Written evidence from Actis
PARAMETERS OF
ACTIS'S
SUBMISSION
1. Further to the Select Committee session of Tuesday,
18 January 2011, the Committee has asked for input from Actis
regarding the spin out of Actis from CDC in 2004: the members
have also sought clarification of the work of "Actis Acts"-
the Actis in-house volunteering programme. Aside from a brief
overview of Actis, these are the subjects this document addresses.
INTRODUCTION TO
ACTIS
2. Actis is a leading private equity investor that
invests exclusively in the emerging markets. With a growing portfolio
of investments in Asia, Africa and Latin America; it currently
has US$4.7 billion funds under management.
3. Committed to the highest financial and non-financial
returns for its investors and the companies in which it invests,
Actis adopts an investment approach defined by corporate governance
and rigorous environmental and social standards.
4. Combining the expertise of over 100 investment
professionals on the ground in nine countries, Actis is proud
to actively and positively grow the value of those companies in
which it invests.
| US$4.7billion | Total funds under management
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| 87,383 | Number of employees working in Actis portfolio companies around the world
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| 68 | Number of portfolio companies
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| US$4.3billion | Amount returned to investors from US$1.7bn cash invested
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| 234 | Number of Actis employees
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| 117 | Number of investors in Actis funds
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FACTUAL INFORMATION
AND RECOMMENDATIONS
5. Prior to 2004, CDC invested taxpayers' capital directly
into businesses in the emerging markets. In 2004, CDC's operations
were separated into two parts, an emerging markets fund manager
(Actis), which would seek capital from CDC and other investors
and invest that capital directly into the emerging markets; and
an emerging markets fund of funds, CDC, which would invest indirectly
in the emerging markets by deploying taxpayers' capital with a
range of fund managers, including Actis.
6. There has been some discussion subsequently on the terms
of agreement of that spin out. Rather than argue our own case
here it may be more effective and impartial to refer the Right
Honourable Members to the report on the conclusions of the Public
Accounts Committee which published the following statement in
2009:
This note has explained the background to the sale of Actis and
set out the relationship between operating profits and residual
profits.
It shows that:
- (a) Valuing Actis is not straightforward. It has few comparators
and was not expected to make significant profits. In addition,
because it has been purchased in part by its employees, any valuation
needs to distinguish between the amounts managers receive as workers,
and their residual rights to profits.
- (b) The valuation approach adopted in 2003 was reasonable,
although it may not have taken into account elements of value
that could only be tested through a competitive process which
the Department did not consider feasible in this case.
- (c) Since the sale, Actis has performed well. It has increased
both its funds under management and its operating profits.
- (d) In consequence, the employees have received remuneration
in line with the incentive-based remuneration approach adopted
by Actis.
- (e) In practice, the remuneration paid to employees has
absorbed all operating profits, meaning that there is no residual
profit to distribute, either to the Department (who have a right
to 80% of any residual profit) or the employees-as-partners and
staff (with a right to 20% of any residual profit).
- (f) As a result, the reported operating profit of $8 million
in 2004 (equivalent to £4.6 million) is not a meaningful
guide to the reasonableness of the £381,610 paid for a stake
in the business. Operating profits are all absorbed by incentive-based
remuneration, which would accrue to the employees regardless of
the ownership structure for Actis.
Public Accounts Committee, 23 February 2009, http://www.publications.parliament.uk/pa/cm200809/cmselect/cmpubacc/94/8121512.htm
7. It was intended that the spin out would make available investment
(equity) capital as opposed to, or in addition to, aid and that
this would stimulate development in the emerging markets in several
ways. First, by making CDC capital available to emerging market
businesses. Second, CDC's involvement would set an example to
other investors, reducing the perception of risk and attracting
more investment to the emerging markets. Third, by using a fund
of funds model, CDC would become a vehicle for backing other emerging
markets focused fund managers. CDC would be the seed investor
for several small fund managers, enabling them to
establish their businesses and anchor their early funds.
8. Against these measures, the arrangement has proved
to be a great success. Through Actis alone, CDC has invested US$
1.6billion[1]
in the emerging markets since 2004; capital that may not have
been directed to these markets without CDC's involvement.
9. Equally importantly, aside from Actis, CDC has
seeded the early funds of numerous other emerging market fund
managers (including many smaller local fund management operations);
in a number of cases these have become viable businesses thanks
largely to CDC's early participation.
OUTSTANDING ISSUES
RELATING TO
ACTIS THAT
MAY BE
OF INTEREST
TO THE
RIGHT HONOURABLE
MEMBERS
10. As part of their work, Actis colleagues are encouraged
to get involved in the life of the communities around them - in
the emerging markets in which we operate and within the UK. This
volunteering effort is called Actis Acts and enables every Actis
employee to spend five days a year working on community based
initiatives.
11. Actis colleagues identified education and social
enterprise as being important to them and initiatives have been
developed in our local offices to facilitate volunteering activities
in these two areas.
12. In the UK, it takes the form of a volunteer programme
through which Actis colleagues mentor pupils at the Globe Academy
in Southwark (one of the most deprived of the London boroughs)
and a successful mentoring scheme which has been developed in
partnership with UnLtd UK, whereby Actis professionals mentor
social entrepreneurs as they develop their start up businesses.
13. Elsewhere, for example, in China, a partnership
with Compassion for Migrant Children - a non-profit organisation
established to help China's urban migrant children by offering
social and educational programmes - sees Actis staff members volunteering
as assistant teachers and helping the children with their homework.
14. In financial terms, contributions in the form
of grants made to the community based organisations are modest,
typically ranging from several thousand dollars to a maximum of
US$75,000.
IN CONCLUSION
15. CDC and Actis play different but complementary
roles in delivering private investment to the emerging markets,
thereby encouraging sustainable economic growth in these markets.
16. We believe that CDC has performed well in relation
to its original objectives, through the investment of its capital
in the emerging markets, its ability to attract other investors
to the regions it invests in and the support its investments give
to early stage fund managers in the emerging markets.
17. We believe that CDC is not only highly effective
compared to similar institutions in creating sustainable economic
development in the emerging markets, in our view its success in
this field is unique.
1 Includes amount invested in portfolio companies in
the emerging markets plus fees and other costs payable to Actis.
It should be noted that this amount does not include the value
of the CDC legacy portfolio. In 2004, Actis agreed to manage this
portfolio on behalf of CDC and at that time the portfolio was
valued at £820.4 million. Back
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