I wish to inform the House of the Government’s decision to sell its residual 40 per cent ownership interest in Actis Capital LLP (Actis).
Actis is a fund management business which promotes and manages private equity funds on behalf of third party investors in a range of developing countries.
Actis was created in 2004 as a spin-out from CDC Group plc (CDC), the UK’s development finance institution, following a reorganisation in which CDC moved from being a direct investor to being an intermediated investor. CDC sold a 60 per cent stake in Actis to Actis management for £373,000. I would refer the House to the written statements of 8 January and 8 July 2004 by the then Secretary of State for International Development on the reorganisation of CDC.
DFID does not take part in the day-to-day operations of Actis, has no Board representation and very limited governance rights.
Since 2004 Actis has performed well. It is now established as a leading and successful fund manager in its own right, with some US$4.6 billion of funds under management. Yet despite the successful performance of funds managed by Actis, as a consequence of the ownership structure and financial arrangements put in place in 2004 under the previous Government, DFID has not received any payment whatsoever or direct financial benefit from Actis.
In my evidence to the International Development Committee of this House in January 2011 and in the context of that Committee’s report on the Future of CDC, I said that I thought that the arrangement entered into in 2004 by the then Government represented poor value for the taxpayer, that there was no reason for the Government to retain its shareholding in Actis and that moreover, if we can realise proper value for it, in the interests of the taxpayer, then we should do so. The International Development Committee took a similar view as it subsequently recommended in its report that DFID’s shareholding in Actis should be sold, but that care must be taken to achieve maximum value.
DFID’s financial adviser on the sale process - Canaccord Genuity Hawkpoint Limited (Hawkpoint) - has looked closely at the Government’s position and rights within Actis and at Actis’s future prospects. Hawkpoint has advised that, even if Actis continues to be successful, the Government has no realistic prospect of receiving direct profit distributions in the foreseeable future. Hawkpoint estimates the current value of the Government’s 40 per cent ownership stake in Actis at US$ nil to US$3 million.
The Government followed an open and competitive sale process. Our advisers identified and approached a number of potential bidders who were believed to have the strategic rationale and the financial capacity to acquire the DFID stake. DFID also advertised publicly in the Financial Times (Worldwide) that the DFID stake was for sale. Following Hawkpoint’s discussions with potential bidders, no third party bidders subsequently came forwards with a credible offer for the DFID stake as currently constituted. The Government therefore decided to proceed on the basis of the offer made by Actis management.
The Government has now concluded its negotiations with the management team. In consideration of the sale of its stake in Actis, DFID will receive both an upfront cash payment and a share in the future profitability of Actis’s funds. The cash element will comprise US$13 million payable in two equal instalments, the first instalment payable on completion and the second instalment 12 months after completion. The profit share element will comprise a 10 per cent share of carried interest profit of Actis Emerging Markets Fund 3 and Actis Infrastructure Fund 2, which have to date invested in 34 businesses across the developing world, and a 7.5 per cent share of carried interest profit in Actis’ latest Fund 4, which is currently being raised.
The carried interest consideration will be payable over time and its value will depend on the size and future performance of Actis’s funds. However, if Actis’s funds continue to perform strongly, as they have done historically, then this profit share would generate a substantial return for the Government and for the British taxpayer, which mid-point calculations developed by our financial advisers indicate could over time deliver an amount in excess of US$100 million (undiscounted).
In the event of a subsequent transaction taking place within the next five years which attributes a significantly higher value to Actis, provisions have been agreed enabling the Government to share in the proceeds of that transaction.
The Actis business has been created through combined contributions from CDC and the Actis partners. CDC contributed the initial investment portfolio to be managed, the people and their associated infrastructure and knowledge base. Beyond that initial contribution, CDC has continued to support the viability and economics of Actis through its formative years via its commitment to invest in further substantial funds raised and managed by Actis.
On the back of that support, Actis has built a successful business measured in terms both of investment performance and third-party funds raised. Under previous arrangements, the UK taxpayer was not able to benefit directly from the success of the Actis business. By giving the Government the chance to share in the future profits of funds managed by this successful business, I believe that this sale represents a much fairer and better deal for the taxpayer.
The US$13m cash element of the consideration is alone significantly above Hawkpoint’s estimate of the value of DFID’s existing stake at between US$ nil and US$3 million, with significant scope for upside beyond this through Government’s share in carried interest.
I am today publishing Hawkpoint’s fairness opinion to Government and other information about the sale on the DFID website and will also place copies in the Library of the House.