CDC Strategy 2012-2016

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1. Summary and evolution of strategy

2. CDC mission and focus on development impact

3. Investment strategies

4. Financial projections

5. Execution

6. Measurement

Contents

1. Summary and evolution of strategy

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A five-year strategic plan, laying the foundations for a distinctive, effective DFI with a greater appetite for risk and a clear focus on development impact

• Development impact embedded in all CDC’s investment strategies, based on three elements

- Supporting the building of businesses and creating jobs

- Focusing on Africa and South Asia, especially the poorer regions

- Backing commercially viable, successful businesses, financial institutions and essential infrastructure

• A highly rigorous, commercial approach to assessing investments

- Success highly correlated to impact, especially sustainable job creation

- Demonstration effect essential for attracting commercial capital to follow

• Investment through funds remains important for CDC

- Especially the critical role of sponsoring and anchoring first time funds in developing the private equity markets

• But will be supplemented by equity and debt, provided directly – initially through co-investment/co-lending

• A longer term vision to return closer to CDC’s roots

- Building small numbers of businesses at scale over a 10 year+ time horizon alongside high calibre management teams

• Greater focus on tracking, measurement and communication of impact alongside financial performance and ESG

• A phased approach to execution as the organisation grows significantly to implement a more complicated and resource intensive strategy

Evolution of CDC Strategy2012-16 plan confirms and builds on last year’s high level business plan

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CDC 2010

High Level Business Plan 2011

CDC Strategic Plan 2012-16

• Investment strategy almost exclusively focused on PE (private equity) funds

• Broad geographic remit - emerging markets, including China, South East Asia and Latin America

• Aspiration to build direct strategies in equity and debt alongside PE fund selection

• Geographies focus on Africa and South Asia

• Mission statement more explicit

• New ex-ante investment criteria to ensure focus on development impact

• Greater focus on more challenging regions across Africa/South Asia

• Vision to take CDC closer to its heritage in building businesses

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CDC’s universe will shrink to Africa and South Asia with an aspiration to direct capital over time towards the more challenging regions

CDC’s old universe

CDC’s new universe

…

2. CDC mission and focus on development impact

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CDC is sharpening its mission for the next phase and, like DFID, is seeking to serve people in poorest countries

“CDC’s mission is to generate wealth, broadly shared, in emerging markets”

“CDC supports the building of businesses throughout Africa and South Asia, to create jobs and making a lasting difference to people’s lives in some of the world’s poorest places.”

support: alongside like-minded partners, we bring together fresh approaches, entrepreneurs and pioneering finance

building: directing capital to promising businesses that grow and prosper over the long-term with maximum impact on their wider economies

businesses: we help build business of all sizes and in sectors we believe to be the most developmental as well as vital infrastructure and financial institutions

jobs: boosting jobs lies at the heart of economic growth -for individuals, families and communities it’s the key to a better future

2004 2012

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CDC achieves its mission by directing capital to businesses with high potential for development impact and then supporting their financial success

CDC will select investments with high development impact potential that

• Build successful businesses

• Create jobs and an environment for jobs

• Deploy capital across Africa and South Asia, with a strong appetite for the most challenging places

Measurement will take place before (ex-ante) and after (ex-post) investment

CDC will take a highly rigorous commercial approach to assessing individual investments but with the flexibility to take a longer term investment horizon and accept

elements of higher risk within the portfolio

Results sought

Successful businesses with reasonable investment returns

• losses typically mean no impact

• returns give a demonstration effect for fully commercial capital

Investment criteria

Financial return and development impact are not mutually exclusive:CDC seeks to invest in ways that deliver both

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2

3

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-60% -40% -20% 0% 20% 40% 60%

Jobs created

IRR

IFC data shows that successful investments, measured by IRR, are also those that are

most successful in creating new jobs

CDC will invest where there is high correlation between growing businesses and creating jobs with financial returns

Source: draft IFC data on 64 funds invested 2000-2010

Value creation through• Leverage• Price arbitrage

Delivering development impact

Delivering positive returns

Examples

But will avoid investments where positive returns and development impact are not both achievable

• Grants• Aid

Examples

3. Investment strategies

Investment strategies

CDC’s investment strategies will focus on Africa and South Asia, with a particular appetite for the poorer regions, and will invest capital through

1) Intermediated vehicles

• Private equity funds

• Debt funds

• Microfinance funds

2) Direct investment

• Equity

• Debt instruments

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Estimated data Sources: CDC internal, EMPEA full year 2011 EM PE

statistics (2007-2011), World Bank, Venture Intelligence

Africa

• Small economies outside South Africa and Egypt

• Private equity market focused on South Africa, Nigeria and Kenya

• DFIs provide large part of funding, but increasing interest from commercial capital

• Substantial unsatisfied infrastructure need but not getting built

• Fragmented / few major corporate champions

• Critical bottleneck is experienced management with a track record of building successful businesses

South Asia

• More private equity funds than opportunities in India

• Nascent private equity market in Bangladesh / Pakistan

• Returns generally below Limited Partner (LP) expectations

• Similar infrastructure need

• Several national champions / family conglomerates

• Relatively developed public capital markets provide viable alternative to private capital

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CDC’s markets in Africa and South Asia have similar sized economies but the private equity markets have developed differently – this creates opportunities for a re-shaped CDC

• Target private equity market is small (Africa + South Asia is comparable in size to London + South-East England)

• CDC plays an important role in Africa – a relatively small market outside South Africa/Egypt

• But has taken a smaller share in an overcrowded and key metropolis-focused Indian market

• Investing equity and debt directly allows CDC to take a longer-term view than is possible through traditional private equity fund structures

Indicative key market data 2007 - 2011

Africa S. Asia

No. of GPs 150 300++

Ave. annual funds raised $1.9bn $4.4bn

Ave. no. deals p.a. 53 367

Ave. deal size $20m $17m

Market concentration (top 10 GPs’ market share) 68% 22%

Approx. CDC market share 10% 3%

Approx. DFI/IFI Debt $3.5bn $1.6bn

GDP $1,700bn $2,000bn

Population 1bn 1.5bn

Key issues

Estimated data Sources: World Bank, CDC internal, EMPEA full

year 2011 EM PE statistics (2007-2011)

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Funds Africa market summary

Current situation

• The private equity market across Africa is currently about 1/5th the size of the market in London/South-East England

• Excluding South Africa and Egypt this figure falls by 80%

• Over the past 5 years, the number of General Partners (GPs) has grown significantly in Africa, from a small base to around 150

• The market is concentrated with the top ten GPs accounting for around 68% of funds raised

• A steady stream of new funds continue to emerge as the market builds in a relatively orderly fashion

• Fund-raising has become extended and uncertain, and expected returns of some important maturing funds likely to be below expectations

• CDC’s investments represent about 13% of total PE funds raised, making an important supporter of this market

• First time teams rely on DFI backing, and private capital looks for DFIs’ continued support in Fund 2, Fund 3

Indicative market summary

Est. number of GPs 150

Ave. funds raised p.a. $1.9bn

Market share of top 10 GPs 68%

Ave. number of investments p.a. 53

Average deal size $20m

GDP $1,700bn

Population 1.0bn

CDC summary

No. of funds 51

No. of GPs 32

No. of investee companies 463

Ave. disbursement p.a. $225m

Undisbursed commitments $565m

CDC market share 13%

Median CDC ownership % 19%

As at 31 Dec 2011

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Funds Africa

In Africa, CDC’s fund strategy is to

• Maintain and create new relationships with fund managers who are strongly aligned with CDC’s mission to build businesses and create jobs across Africa especially in more challenging geographies

• Support strong teams with a deep knowledge of their markets and an ability to identify and add value to those business that can grow and create jobs over a medium-term time horizon

• Maintain a balance of diversified strategies across pan-African, sector-focused, regional and SME funds

• Increase CDC’s sector focus on infrastructure, agribusiness and access to finance

• Support the creation of new funds especially in more challenging areas by proactively encouraging talented new teams and by helping them to attract capital alongside CDC’s with a view to shortening the fund-raising period

• Explore the creation of new pools of capital that can take higher risk, especially in frontier markets, alongside CDC’s shareholder DFID, and other like-minded investors

• Commit similar amounts to new and existing relationships over the next five years, with on average around $100m pa committed to each category

Estimated dataSources: Venture Intelligence 2004-2011,

World Bank

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Funds Asia market summary

Current situation

• The private equity market across South Asia is currently about 4/5ths the size of the market in London / South-East England

• Excluding the major cities this figure falls by around 70%

• Over the last five years, the number of GPs has grown exponentially from a small base to more than 300

• The market is highly fragmented with the top 10 GPs accounting for only around 22% of the market

• The challenging fundraising environment, combined with returns below expectations, suggests that consolidation is likely – with only the stronger performers and more focused and/or distinctive strategies likely to succeed in raising funds

• The regional split of CDC’s $1.2bn commitments since 2004 across 34 funds is $1.14bn in India; $50m in Pakistan and Bangladesh

• 17 of the 34 funds were first time funds, representing 51% of total commitments to South Asia

• Overall 75% of disbursements via CDC’s India funds have been invested outside of the major cities, much greater than the market norm.

Indicative market summary

Est. number of GPs 300+

Ave. funds raised p.a. $4.4bn

Ave. funds invested p.a. $6.0bn

Market share of top 10 GPs 22%

Ave. number of investments p.a. 367

Average deal size $17m

GDP $2,000bn

Population 1.5bn

CDC summary

No. of funds 34

No. of GPs 23

Undisbursed commitments $441m

No. of investee companies 213

Ave. disbursement p.a. $121m

Median CDC ownership % 16%

As at 31 Dec 2011

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Funds Asia

In South Asia CDC’s fund strategy is to

• Maintain and create new relationships with fund managers who are strongly aligned with CDC’s mission to build businesses and create jobs across South Asia especially in the more challenging regions

• Support strong teams with a deep knowledge of their markets and an ability to identify and add value to those business that can grow and create jobs over a medium-term time horizon

• Maintain a balance of diversified strategies across SME and venture capital and sector specific strategies, especially in agribusiness and infrastructure

• Support the creation of new funds especially in more challenging areas by proactively encouraging talented new teams and by helping them to attract capital alongside CDC’s with a view to shortening the fund-raising period

• Explore the creation of new pools of capital that can take higher risk, especially in frontier markets, alongside CDC’s shareholder DFID, and other like-minded investors

• Commit similar amounts to new and existing relationships over the next five years, with on average around $100m

Estimated dataSources: EDFI (2006 – 2010), IFI (S Asia) financial statements

(SSA: 2006 – 2009), IFI (S Asia) financial statements 2009 – 2011 (except for EIB: 2008 – 2010)

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Debt

Current situation

• The existing debt portfolio is the product of a funds-based approach and is focused outside CDC’s current core geographies. CDC has a very small share of the DFI/IFI debt market in sub-Saharan Africa and South Asia

• Following the crisis, international commercial banks have reduced their exposure to Africa giving CDC an important role to play in meeting this need

CDC debt summary

S-S Africa S. Asia

Current CDC portfolio $36m $12m

Ave. annual CDC commitment $22m $3m

Indicative market summary

S-S Africa S. Asia

No. of relevant DFIs/IFIs 21 16

Total ave. annual DFI/IFI commitment

$3,547m $1,550m

As at 31 March 2012

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Debt

CDC’s debt strategy is to

• Build a broad debt portfolio including infrastructure and corporate loans, credit lines to financial institutions and selective trade finance facilities all focused on the regions of sub-Saharan Africa and South Asia where businesses have difficulty attracting capital

• Increase debt exposure specifically through four approaches

• Debt funds, seeking out and backing credible managers

• Co-financing, in debt deals led by other DFIs and IFIs, particularly in infrastructure, financial institutions and corporate growth

• Risk sharing, in debt deals led by reputable international commercial banks and increasing volumes through short-term trade related instruments

• Selective direct loans to financial institutions in more challenging places to extend financial inclusion where they have the potential to operate to acceptable standards in relation to ESG

• Develop productive co-financing relationships with selective DFIs and IFIs

In the longer term, CDC has the ambition to source infrastructure and corporate debt opportunities directly.

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Microfinance

CDC’s microfinance strategy is to

• Invest in microfinance to build commercially sustainable companies focused on the developmental goal of providing access to finance through:

• Microfinance PE funds

• Microfinance holding companies

• Microfinance debt funds

• Direct investments in MFIs

CDC’s existing investments in MF

$120m of exposure to Microfinance initiatives globally

5 MF Private Equity funds

3 MF Holding companies

1 MF local currency debt fund

• Play an important role as a provider of long term, patient capital and as a leader around innovation with a focus on making investments in South Asia and sub-Saharan Africa

• Adopt a more proactive approach to engage with key stakeholders in the microfinance sector, including regulators, policy makers, the Consultative Group to Assist the Poor (CGAP) and other sector specialists, DFID and DFIs

• Be an advocate for the SMART Campaign

• Be an advocate for the UN Principles for Responsible Investments in Inclusive Finance

As at 31 March 2012

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Direct equity co-investment

CDC’s direct equity co-investment strategy is to

• Rebuild CDC’s direct investment capabilities and support businesses that are creating jobs and building infrastructure in Africa and South Asia, prioritising investments in economies where businesses have difficulty attracting capital

• Seek co-investment opportunities aligned to CDC’s mission, led by private equity funds and DFIs that

• build on CDC’s existing relationships

• leverage their in-country presence, origination and investee company management capabilities

• Seek co-investment rights from CDC-backed private equity funds that are active in developmental deals

• Develop a reputation as a quick, rigorous, commercial and consistent co-investor

• Remain sector agnostic at first due to small number of opportunities in CDC’s markets

• Develop a shadow portfolio of opportunities for follow-on growth capital from private equity and DFI portfolios and other sources

• Invest in a range of deal sizes from $10m to $50m for general private equity and $20 to $100m for infrastructure

CDC will build a team and use the knowledge gained during this co-investment period to develop the Corporate Pioneering strategy (see next slide)

15%

17%

51%

32%

74%

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Corporate pioneering

CDC’s corporate pioneering strategy is to

• Invest in a small number of businesses that can be built to scale, over the long-term, into economies where the private sector is under-developed

• Seek out and support the highest calibre management teams capable of executing a long-term expansion strategy without relying on creating a CDC organisation across the region

• Play to CDC’s strengths in combining a long-term investment horizon (10 years +), the ability to make multiple follow-on investments (up to an aggregate of $50m-$200m), a willingness to take majority equity stakes and a team that works closely with management

• Build this strategy slowly based on the knowledge gained during the co-investment period

CDC will execute this strategy through different approaches

• Identify the most promising businesses with potential to grow into small/challenging economies (the initial investment could be made in more developed regions)

• Identify the most promising management teams with interest in small/challenging economies and create vehicles for them to execute their strategies

• Identify sector focused themes suited to this strategy and the necessary management and corporate targets

• Consider joint ventures with multi-national and/or other corporates who have a desire to roll out strategies into more challenging regions

30%

30%

4. Financial projections

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55% of CDC’s portfolio today is invested in our new universe

CDC portfolio at 31 Dec 2011

Ongoing Funds

Africa S. Asia

No. GPs 32 23

No. Funds 51 34

No. Investee co’s 463 213

Fund portfolio $1,030m $525m

Ave. disbursements p.a. $225m $121m

Median CDC ownership 19% 16%

Excluded Investments*

No. GPs 22

No. Funds 62

No. Investee co’s 415

Ave. disbursements p.a. $339m

Investment portfolio $1,342m

Debt

Africa S. Asia

Debt portfolio $25m $0m

Microfinance

Africa S. Asia

Microfinance portfolio $8m $12m

$m

Direct equity

Africa S. Asia

Equity portfolio $52m $24m

*Investments that fall outside CDC’s new universe

CDC portfolio

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Indicative strategy projections show a growing portfolio, with an increasing percentage invested directly

CDC portfolio

2011 2016

Africa Funds 34% 25%

Asia Funds 17% 15%

Debt 1% 12%

Microfinance 1% 4%

Direct equity 2% 27%

Excluded investments* 45% 17%

2011 2016

Between 2011 and 2016, a significant proportion of CDC’s portfolio will remain outside the new universe as commitments made prior to the new strategy must be honoured. This will decrease over time as the investments are realised and is likely to be <5% of CDC portfolio by 2018.

*Investments that fall outside CDC’s new universe

5. Execution

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CDC will execute its new direct equity and debt strategies in two distinct phaseswith Phase 2 informed by learning from Phase 1

Phase 2 - 2014-6

Market driven based on learning from Phase 1

• Sector focus with specialist teams

• Willing to lead transactions selectively alongside continuing co-invest and co-lending strategies

• Capital and management capacity building

• CDC team largely built and resource now well matched to market opportunity

Phase 1 - 2012-3

Re-entering direct equity/debt markets

• Sector agnostic as knowledge and capacity grows

• Co-invest and co-lending – unlikely to lead transactions

• Capital provision only

• CDC team will be resource constrained

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CDC’s strategy is intended to reach businesses of all sizes

Infrastructure � � �

Large / Mid Size Enterprises � � �

SME � �

Early stage �

Micro � �

FundsDebt and

microfinanceDirect equity

Via banks

Via funds

Funds• Harnesses local knowledge

• Builds local investment capacity

• Allows a small team to deploy capital widely and effectively

Debt• Targets frontier markets where provision

of debt capital is under-developed

• Provides capital to financial institutions which help SMEs

Direct equity• Targets larger businesses with high

potential development impact

• Gives CDC more influence over individual investments

• Closer relationship with management

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Resources

• Rapid growth will create large execution risk in 2012 and beyond• New remuneration framework will ensure CDC recruits talented individuals aligned to

CDC’s mission

* As at end of 2011

• To execute the strategy CDC needs to grow rapidly to move from its focus on fund-of-funds investing to add direct equity and debt investment expertise

• CDC is understaffed compared to other DFIs pursuing mixed investment strategies

Institution Staff Portfolio ($bn)Home Overseas

IFC >1,700 >1,600 29.9

DEG 373 20 7.3

FMO 294 0 7.6

Proparco 142 29 4.7

CDC 49 0 4.9As at end 2011

6. Measurement

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A new approach is proposed: three distinct parts with different purposes

CORE

Core• Closely tied to mission/strategy

• Drives compensation

Communicating Impact

TrackingTracking• For progress of investments and learning for CDC

Communicating Impact• For wider stakeholder objectives

• Quantitative data

• Qualitative stories

• Managed by a new function in CDC

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New measurement approach will ensure rigorous selection of investments, on-going management and effective demonstration of impact

Tracking

Throughout investment period

• Investments monitored regularly against financial, developmental, Environmental, Social and Governance (ESG) goals

• Regular visits for deeper picture

For risk management, identification/addressing issues, team sharing and learning

Communicating Impact

• Shared where possible – open source model

• For multiple audiences – shareholder, stakeholders, internal, website etc.

Quantitative

• Data collected defined by market-consistent approach

• Output based on IFC and DFI industry standards

Qualitative

• Numerous stories of intended and actual impact

Core

Drives selection of investments which:

• Build businesses and create jobs

• Deploy capital into hard environments

• Maximise the likelihood of economic success

End