Sunday, December 13, 2009

An Adventurous Fund Manager Takes Aim at Developing World

Richard Laing must count as one of the world's more adventurous fund managers. His portfolio spans banking in Rwanda and clothing in El Salvador, with an assortment of energy, environmental and manufacturing projects along the way.

His aim isn't simply to turn a profit, but to bring long-term benefits to those areas of the developing world where he puts his cash, helping them toward economic growth and a better future. He is firmly embedded in the school of thought that says that simply giving cash aid to poor countries isn't the answer to their problems. Investing in businesses that will create jobs and pay taxes is his preferred route to lift these countries out of poverty.

Mr. Laing spreads his net widely by running a fund of funds, investing in funds run by dozens of different fund managers. "We're now involved in around 130 funds with 65 fund managers," he says. But his mode of operation is far more active than the normal fund of funds. If there is an area in which his team particularly wants to get involved, it will encourage proposals for new funds for which it would be the primary backer.

His employer is the British Government, for Mr. Laing's role is a modern reincarnation of what was Colonial Britain. His business now rejoices in the anodyne name of CDC Group PLC but was once the Commonwealth Development Corporation.

Despite its government backing, it is a commercial operation that doesn't drain taxpayers' funds.

That didn't prevent the cries of righteous indignation from political campaigners when it was learned that Mr. Laing's 2007 salary had reached almost £1 million. The shrieks implied he was profiting at the expense of those his business purported to help rather than being rewarded for generating successful returns that would then be ploughed back into more investments.

Those voices weren't heard last year, when Mr. Laing's earnings took a hit, as did the value of CDC's portfolio. By the year end, net assets had fallen 13% to £2.3 billion and the value of the portfolio was down 22%. The current year hasn't been easier, as economic turmoil has continued to envelop the world. But CDC's performance over the longer term has been above average: in the five years to the end of 2008, it produced an average annual return of 18%.

Mr. Laing has been chief executive of the business since 2004, having joined as finance director. He had previously been at De La Rue, the bank-note printer, a position that had also brought him a directorship at Camelot, in which De La Rue is an investor.

Camelot runs the U.K.'s national lottery, and some might see a link between lotteries and investing in some of the businesses that CDC backs. But Mr. Laing, a Cambridge-educated accountant, believes that, with careful homework, the risks can be modified.

"We spend a lot of time on doing due diligence of the fund and the team running it, and we do stay in dialogue and monitor the projects," he says. Occasionally, when things appear to be going wrong, CDC will step in and get more directly involved. That has happened a couple of times during the past year, he says, adding that is only two out of 130 funds that have needed extra attention.

The organization's original remit saw it investing in Africa, Asia and Latin America, the idea being that it would go where capital was scarce. That could hardly be said to be the case now in places such as China and Brazil, so CDC's brief has been more tightly defined, and it is concentrating its efforts on sub-Saharan Africa and South Asia.

Infrastructure is high on the investment-priority list with a $500 million commitment to infrastructure funds, but, at the other end of the scale, CDC has committed $5 million to a fund backing small and midsize businesses in Sierra Leone.

"Our managers tend to like businesses that aren't export led," Mr. Laing says. "In sub-Saharan Africa there are consumers who, for the first time in their lives, have a little bit of money to spend and who want products and services." Backing businesses catering to them is an important part of the CDC philosophy.

Emerging markets aren't generally easy places in which to do business. Corruption can be rife and Mr. Laing doesn't deny it. But he insists those he backs manage to avoid getting embroiled in it. "Entrepreneurs will now say that they will not play that game," he says.

It is the scale of bureaucracy that can be the biggest problem, he says, citing the case of a Bangladeshi business that needed to import spares for its power business. "They needed to get 57 different signatures in order to bring them in," he says with a sigh.

Given such difficulties, perhaps it isn't surprising he says the biggest issue for CDC is "finding good fund managers."

Some of the most successful managers it now backs originated in CDC. Actis, spun off in 2004, is styled as a private-equity fund specializing in emerging markets. Since it gained independence, it has raised $7.6 billion, a chunk of it from CDC. Now, however, the Actis model of investing in larger projects is drawing ample backing from the private sector, and CDC is lessening its involvement with the firm, which currently accounts for around 45% of its portfolio.

'Where we can be most efficient is in focusing on those areas where there is a shortage of capital," Mr. Laing says. He sees plenty of potential investments to be made and finds it frustrating that, because of the difficulties that have hit markets recently, his existing investments aren't throwing off the level of return that would enable him to take full advantage of opportunities. "We're cash restrained when there are bargains to be had," he explains.

But if that is one of the frustrations of his job, he sees plenty of upside too. "I love it," he says with a smile. He spent three years working in Brazil in his previous job and determined he wanted to work in emerging markets. Now he spends a great deal of time travelling around them and is convinced that he and CDC are benefitting countries in which they put their cash.

He is a realist and recently wrote in the group's Development Report that: "Of course, with such a large portfolio of companies which operate in some difficult environments, things don't always go according to plan, and we do have instances of business failure, governance frailty and environmental concern. However, we work hard with our fund managers so that these are identified and rectified as soon as practicable."

Emerging markets are packed with challenges but also with potential, and Mr. Laing is determinedly pursuing the latter.

Write to Patience Wheatcroft at

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