As part of its efforts to build a portfolio that offers competitive returns to private sector shareholders, CDC Capital Partners has teamed up with Norfund to form Aurora Capital, an alliance that targets risk capital investments in the small and medium sized enterprise (SME) sector in developing countries.
Established three years ago with capital of $125 million and the notion that SME support is a catalyst for economic development in emerging economies, Norfund is the Norwegian investment fund for developing countries, and, as such, is 100% state-owned and run. Since its launch, Norfund has participated in four of CDC?s country funds. Norfund itself is set up as a limited liability company. The board is appointed by the Norwegian government and bears full responsibility for the management of the fund, which has made 27 investments to date.
Michael Ellen, who is currently director of private funds at CDC Capital, will begin as director of operations of Aurora Capital beginning July 2, when the new entity begins operations out of London. Thorbjorn Gaarder will be managing director.
“In view of the upcoming privatization (of CDC), [the firm] needs to build up a balance sheet with private equity deals,” said Ian Weetman, regional manager, Latin America, of CDC?s strategy behind the alliance. “Norfund was established relatively recently, and has similar objectives of investing in SMEs, so the mix of [that] combined with CDC?s experience and infrastructure around the world was” a good fit, he said.
As regards CDC Partners, its parent, CDC Group PLC, formerly the 100% state-run Commonwealth Development Corp., became a public limited company in December 1999. Weetman said CDC is now looking to privatization in 2002. Ellen said CDC “will likely be 40% government owned after the sale of 60% of its equity” to the private sector next year.
“It was put off because of the elections in Britain,” he said. “The main shareholder [the British government] has plenty of other things on its plate.”
In order to be profitable, CDC “would no longer sponsor new SMEs,” he said, adding the alliance “enables CDC to face investors with a growth prospect. The business has a whole lot more focus than ever before because Aurora is set up as a holding company. It?s self-financing. We can see what we can afford and not afford. It?s much more clearly focused.” It also means Norfund will stand in CDC?s shoes for new funds.
The immediate task the management team at Aurora Capital has set for itself is the building and managing of an existing family of 14 country funds in Central America, Africa, South Asia and Pacific Islands, developed by CDC over the past four years.
These funds make investments typically from $200,000 to $2 million. The committed capital of these funds is $175 million and CDC is the single largest investor with $59 million. Norfund has committed, in principle, to co-invest alongside other investors a further $50 million, by taking stakes in second round and new SME funds that will be managed by the Aurora Capital group.