerging markets and have a look yourself. You have got to get under the skin of the countries you are going to invest in. I can tell you from my experience, it is not difficult. Call on local people, businesses, trade associations and embassies. They will all be very happy to talk to you. It's time-consuming but it is worth the effort.'
In the future, what do you think are the most interesting countries within the emerging markets?
'India and China are clearly exciting. In Africa, Nigeria has huge potential and a government which is doing the right things, though there are obviously still pitfalls. And there are many others such as Malaysia and South East Asia, South Africa and Egypt.'
Within the regions you are active in, what are the most interesting industry sectors going forward?
'Consumer goods is one. Disposable income in the poorer countries is increasing and there is a need for new products. However, I do not think that the Western model would work in many of the regions. I believe that you need to tailor your products to the markets: sell smaller quantities of, for example, shampoos, tooth paste, etc, and sell them at realistic price points. New business models are needed.
I also think that companies that provide goods and services to the West will continue to do well in the future. One recent example has been India's provision of outsourced IT services to Western companies. There is also room for growth in the processed and packaged goods segment. Agricultural and other products could increasingly be processed and/or packed in Africa or Asia.'
How many commitments do you intend to make over the next year?
'Around 10. In the last 12 months we have made 11.'
What are your predictions for the future of the emerging private equity markets?
'They will continue to be profitable but volatile. As their economies grow, private equity markets should thrive. The emerging markets provide a rewarding environment for firms like us, and returns should improve further as their commercial and physical infrastructure develops. It's a fascinating and rewarding place to be.
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