China-Africa Development Fund

Dominique Patton (Business Daily)-A glass factory in Ethiopia will be one of the first investments in Africa to benefit from the new China Africa Development fund, its chief has revealed.

The fund, launched in June, has already had around 50 applications, mostly from Chinese companies. Due diligence has been carried out on both the Ethiopian factory and an electric power station in Ghana, and investment could be signed off by the end of the year, chief executive of the fund Chi Jianxin told Business Daily.

He did not disclose the scale of investment in each venture, but said the private investment fund, bankrolled by the China Development Bank to the tune of US$1 billion in the first phase, plans to spend between $300 and 400 million in around 20 to 30 Chinese or Chinese-African joint ventures in 2008.

The sum is close to the $480 million already invested by Chinese firms on the continent during the first half of this year.

The new fund will push Chinese presence in Africa up another gear. Companies will gain easier access to funds than applying for bank loans and will be able to take on higher risk projects, boosting the country’s presence in new areas. “It will certainly be quicker than getting money from the bank. Because this is an equity investment, the risk is held by the fund, and the company does not have to find a guarantor which it would do if it went to the bank,” said Mr Chi.

Announced as part of a package of measures to boost relations and development in Africa at a summit in Beijing one year ago, China has promoted the fund as different to the aid and loans previously made to Africa and widely criticised in the West for failing to take governance into account.

“It’s totally different because we need to make a profit. This is not aid, it’s a market-based fund,” said Mr Chi.

The 50-year lifespan of the fund puts it in a very different category to Africa’s emerging private equity sector however.

“This already tells you that the perspectives are very different,” said Mawuli Ababio, managing director of the African Venture Capital Association.

“It looks like the typical development finance aid tied to Chinese companies. You don’t suddenly raise a billion dollars without some strategy or philosophy behind it.”

However the launch of the fund comes at a time when China’s investments are beginning to attract more attention than its aid and loans.

China’s ICBC Bank recently announced plans to invest $5.6 billion in a stake in Standard Bank, the biggest investment in the continent in years. The CAD fund’s guideline document says companies must comply with environmental and labour laws in the countries where they make their investment although Mr Chi says it is “up to the local government to control this”.

He insists that Chinese companies need more help investing in Africa. “The African market is very new and many companies are not familiar with it so they need to share the risk with other investors. Most Chinese companies don’t have much experience in risk management.”

He added that there will be little pressure for companies to generate returns in one or two years. “We think we will stay in a project for five to eight years, but if some need a bit longer we can do that.” CDB, which has gained substantial experience in Africa, will offer risk management consultancy to the investment projects. The bank has recently set up “missions” in more than 20 African countries (including Kenya) to build relationships and support debt financing.

It will also be on the look-out for projects that can apply for CAD fund investment. China sees itself as a friend to other developing countries and wants to share its experience of development, added Mr Chi. The fund would like to invest in all African countries where China has a foreign relationship. “But it depends on opportunities.”

Joint venture

Dedicated Africa funds are on the rise, spurred by good economic growth in much of the region and some attractive deals in recent years such as the sale of telecoms firm Celtel for $3.4 billion in 2005.

But it remains difficult for typical private equity funds to find later stage transactions.

In China, private equity is still relatively new. Mr Chi previously headed the CDB’s investment banking department, and was involved in setting up some of the country’s first fund companies including the Bohai fund.

As yet, he has no experience of working in Africa or with African companies. Other projects seeking investment from the CAD fund include agricultural projects in Tanzania, namely a flower farm and a sisal producer seeking expansion, and an African mobile phone company looking to establish a joint venture with a minority Chinese shareholder.

Manufacturing, infrastructure, transport, and industrial parks are also deemed to be “priority” areas for investment by the fund. Investments are between $5m and $50m per single project.

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