UK-based CDC Group, the tax payer-owned development finance institution and a significant LP in emerging markets funds, is facing new guidelines on investment strategy, executive pay and other organisational changes.
Those changes could include a move toward more direct investment activity in the emerging markets and away from making fund commitments.
In recent years, the group has faced criticism from some quarters for its remuneration structure of top executives, alleged lavish expense claims, and for supposedly not directing enough capital to emerging markets most in need of investment.
I want CDC to be more pro-poor focused than any other development finance institution, doing the hardest things in the hardest places
CDC has not received any money from taxpayers since 1995, according to the group’s website.
In 2009, CDC also adopted a new investment policy following consultation with the Department for International Development, the government department which owns the group.
Following the consultation, CDC now makes 75 percent of new investments in low-income countries, defined as countries with an annual gross national income per capita of less than $905 in 2006.
However, CDC has became too “financially focused”, and must balance its ability to generate stable returns while still providing development to emerging markets most in need of capital, argued the Secretary of State for International Development, Andrew Mitchell, in a letter to Parliament this week.
As a result, Mitchell is proposing the group reduce commitments to third party funds and begin increasing direct and co-investments to markets typically ignored by private sector counterparts.
CDC is currently invested in approximately 800 companies in 71 countries through 65 different fund managers.
“CDC also needs more financial firepower,” argued Mitchell, adding the group “needs to try to find liquidity for its investments so that capital can be recycled more quickly to new targets”.
In one of his more significant proposals, Mitchell said one way of increasing such firepower would be to allow the group to borrow capital, which would give CDC “the ability to move more quickly and more effectively”.
As part of a greater overall consultation on the changes, Mitchell also revealed the government will review the group’s remuneration structure, ensuring that it “is fair and appropriate, but not excessive”.
After a further announcement from Mitchell early next year, CDC will publish the revamped business plan sometime next spring, the letter stated.
“I want CDC to be more pro-poor focused than any other development finance institution, doing the hardest things in the hardest places,” said Mitchell.
CDC stated they welcomed the consultation, adding “it is right that we review our effectiveness and find ways of ensuring that our impact is maximised”.