Richard Laing: Countdown to 2008

The chief executive of emerging markets investor CDC still believes there is money to be made, but managers will have to work harder to improve portfolio companies.

Richard
Laing

“In 2006 developing economies were projected to grow more than twice as fast as developed countries and remain robust throughout 2007 and 2008.  However, the world became a more uncertain place in the second half of 2007 with the effects of an unstable US economy having a global impact.  So can we now be so sure of such projections?

Private equity in emerging markets cannot divorce itself from this instability, nor from a weakening US dollar, the effects of the sub-prime crisis and the relentless increase in commodity prices. The developed and developing world’s economies are not decoupled.

That said, the domestic economies of the powerhouses of China and India and countries such as Nigeria, Indonesia, and even Pakistan, have a momentum that continues to make private equity investment attractive.  Being a pioneering private equity investor in these emerging markets, CDC is seeing a rapid increase in the level of interest from a range of investors in these regions which are generating good returns.  With continued investment, developing countries are already becoming the main drivers of the global economy. 

However, watch those entry multiples! In the last few years we have seen them rise from low single figures well into double figures.  The “momentum” investors will find the environment in emerging markets far less benign. GPs will have to work harder at improving the underlying operating performance of businesses in which they invest, rather than just relying on financial engineering and arbitrage, to generate value.

On balance, the waters are choppy and more difficult to navigate when investing in emerging markets.  But, with courage, there are still some profitable journeys that can be made.” Richard Laing, chief executive of CDC Group

2007 has been another successful year for CDC Group.  In total, it committed almost £1 billion during the year. It made significant investments across its core geographies of Asia, including China, Africa and Latin America. These investments were in funds focused on mezzanine capital, microfinance, small and medium size enterprises and environment-related investments.

In terms of exits, its Asian and Latin American investments in the emerging markets power group Globeleq, managed by Actis, realised strong returns of £1.2billion with an IRR of 18 percent. These assets were sold to two separate consortia of private investors. 

This year has highlighted CDC’s mission: to generate wealth, broadly shared in emerging markets, by providing capital for investment in sustainable and responsible managed private sector businesses. With $2.2 billion committed to over 40 fund managers, and continuing strong growth in emerging markets globally, CDC is looking forward to another successful year in 2008.