The Future of CDC

Evidence from The Department for International Development


CDC is a bilateral development finance institution (DFI) 100% owned by the UK Government through the Department for International Development (DFID). CDC’s website is at

CDC’s objective s are: to invest in the creation and growth of viable private businesses in poorer developing countries to contribute to economic growth for the benefit of the poor; and to mobilise private investment in these markets both directly and by demonstrating profitable investments.

CDC is classified by HM Treasury as a self-financing public corporation. It is a public limited company (plc) with its own board and is regulated by the FSA. DFID sets CDC’s Investment Policy (within which sits its Investment Code around environmental, social and governance standards) and its Remuneration Framework. Both Investment Policy and Remuneration Framework were last set in 2008. DFID does not get involved in CDC’s operational decisions: this responsibility lies with CDC’s Board and Management.

Since its restructuring in 2004, CDC has operated primarily as a private equity fund of fund. Under this business model, CDC commits capital to fund raised and managed by independent fund managers, the majority of whom are based in developing countries. The fund manager invests CDC’s money together with money committed by other investors, both public and private, in promising private companies in developing countries. Such investments are generally held for about five to eight years. During this time, CDC’s fund managers play a hands-on role in nurturing the companies in their portfolios and add value through the provision of business expertise and the promotion of responsible business practices. When the fund manager sells the investment, it returns the capital and any net profit to CDC and other investors. CDC re-cycles the proceeds from these investments into new commitments to fund. In this way CDC is self-financing. CDC has received no public money since 1995.

The Secretary of State set out a range of intended reforms to CDC in his speech on Wealth Creation on October 12, in which he noted that a public consultation will inform further these proposals. The consultation runs from the beginning of November 2010 to the end of January 2011.

Effectiveness of CDC compared to other similar institutions

CDC’s effectiveness can currently be assessed through how it matches up to its 2008 Investment Policy targets and the development impact of its fund investments. There is less comparable evidence available around CDC’s effectiveness vis a vis other, similar bilateral and multilateral DFIs. This is in part due to the different models, objectives and areas of geographic focus employed by those institutions. (For example, CDC's almost 100% fund of Funds private equity model is unique in the DFI sector. Other organisations have different instruments at their disposal and several have different ownership models, including private sector shareholders).

CDC’s November 2008-revised Investment Policy focused CDC tightly on the poorer countries. Its Policy targets required that, for investment funds that CDC backs from January 2009 to 31 December 2013, more than 75% of total investment by CDC over the period must be in Low Income Countries (those with an annual GNI per capita of less than US$905) and more than 50% must be in sub-Saharan Africa. In 2009, 100% (£52 million) was invested in Low Income Countries, of which 96% was in Sub Saharan Africa. (Since its reorganisation in 2004, under a previous Investment Policy, CDC has also made 75% of new investments in the poorer developing countries and 64% in sub-Saharan Africa or South Asia, exceeding the targets set for it at the time).

CDC has a greater proportion of its portfolio in poorer countries than other DFIs. In its 2009 report [1] the House of Commons Public Accounts Committee found that "CDC’s portfolio is much more focussed on poor countries than are the investment portfolios of other Development Finance Institutions. For example, CDC is investing more in poor countries than the combination of the German, Dutch and French Development Finance Institutions".

In 2008, CDC had some 56% of its portfolio in Africa, compared to 11% for the International Finance Corporation, 13% for DEG (Germany), 45% for Proparco (France), and 28% FMO (Holland). [2] At the end of financial year 2010, the International Finance Corporation had 8.3% of its overall portfolio in Low Income Countries.

To illustrate the contribution of CDC’s investments in its target countries, in 2009 CDC had capital invested in some 800 businesses in developing countries, employing some 733,000 people and paying annual taxes in excess of $2.8 billion to their governments. And in the last six years , CDC has committed £2.9 billion in the poorer countries of Africa, Asia and Latin America , which has played a role in attracting £24 billion of capital that private investors and other DFIs have also committed to those funds. Over the same period, CDC has also grown in value from £1 billion to £2.5 billion at the end of 2009.

CDC began properly quantifying its development impact in 2008 with its first annual impact report which set out, on the basis of a model adapted from the International Finance Corporation’s Development Outcome Tracking System, its emerging evidence on impact of its post-2004 investment activities. In 2009, for example, of the 20 CDC-invested fund evaluations undertaken by CDC, 17 scored 'satisfactory' or 'successful' on development outcomes. Three were scored ‘below expectations’. Independent verification of its impact is also being increasingly used by CDC to ensure its veracity.

CDC’s approach to development impact measurement has been since taken up by other bilateral DFIs including Swedfund. (CDC’s 2008 and 2009 reports can be found on CDC’s website, at the address shown above).

The reforms proposed by the Secretary of State for International Development on 12 October 2010 and the feasibility of achieving desired results given the CDC's current resources, including staffing

The aim of the ambitious reforms proposed by the Secretary of State is to make CDC an essential ingredient to wealth creation in the poorest countries. The reforms will bring about a revitalised CDC driven by both development, as well as financial, returns and an organisation which has more clarity and ambition over what it does and where it works.

The first reform proposed is that the fund of Funds model, which can lock up CDC’s capital for up to 10 years, should make up no more than a part of a broader and more actively managed portfolio. CDC should further have the ability to make investments directly in target markets, beginning with co-investment with other capital providers.

CDC should then also engage a wider range of instruments including debt and guarantees to create a more diversified portfolio in terms of risk, maturity and liquidity.

The reforms also include the need for CDC to demand more effective treatment of environmental issues, more transparency, and a rigorous approach to corruption, and monitoring of the improvements in conditions under which people work.

The proposed reforms provide CDC with significant opportunities. But to meet these challenges, the Secretary of State recognises that CDC, which has a current complement of 46 staff, will require new skills and capacity in order to deliver on its upgraded objectives. For example, given its lack of current direct investment expertise, CDC may initiate co-investments before embarking on its own investment origination but, over time, will need to build in-house skills. A growing debt portfolio will also require adequate resourcing, recruiting the people with the right expertise to do the job. And to achieve the results required, CDC must attract and retain high calibre people committed to international development – and who want to be remunerated fairly, but not excessively. DFID will also therefore take on board advice from the public consultation on what the most appropriate remuneration structure (as well as instruments and sectors for investment) should be.

Finally, CDC must also have the financial capacity to support its investment operations. It will therefore regain the power to borrow through access to a substantial borrowing facility.

The extent to which the proposed reforms will be sufficient to refocus CDC's efforts, especially with respect to poverty reduction

The Secretary of State is clear that CDC must be more focused on the poorest countries than any other development finance institution – doing the hardest things in the hardest places. The package of reforms proposed is a strong addition to CDC’s armoury to help achieve this. It will allow CDC more scope to provide capital to businesses which could not otherwise access it in some of the poorest countries in the world.

Reducing CDC’s new commitments to future third party funds - which can tie up capital long term in places where it may no longer be needed - and possible liquidation of some of its existing investments (where this is achievable on suitable terms) and developing a set of new instruments will allow CDC a more active approach to portfolio management, more suited to building the range of poverty-focused investments it needs to be able to make. It will permit more active management of its flows of capital, using for example loans of different tenors and investments of varying risk levels to build a portfolio which will have the greatest impact on poverty.

New instruments will also provide CDC with greater flexibility to invest creatively in the poorest countries in which private equity markets are not yet developed and where investing in businesses therefore needs a different vehicle. CDC will be able also to extract itself more quickly when it is no longer adding real value. And investing alongside others will allow CDC to use others’ on-the-ground knowledge and expertise to deploy capital in challenging places, having an impact on poverty whilst building its own capacity to invest directly over a period of time. All this will be backed by the additional financial firepower provided by a borrowing facility which will maximise CDC’s ability to respond quickly to the investment opportunities it develops.

So the reforms will bring about a substantial refocusing of CDC’s work in reducing poverty through more control over what it does, the use of more instruments, and extra flexibility to be where it is needed most and not where it is not.

The public consultation will provide further important advice and evidence from which CDC can learn about what works best in investing to fight poverty, particularly in Sub Saharan Africa and the poorer parts of Asia, and on CDC’s modus operandi more broadly. And these changes to CDC’s mission and business model will be managed to ensure that co-investors and the financial markets recognise the new opportunities on hand for CDC.

Final decisions on CDC’s reconfiguration will be made following the consultation and will be reflected in CDC’s new Business Plan which will be approved by the CDC Board and published in May 2011.

Whether alternative options, including the abolition of the CDC, should be adopted

The status of CDC and whether it should be sold off or brought into DFID as an executive agency was considered as part of the summer 2010 Cabinet Office review of non-departmental public bodies.

CDC is not being sold off for two reasons. First, DFID would lose an important tool for supporting private sector development in developing countries. Private investors fail to invest enough in the poorer countries to drive the development and economic growth that will reduce poverty. CDC plays an important role in demonstrating that profitable investments in these countries can be made. Since 2004, when it was restructured into a fund of fund, CDC has r ealised investme nts that have returned some £2.6 billion to CDC for reinvest ment in new businesses – from an initial value of £1 billion.

Second, any sale of CDC investments in the secondary market would likely be at a discount, probably crystallising a loss to the taxpayer and representing poor value for money.

If the status of CDC were to change from the relative independence of a plc to become an Executive Agency within DFID, many of the benefits that accrue from that independence are likely to be lost. In particular, any actual or perceived increase in Government control or influence over CDC is likely to compromise CDC’s ability to attract other private sector investors to invest in fund alongside CDC and in other forms of parallel investment.

DFID's shareholding in Actis

Actis was created in 2004 as a spin-out from CDC, the UK’s development finance institution, following a reorganisation in which CDC moved from being a direct investor to being an intermediated investor. A new independent company, Actis Capital LLP, was de-merged from CDC to handle the fund management side of the business. Actis took over CDC's overseas offices and most of CDC's staff, including all those in overseas locations.

Actis is now a limited liability partnership (LLP), owned 60% by its partners and an employee share trust, and 40% by the Secretary of State for International Development. Actis is regulated by the FSA. DFID has an 80% economic interest in Actis until 2013 and 40% thereafter. It is a commercially-oriented fund manager, promoting and managing private equity fund in a range of emerging markets and developing countries. Its principle activity is fund management on behalf of third party investors.

Actis had $4.8 billion of fund under management as at May 2010. CDC remains an important investor in Actis managed fund, and currently represents approximately 46 per cent of total commitments to Actis managed fund worth £1.3 billion.

Further information on Actis is available on its website:

DFID does not take part in the day-to-day operations of Actis and has no Board representation. This was set up at Actis’ inception to ensure that the business could credibly present itself to private investors as a commercially driven and independent organisation, thereby assisting its fund raising activities.

DFID is reviewing its stake in Actis to ensure that the UK’s development interests remain best served by maintaining its share in the business.

[1] Investing for Development: the Department for International Development’s oversight of CDC Group plc. Eighteenth Report of Session 2008-2009.

[2] EDFI 2008 Comparative Analysis of EDFI Members, quoted in CDC’s Development Report 2008.