CDC Group, UK government-backed private equity emerging markets fund of funds investor, today revealed record results for returns and fund commitments to emerging markets for the 12 months to 31 December 2007.
The total return after tax increased by 79 percent to £672 million (€840 million; $1.3 billion); the proceeds were reinvested in new commitments in emerging economies.
Richard Laing, CDC’s chief executive told PEO the returns were boosted by the sale of majority of energy firm Globeleq’s assets, which generated realised gains of £281 million, on cash proceeds of £621 million and an internal rate of return of 18 percent.
He said there was more to come from Globeleq, whose sub-Saharan assets were retained and committed to emerging market manager Actis’s latest fund, an infrastructure fund along with $750 million. This is CDC’s largest ever single fund commitment and the final one under preferential terms agreed with Actis as part of its agreement to spin out of CDC in 2004.
Laing said: “First of all, Actis’ performance is very good. So we have been and remain quite happy to have that exposure – 62 percent of all our funds. We are perfectly relaxed. Look at what they have done for us.” He said the manager was likely to continue be a large part of CDC’s programme.
Laing is more concerned with the glut of managers in emerging markets: “Some of the very large global firms are looking at emerging markets and saying this is the place we need to be. They have not been there before and they are pricing transactions high. It’s a worrying trend.”
[Global firms] are pricing transactions high. It's a worrying trend.
He said the number of domestic managers had also boomed. “In India for example a couple of years ago there were a dozen managers available. Now estimates are at around 400. By definition not all of those can be good.”
The boom in emerging market interest was also creating intense competition for people with some offers of compensation at two or three times annual salary.
He said in order to ensure good returns fund of funds had to be cautious and selective.
CDC’s portfolio performance of 57 percent exceeded the MSCI Emerging Markets $ Index by 20 percent and net assets were up by 33 percent to £2.7 billion reflecting strong portfolio company performance.
Commitments rose by 175 percent to £1.1 billion. Net cash stood at £1.4 billion with outstanding, board-approved commitments of £1.6 billion, representing an over commitment of 14 percent.
Laing said this level of investment would continue in 2008, but it would reach an undefined ceiling. He warned this year’s results were not sustainable. “CDC is still set for considerable growth. Emerging markets have been a good place to be, but a global economic slowdown will have some impact. The decoupling of emerging markets from more mature markets is not binary.” He said some countries and sectors would be more adversely affected than others.
CDC made commitments during 2007 to 31 new funds and three co-investments with 16 new fund managers totalling £35 million.
Overall commitment to funds covering multiple regions in 2007 rose significantly to £512 million reflecting commitments to Actis Infrastructure Fund II, Actis Fund 3, Minlam Microfinance Offshore Fund and Global Environment Emerging Markets Fund III.