Africa: UK’s CDC embarks on multi-billion dollar push

As the UK prime minister, Theresa May, embarked on a whistle-stop tour of South Africa, Nigeria and Kenya last August and September in a bid to boost trade ties outside the European Union, she brought along a 30-strong trade delegation to cut deals and explore new opportunities on behalf of “Global Britain”.  

Among the lawyers, financiers, engineers and representatives of Scotch Whiskey was Nick O’Donohoe, CEO of CDC Group, the government-owned development finance institution that is rapidly boosting its presence on the continent by targeting ambitious African investments of $4.5bn over the next four years.  

Speaking to African Business at the group’s headquarters in London, O’Donohoe, a former JP Morgan executive who has led the group since 2017, says newly opened offices in Lagos and Nairobi will allow the firm to seal investments and expand its support to enterprises across the continent.  

“I think we wouldn’t have committed to that number unless we thought it was doable in a way that allowed us to earn a return and have significant development impact. It does require an increase in our investment pace. That’s one of the reasons why we’ve opened a Nairobi office, why we’re opening in Lagos and looking at another couple of places… One of the things that was obvious to me is we had reached a point of evolution where we really needed to get on the ground.” 

Formed in the 1940s as the Colonial Development Corporation, later the Commonwealth Development Corporation and now simply CDC Group, the organisation has long been a torchbearer for UK interests on the continent. But it was not until 2012 that the group moved away from its recent history as a fund-of-funds and became a direct investor in equity and debt, transforming its role to a direct investor in enterprises alongside its private equity investments. It currently invests in over 30 countries on the continent.  

As CDC Group is owned by the UK’s Department for International Development, investments must have a provable developmental impact as well as the ability to make a return. As a government-owned entity, it inevitably reflects the priorities of the UK’s push to embrace emerging markets and forge new trade routes as the country extricates itself from the European Union.  

“I think there’s been more attention focused on us as part of the post-Brexit agenda of how the UK can use its soft power and influence to help support British trade and companies… Although it’s not directly linked to British companies or trade, there’s a greater sense that the government wants to present more holistically all the things we are doing in Ethiopia or Ghana, Rwanda or wherever, and as part of that hopefully improve the trade relationship.”  

Nigeria and Ethiopia focus 

O’Donohoe says that Nigeria, where CDC has 99 investments and plans a further push, is a crucial part of the renewed focus on Africa. CDC has long had a presence in the country, with active stakes in major Nigerian banks including Diamond Bank, Guaranty Trust Bank and Zenith Bank and investments in malls, food production and insurers. 

“It’s enormously rich in terms of resources, has a hugely energetic entrepreneurial population and an increasingly large diaspora that want to go back and build businesses… There’s a lot of opportunities in infrastructure and power, it’s a centre of technology. For a whole host of reasons, if you’re an investor, you have to be focused on it.” 

While Nigeria gears up for a significant presidential election in February after several years of muted growth under President Muhammadu Buhari, O’Donohoe says that CDC’s long-term investment strategy of prioritising steady growth over big-money exits allows it to ignore short-term political and economic noise in favour of long-term investment fundamentals.  

“One of the things that differentiates CDC from mainstream investment firms is that we’re genuinely a long-term, patient investor. Unlike the world of private equity where they’re very focused on raising a fund, investing the money and harvesting investments in five to seven years, CDC doesn’t have that pressure. The traditional private equity model and five-to-seven-year holding period doesn’t work terribly well in Africa. It just takes a lot longer to build businesses there, particularly those that are cross-border.” 

This longer-term approach has allowed CDC to alight on Ethiopia, a country undergoing significant political and economic reforms, as a potential future engine of the East African region. The firm currently has 17 investments in the country, including stakes in winemakers and coffee exporters. Under the government of its ambitious prime minister, Abiy Ahmed, the country is exploring privatisations and mulling opening up key industries, including banking and telecoms, to foreign competition. 

While Abiy’s ability to push through his reforms is uncertain, the direction of travel clearly excites O’Donohoe. “Kenya is a strong story because there’s a real tech hub developing there, but Ethiopia is one of the most interesting countries I’ve visited in the last year and half. There’s huge development needs and a government that’s really focused on how to attract private sector involvement. They’re still quite controlling in some key industries, but increasingly becoming less so. If you look at Africa today and what are going to be the key investment destinations, Ethiopia will be close to the top of the list.” 

Risk taking  

Yet despite the evident promise of East Africa, it was in Kenya that CDC registered one of its most humbling reverses of recent years. In 2016, the firm invested $140m in a 41.7% stake in ARM Cement, a Kenyan cement manufacturer. By August last year, the company was in administration following its failure to compete with its regional rivals. 

CDC, whose stake value has been decimated, says that it supports an “orderly process that secures the long-term viability of the company and the future of employees, suppliers and other stakeholders.” 

O’Donohoe, who joined as CEO in 2017 after the investment, accepts that mistakes were made but says that CDC has learned from the experience – especially in relation to the competitive nature of certain African markets.  

“We take risks. We’re not going to get everything right. We didn’t get that one right, but there are a number of lessons we learned. We did an in-depth review of our investment process and what lead us to that investment. Some parts we were quite comfortable with, we made it for the right developmental reasons. This was a big, strategically important company in Kenya in a strategically important industry… Our mistakes were more that it’s a cyclical industry. The price of cement goes up and down. It’s very exposed to competitive factors. I think we underestimated the competitive nature of the market… Our timing in the cycle was wrong.” 

He argues that the experience has not dissuaded CDC from pursuing riskier investments in Africa. While the firm was criticised in the past for the perceived safety of investments that delivered low development outcomes, O’Donohoe suggests that acceptance of significant risk comes with the territory when investing on the continent today.  

“We take a lot of risk, go to a lot of difficult places, do very difficult transactions, and prior to my arrival for the last five years the team has done a very good job. It doesn’t mean to say we’ll make money in everything and we’ll certainly make some mistakes and hopefully learn from them.” 

Indeed, in December, CDC embarked on one of its most ambitious investments to date, a $180m equity investment in Liquid Telecom, the pan-African fibre and cloud provider majority-owned by Strive Masiyiwa’s Econet Global. CDC will own around 10% of the company, while the firm says it will plough the money into network and data centre construction to satisfy exploding demand for data on the continent.   

“That’s a big equity investment. Cable infrastructure is always risky, and that’s testament to the fact we haven’t lost our appetite to do large transactions if we think they can be important developmentally and we’re backing the right partners and the financials are solid… This is a company led by an African entrepreneur who’s been very successful in a number of business areas and who has an ambition and vision of building a fibre network from Cape Town to Cairo – that would be a unique asset. From that perspective it was a very attractive opportunity.”

Strict criteria

O’Donohoe says that CDC’s confidence in its ability to take well-considered risks will play a crucial role as the African expansion continues. But only investments that meet strict criteria will be considered. 

“We don’t have specific investment targets. If we don’t spend $1.25-1.5bn in Africa this year I suppose we’d be disappointed, but it’s not that we’re holding a whip to everyone saying we’ve got to get this number, because if you do that you will end up making bad investments. It’s a constant balancing act.”

Sources: African Business | JIC Media