The Future of CDC

Evidence from Tom Cairns

My experience of CDC is as the manager of the Sierra Investment Fund, a private equity fund that focuses on investing in Sierra Leone. CDC is an investor in the fund.

1. The main points I would like to make are as follows:

a. CDC should be considered the jewel in the crown of the UK’s development activity

b. However, it has become a victim of its own success, and what seemed bold a few years ago, no longer seems so.

c. This is no excuse for stagnation. Rather CDC should continue to innovate at the forefront of the development field and reform is justified.

d. My view is that any reform should be guided by the following principles:

i. Focus on the lowest income countries: CDC’s raison detre should be to invest where others will not. In doing so, Government, as the owner of CDC, should recognise the increased risk of investment loss this entails. An allocation of the portfolio to middle income countries is therefore justified.

ii. Do not sacrifice investment principles for development goals: Bad investment is good for no-one. I believe there is no trade off between investment returns and development returns (within some common sense rules of what businesses you should and should not invest in). However, pressure may come to invest quickly to demonstrate "we are doing something to help". This risk should be managed carefully.

iii. Focus on countries where the UK has the greatest political influence: Development does not happen in a political vacuum. Combining British influence with investment capital will have a positive effect on both.

iv. The pace of change should be driven by people, not by policy: Investing in the poorest countries in the world is unpopular because it is both difficult and very risky. As such, CDC should look to build a world class team (benchmarked against the private sector) to deliver any new business it undertakes. The existing team has been built to run a fund of funds business - a job they are very good at. Changing this focus will require adding new people. Taking time to find the right people will repay itself significantly in the long run. It would be a mistake to rush this.

v. Private equity should remain a significant part of CDC’s business: CDC have a great team that has done a great service. Keep the best people you have and make the most of them.

vi. Making direct investments (as either debt or equity) will require building out the organisational infrastructure that CDC lost when Actis and Aureos were formed: You can’t make direct investments if you are based in London. Being on the ground, and hiring strong local teams, is essential. I envisage this to be the greatest challenge in implementing the reforms proposed by Andrew Mitchell. I think there are two ways to do this, and perhaps both should be implemented in parallel:

1. Firstly, CDC should consider buying out some funds in which it has a significant stake. This would i) give it presence on the ground, ii) give it control over capital it has tied up over a long term, iii) most importantly give it access to talented managers. The challenge here is of course the price CDC would need to pay.

2. Secondly, CDC could look to directly recruit talented managers in areas where it wanted to build capacity. To ensure on the ground presence they will need to open offices in locations where they want to operate.

e. It is acceptable to do well by doing good: People should get angry about poverty and not wealth. It is good that those who make a significant positive contribution get financially rewarded – I have no problem with paying the head of CDC a large bonus if they do well. Having said that, performance must be measured over the long term – I am not an expert on structuring compensation, but believe that this can be done simply. I believe the public is accepting of high salaries if they understand why they are being paid. There is limited public anger at footballer’s wages, whereas bankers (about whom people have very little information and are involved in an activity people do not understand) receive public scorn.

2. To conclude, the British government should be proud of the work done to date by CDC. However, all organisations must change as their environment changes. Finding ways to make CDC even more effective at reducing poverty in emerging markets will require some experimentation (and as a result, some failures), but if done sensibly will keep the organisation at the forefront of international development.