Tuesday, March 24, 2015

Mysteries of the China Africa Development Fund

The China Africa Development Fund (CAD-Fund) launched by China Development Bank (CDB) in 2007 remains poorly understood. For example, a 2012 statement by the Africa Finance Corporation outlining a strategic partnership being developed by the AFC and the CAD-Fund describes the CAD-Fund as having "US$50 billion" in funds under management.   Surprise: when fully mature several years from now, CAD-Fund will only be a $5 billion fund. In the past 3 years, no one has corrected that error at the AFC website.

Others have described the small CAD-Fund as a "sovereign wealth fund" -- this is not technically correct, as an adviser for China's sovereign wealth fund, China Investment Corporation (CIC) confirmed to me. Sovereign wealth funds are usually funded directly from central bank reserves arising from trade and budget surpluses (e.g. Korea Investment Corporation; China Investment Corporation) or natural resource exports (Kuwait Investment Authority, etc.). The CAD-Fund is a private equity fund, and was supposed to raise its own funds on the private market, after the initial infusion of $1 billion from CDB.

After two years of trying to raise the second $2 billion, CAD-Fund had to ask CDB for help. CDB arranged to provide CAD-Fund with a loan at LIBOR plus a margin, with an 8 to 10 year term. As noted in the financial newspaper Caixin in April 2012: "Development bank takes out loan after domestic institutions decline to invest" in CAD-Fund.

On another note, it is true that the CAD-Fund is not at all transparent. Its website gives no lists of the projects in which it invests, aside from a few paltry examples. Is this standard practice for other private equity funds, or something uniquely Chinese?


  1. CADFund typically provides about 1/3 of the equity for projects, as a passive financial investor. The remaining equity is provided by Chinese and/or foreign sponsors. Debt:equity usually is 70:30, with CDB as main lender. So $5 billion of CADFund investment represents $50 billion of total capex. So technically AFC's statement that CADFund has $50 billion "under management" is incorrect; however, CADFund will be a key participant in an investor group directing $50 billion of total capex to Africa -- significantly more than any other investment group in Africa.

  2. "Debt:equity usually is 70:30, with CDB as main lender."

    Are you sure about this ratio?

  3. Through my interaction with CADFund in the past 3.5 years, I understand CADFund is not necessarily a private equity fund as it does not make own decisions on investment. It's more like an government-supported agent between Chinese investors and African projects across various sectors, and then provide additional monetary support in terms of equity as a minor stakeholder.