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UK’s CDC group has become the first development finance institution to make an equity investment in Sierra Leone since the end of the civil war in 2002. The investment suggests that appetite for Sierra Leone risk might be tentatively rising. Rebecca Spong reports.

The UK development bank CDC has committed US$5mn to the Sierra Investment Fund (SIF), a fund solely focused on Sierra Leone, making investments in small and medium-sized enterprises. The fund is the first of its kind, and is managed locally by fund manager ManoCap.

This is the first time a development bank has made a private equity investment in Sierra Leone since the devastating 11-year civil war that came to an end in 2002.

“This is our first investment in a fund in Sierra Leone although we do have other pan-African funds that could invest in the country,” explains Rod Evison, CDC’s managing director for Africa.

The investment was announced in the same week that a host of government officials from Sierra Leone landed in London in late November 2009, to attend an investment conference aimed at whipping up investor enthusiasm in Sierra Leone. The event drew the attention of the UK international development minister Gareth Thomas, and former UK prime minister, Tony Blair.

Since the elections in Sierra Leone in 2007 and the victory of the All People’s Congress party (APC), the country’s government is seen as very pro-business, giving some reassurance to prospective investors.

“The current government is business-friendly and trying to make the investment climate more favourable,” CDC’s Evison remarks to GTR.

Economic growth in Sierra Leone has been relatively strong, averaging 7% per year over the past five years.

In an official statement, Thomas, the UK’s development minister stated: “In the last seven years, Sierra Leone has made real progress towards becoming a more stable and peaceful country. There is now steady economic growth, democratic elections and a new tougher stance on corruption.”

However, as yet, investors are far from queuing up to part with their money in this small West African nation, with most of the country still crippled by poverty.

Around 70% of the population live below the poverty line, and the average life expectancy is just 49 years. The country’s infrastructure has barely recovered from the effects of its long civil war.

Indeed, its economic growth in recent years has been dependent on donor funding, with the UK being one of the largest donors to the country, contributing around £48mn in aid last year.

However, CDC investment may herald the flow of new streams of private finance, with the equity investment aimed at supporting private sector development and supporting small entrepreneurial businesses. In particular, SIF will aim to acquire stakes in firms with signs of high growth potential such as agribusiness, tourism and transportation.

Growth hotspots
Over the past few years, Sierra Leone’s economy, and dented reputation, has rested on its mining industry, in particular the mining of diamonds.

Yet this controversial industry has now fallen into further decline in the aftermath of the global financial crisis. The country’s trade performance over 2009 deteriorated, mainly due to problems in the mining sector.

As CDC’s Evison notes. “I think that perhaps the downturn in the extractive sector probably hides improvements in other areas.”
CDC and SIF are avoiding the mining sector, preferring to focus on sectors such as the nascent financial services industry. This area has already caught the attention of nearby Nigeria.

“A number of Nigerian banks are moving into Sierra Leone opening up offices,” says Evison.

However, these banks are still focusing on the less risky short-term business. He argues that there is huge opportunity for a fund such as SIF to put in the necessary expansion capital into attractive private sector businesses which will unlock future capital flows.

Mobile phone technology is another area of high growth potential in Sierra Leone, and fund manager ManoCap has already invested in a company that brings together mobile phone technology with the financial services sector.

The firm, known as Splash, is Sierra Leone’s first mobile payment company, and allows its customers to send money to other mobile users using just their mobile. The service is being particularly targeted at rural areas. CDC’s investment in SIF is expected to continue to support the growth of this business.

Transportation is a further area being targeted by the fund, and negotiations are taking place with a start-up logistics firm, with an appointed manager in the process of writing a business plan.

Ice and fishing
SIF has already acquired stakes in two businesses, one being Ice Ice Baby (IIB), a local ice producer. With electricity coverage in Sierra Leone being extremely limited, demand for ice is high given that it is the only way to keep food cold.

The other investment was made by the fund in the Sierra Fishing Company, the largest fishing business in the country. This is a firm that is already actively increasing its exports to neighbouring countries, such as the Democratic Republic of Congo, Cote D’Ivoire and Liberia.

These two investments are of particular importance as they both have been covered by insurance from the World Bank’s Multilateral Investment Guarantee Agency (Miga). Not only does this help mitigate the political risks involved in the investment it has also further heightened the level of due diligence completed for each investment.

According to Miga, the insurer has issued a guarantee of US$1.35mn to SIF to cover its investment in Ice Ice Baby. The coverage is for a period of up to 10 years against the risk of transfer restriction, expropriation, war and civil disturbance.

Miga also issued a guarantee of US$4.5mn to SIF to cover its equity investment in the Sierra Fishing Company.

Coupled with Miga’s insurance, CDC also follows a strict investment code that promotes responsible environmental, social and governance practices in all its projects. Evison explains that they work closely with their fund managers to ensure all business operations are in line with international practice.

The results
According to CDC’s annual development impact report, CDC’s investments have successfully led the way for other investors, venturing into areas where others are reluctant to go, and helping mobilise third-party investment. Since 2005, CDC has committed almost US$3.5bn globally, and alongside CDC’s commitments, other investors have committed US$21.1bn.

CDC has also beaten UK government-set targets, having invested £1.5bn in private sector companies in Africa, Asia and Latin America, and generating £2.5bn of portfolio cash for reinvestment in developing economies between 2004 and 2008.

During this same time period, CDC outperformed its benchmark, the MSCI Emerging Market Index, and has reported average returns of 18% per year.

CDC’s core focus is on Sub-Saharan Africa, and as of January 2009 it pledged that it will make at least 50% of its new investments in the region.

Evison tells GTR that they are actively looking for new opportunities in Africa over the coming year.
“Outside Sierra Leone, we are looking to back funds in East and West Africa. We are also investigating some pan-Africa sector funds, potentially in real estate and agri-business, for example.”