Anger at Actis

Actis, the emerging markets private equity giant, has oft found itself the on the receiving end of public criticism. The firm, which manages the largest pool of pan-emerging markets-focused capital in the world, was formerly part of CDC Group, a development agency owned by the UK government. It is this legacy – as a development-focused investor – that has continued to draw unwanted attention to the group.

In late January Andrew Mitchell, the UK’s Secretary of State for International Development, stood before a parliamentary committee and described Actis’ spin-out from CDC in 2004 as an “interesting and sorry saga”. CDC operates today as state-owned fund of funds which backs emerging managers to promote economic development in the world’s poorest countries. Actis, a direct private equity investor, was formerly part of CDC but now operates independently from the group (although CDC remains a limited partner in its funds).

When Actis’ management bought the firm out seven years ago, they paid £373,000 (€439 million; $600 million) for a 60 percent stake in the management company. The government, with its 40 percent remaining stake in the business, is entitled to 80 percent of the ongoing profits under the deal struck.

The problem, Mitchell elaborated to the committee, was that being a private equity firm, Actis’ success is reflected in the carry it generates for partners in the team, not the profit it makes as a company.

“We have a situation where the taxpayer, as a shareholder, is entitled to 80 percent of the profits, but the business is being run in such a way as to ensure that taxpayers and the government receive nothing whatsoever from that,” said Mitchell. He went on to outline the fact that any profits created by Actis had been directed towards a philanthropic arm, essentially meaning there were no profits.

“I very much fear that when ministers made the decision to spin Actis out of CDC, they did not appear to have fully understood the new arrangements that they agreed,” he continued.

Indeed, he would seem to be right. Private equity fees are there to cover running costs, not to generate profits. Managers are incentivised by the fund returns, and as Actis points out, it has paid back $3.4 billion to its LPs (including CDC Group, aka the taxpayer).

Actis operates in a manner entirely in line with industry peers. In fact, it is seen as a leader in the industry on environmental, social and governance issues relating to its investments. But public opprobrium – which is frequently also directed towards CDC – tends to be fuelled by the contrast between individuals’ remuneration and the return seen by the government.
 
“Actis was created on a private sector model. It is extremely successful,” said Mitchell. “It has invested its capital very well. Its existing management, many of whom came out of CDC, are doing phenomenally well and, in my view, they out-negotiated the then government.”

The next step is for the government’s Department for International Development to sell its 40 percent stake in the firm. The Actis management are currently engaged with DfID over the buyout, and Mitchell’s assessment of the situation may not help the process. He described Actis’ management as “enthusiastically exploiting the taxpayer’s position”. “It remains to be seen whether they will recognise and rectify this shameful position in any future discussions,” he said. Actis says it anticipates reaching an outcome “satisfactory to seller and buyer”.

If the government cannot get what it feels is a fair price for its stake in the firm, perhaps it should sell its stake to a third party. There are a number of sovereign wealth funds throughout the world which have hungrily been taking stakes in managers: China Investment Corporation, Mubadala and the Abu Dhabi Investment Authority, for example. These may be interested in Actis as a means to access attractive co-investment opportunities among other benefits. This would let the market decide what is satisfactory to seller and buyer.

As PEI was going to press, news broke that Richard Laing the long-standing chief executive officer of CDC, will step down from the role early next year after the government has completed its review of the group’s activities. Under Laing’s stewardship, CDC has become one of the most important LPs in emerging markets private equity; currently the group has $5 billion committed to private equity funds, predominantly in Africa and Southeast Asia. Laing’s personal contribution to developing the private equity industry – particularly in Africa – was considerable and he will be missed.