Dialogue: Godfrey Davies

UK-backed CDC Group has been investing in emerging markets for nearly 60 years, during which it has worked to reduce poverty in some of the world's poorest countries. In 1997 the firm became a Public-Private Partnership, with Actis spinning out in 2004 and CDC turning into a fund of funds, with net assets of £2.7 billion (€2.9 billion, $3.9 billion). Chief financial officer Godfrey Davies joined the firm in 1992 following six years as a commodities trader at LM Fischel & Co. Kevin Ley spoke with Davies about how the firm has evolved and how its structure as a government-owned entity sets it apart.

HOW DID YOU END UP AT THE CDC?
Before I joined the CDC I was in a firm [LM Fischel] that was a soft commodities trader in London, and in those days CDC used to have a commodity trading desk in the city. We used to trade with that desk and that's how I got to know about CDC. What appealed to me [about CDC] was doing business but also doing good for people; you can run a successful business, but the motivation for doing that is to actually help people out there in developing countries to run successful businesses themselves. I saw in the Financial Times an advert for a financial controller, so I applied. That was in 1992, quite a long time ago.

HOW HAS THE FIRM CHANGED OVER THE YEARS?
When I joined it wasn't a fund of funds. It was investing its own balance sheet, it was largely doing loan financing with some equity investments. That was the first phase of the firm. And then about five years later CDC decided it was taking equity risk but only getting loan returns, so it was decided that perhaps we should be getting out of loans and into equity. So there was a move to become a pure equity investor, but still investing out of the balance sheet and doing very little loan financing. Then five years ago there was another shift to effectively spin out the investment professionals into Actis and for CDC itself to become a fund of funds investing only in private equity funds. So while I've been there for the last 16 years I've really seen three different firms.

WHAT ARE THE CHALLENGES OF BEING A GOVERNMENTOWNED PRIVATE EQUITY FIRM?
Well I have to say CDC is a fairly unique organisation, and that means that you are presented with problems that you can't go and say “well what does everyone else do?”, because other people aren't doing what you do. So you have to sort of work out what to do yourself, so that is very interesting and challenging. The whole reason for CDC is part of the UK government's efforts to alleviate poverty. Our shareholder has given us investment policy guidelines which mean that 75 percent of our investments must be in World Bank low income countries. That's one constraint. Once we're in those geographies basically what we are looking for are successful fund managers with a good track record behind them who we think will be successful investors. Unlike other funds of funds we will try and incubate first-time fund managers. Some of the geographies we operate in, there's not a large choice of fund managers, so we try and help local people who'd like to try and become fund managers to do so. And more than most funds of funds we are particularly interested in digging through and knowing more about what's going on in the underlying companies. One of the challenges for us now that we have more than 120 funds is keeping track of the investments, and one of the particular challenges in the emerging markets is timely reporting from our fund managers and reporting from them in a good format like the EVCA reporting format.

WHAT ARE YOU FOCUSED ON IN 2009?
As chief financial officer I'm looking at the firm's commitments, cash flows, performance, and given what's been happening in the markets recently, we're particularly interested in the cash flows we're likely to see to and from our funds. So we're working quite carefully on what money we think is going to be drawn down by our funds and what money we are likely to receive over the next three or four years from our funds, so that we know how much we can commit to new funds. The other big challenge at the moment is valuations. For our accounting we are looking at the value of the fund, but to get that you need to know the valuation of the underlying investments in that fund, and we have a system of reviewing the valuations, done by our various fund managers, of investments in the funds. And the challenge is getting them to report to us enough information so that we can form a view that they have correctly valued the underlying investments. Because of the movement in the market, how fund managers do their valuations is giving rise to quite a lot of comments at the moment in the UK because a lot of them are fairly reluctant to recognise that there's been a loss in value in their investments.