Dubliner making impact with UK aid
Interview: Former Bill & Melinda Gates Foundation adviser and banker Nick O'Donohoe now runs development investor CDC
Nick O'Donohoe set himself the challenge of visiting one of the most remote regions of Africa before formally beginning his new role as chief executive of Britain's development finance organisation CDC Group last year.
With £4.8bn (€5.4bn) of net assets, including about £3.8bn of existing investments, CDC invests UK taxpayers' money in businesses - through other investment funds, as well as direct equity and direct debt - in Africa and South Asia. It aims to create jobs and boost wider economic development and is set to invest up to £3.5bn more over the next five years.
O'Donohoe, a former banker with Goldman Sachs and JP Morgan, and a native of Rathgar in Dublin, will add new recruits to CDC's 220-strong workforce and open new offices to manage the planned increase in investment between now and 2023.
As we talk in a glass-panelled meeting room in CDC's office building near London's Victoria Station, he takes up the story of the aforementioned trip. "My predecessor said that our job is 'to do the most difficult investment deals in the most challenging places'.
"I went to see a sustainable brownfield palm oil plantation in which we've invested $40m in the Democratic Republic of Congo (DRC), and it was the most remote place I've ever visited.
"From the capital, Kinshasa, it was a three-hour flight to a town called Kisangani, and then four hours down the Congo River in a little motor boat to the huge Lokutu plantation, where about 8,000 people are employed. There are no other formal jobs within 200km of there, and their wages support about 45,000 people. There are no roads and hardly any power. Other than the river, there's no way of bringing goods in and out."
A blog he wrote about the trip describes the challenges of running a business there. Feronia, the plantation owner, is subject to 178 different taxes. The government employs about a million administrators in a country with just 200 formal companies, yet provides few schools or hospitals, few roads anywhere in the country and, in Lokutu, no sanitation or clean water.
Getting a piece of equipment delivered involves long delays, taxes and theft.
"Last week I was in Zimbabwe - which I think will be one of the great investment stories in Africa over the next decade. Despite its challenges in the wake of Mugabe, there is enormous potential in terms of its people, their work ethic, the diaspora and its education system. There are vast resources there and a semblance of infrastructure too."
Corruption is the main reason that CDC doesn't proceed with an investment. A dedicated team of 15 people work on due diligence. O'Donohoe's boss is international development secretary Penny Mordaunt, to whom, along with her Department for International Development, the organisation is accountable.
On the day that we meet, Brexiteer MP and Tory leadership challenger Jacob Rees-Mogg is on the front of one newspaper, supporting its campaign to cut Britain's overseas aid spending. O'Donohoe politely rebuts the argument that CDC's billions should be used closer to home, at a time when critics point to the needs of the NHS and the ongoing effects of other public service cuts.
"CDC's second chairman, Lord Reith, who set up the BBC, described its role as 'to do good, without losing money'. The returns we generate allow us to grow and recycle our capital into new investments. UK taxpayers have not only helped Africa and South Asia, they've also made an average annual return of 7pc over the last five years."
Its investee firms, across sectors ranging from manufacturing to construction, infrastructure, agriculture, healthcare and renewable energy include 342 businesses in South Asia providing 396,000 jobs, while 653 African businesses provide 253,000 jobs. They helped create almost 1.29 million new direct and indirect jobs, while in 2016 those businesses paid $4.1bn in local taxes.
"Since 2012, we've become much more focused on infrastructure, financial institutions, the health sector and so on. We take into account a broader range of variables, to better capture the impact we make, with metrics that include job quality, climate and gender," says O'Donohoe.
With an emphasis on 'patient capital', banks and other funds also spread the money out to smaller businesses. "We influence social and environmental standards and the way they manage their portfolio. We also have a fund with a lower return objective, for higher-risk investments. That's a real opportunity to do things that we wouldn't otherwise. Supporting the development of new drugs using a guarantee facility is one example. We will be the first people in the world outside of the Aids-focused NGOs to do that.
"Being a limited partner in many funds around the world is an important way of getting small amounts invested too, though with the disadvantage of being one step removed. We back a fund in Uganda that tends to invest in $2m to $3m amounts in agriculture, for example. In Zimbabwe, there is only one private equity fund, of $75m, and we were a cornerstone investor in that in 2013. It's the same in Afghanistan, also in the only fund there. Our average direct equity transaction size is $35m to $40m. Africa doesn't have many companies that can absorb that much capital.
Of course, compared to Chinese investment in Africa, CDC is something of a minnow. Consultants McKinsey estimate that about 12pc of Africa's industrial production, valued at about $500bn a year, is handled by many of the 10,000 Chinese firms there - most of whose profits are likely repatriated to China. Nevertheless, Zimbabwe sees China as more visibly supportive of it than Britain, for example, O'Donohoe explains.
Asked about the numerous challenges African countries face, he prefers to accentuate reduced child mortality and better education rates, and the promises of technology like off-grid solar power. "There are newer threats too, like climate change. Robots and automation might be transformative, but also represent a significant long-term threat to growing a sustainable manufacturing base."
Another positive he enthuses about is The Africa List, set up by CDC to foster the development of business networks for people at CEO level in DRC, Zambia, Ethiopia, Tanzania and Uganda. Another, Boardroom Africa aims to increase the board representation of women.
Arguably, O'Donohoe was at the forefront of this sector, setting up a social finance (another description for impact investment) group for JP Morgan, the US investment bank where he worked, at the request of CEO Jamie Dimon in the aftermath of the 2008 financial crash.
The path that had led him there began growing up in south Dublin along with his four brothers. School in Ballsbridge led to an economics degree at Trinity College, where his father was a professor of paediatrics. Recommendations from the brother of a friend, as well as entrepreneur, business lecturer and now fellow alumnus John Teeling, led to an MBA at Wharton School of Business in the US.
Specialising in quantitative finance, he then took a job with Goldman Sachs, who sent him to Zurich for eight years, before moving to London in 1991. "It was a fascinating place to be, as they were building their business around the world in the 1980s. It was a great training ground," he says.
In 1996, he joined JP Morgan in London, becoming head of European equities and then global head of research, for which he had 1,000 analysts around the world reporting to him. He also sat on the management committee of the investment banking division, giving him a front row seat for the 2008 crash, in the one US investment banking giant that didn't need a bailout.
Given that he was global head of research, did he see the crash coming at all? "It was clear there was excess in the market, but you never knew where the break was going to happen, nor how severe it was going to be. Jamie Dimon arrived in 2005, into what at the time was a rather inefficiently, poorly managed bank. He transformed it in terms of its risk management over the following two years because it was clear that there was a huge amount of risk building up in the system.
"I was involved in us taking over Bear Stearns. With little warning, I had to fly to New York and there were 500 new people reporting to me. With some of them however, in the space of a week, they had lost their entire net worth pretty much, as well as their job, as we couldn't keep them on, and they were in tears."
He recalls hearing the news of the Irish bank guarantee. "I was sitting in an office where the screens were a sea of red. I said to myself, 'They can't be serious. What are they possibly thinking?' Having seen what had happened with the US banks, to me it was an extraordinary decision."
Given his former role, what did he make of the recent US stock market falls? "My sense is that it's an overdue correction, rather than the start of a significant downturn. As long as global growth remains robust and interest rate rises remain moderate, then I'd expect global markets to continue to rise, albeit at a slower rate than the last couple of years. I think that derivative markets, particularly short volatility positions, are accentuating overall market volatility. They're unhealthy and deserve ongoing regulatory scrutiny."
Does he invest in stocks and shares, and does he have an opinion on investing in cryptocurrencies? "I typically invest through funds, rather than owning single stocks. Like most people of my age, I don't claim to understand the value of cryptocurrencies, and would not put one penny of my money into them."
He left JP Morgan in 2011, having launched a landmark report on impact investment. By then he had already met Sir Ronald Cohen, the founder of private equity firm Apax, and an establishment figure and donor to Britain's Labour Party. With £600m from the then Tory-Lib Dem coalition government, the duo launched Big Society Capital, the world's first so-called social investment bank, chaired by Cohen, with O'Donohoe as CEO.
It's since been copied in several countries, including Japan, but the 'big society' part of the brand became, he sayd, "tarnished by the perception that it was a way of window-dressing public spending cuts across a whole range of social areas. I honestly don't think politically that was the intention, but we had an enormous wall of scepticism to climb because of it.
"Capital is never going to be the same as a grant. It's going to be complementary and always a much smaller part of how you fund charities or social enterprises. It has a value but isn't a substitute."
After nearly five years at the helm of the organisation, O'Donohoe became a senior adviser to the Gates Foundation, the philanthropic outfit of Microsoft co-founder Bill Gates and his wife, Melinda. He worked three days a week in its London office.
"It's hugely influential in the areas they're focused on, mainly health and financial inclusion, over the past 20 years or so. I felt I was at the real cutting edge, working with the best minds on HIV/Aids, malaria and so on.
He met Gates several times. "For my generation, what he is doing with the foundation is extraordinary. His and Melinda's passion and tireless work is quite something to see up close.
"My job was to think about ways to fund programmes through blended capital [using development finance and philanthropic funds to get private investment flowing]. I was also talking to some of the European governments about the foundation's work too.
"Being an adviser may not have best suited my personality, however. I could only give advice. I wasn't the one making decisions and following them through. I missed being in charge, in terms of being able to make something happen. I was dealing with multiple partners, trying to bring partnerships together in very bureaucratic organisations. That can be frustrating work.
"The only reason I left the role was because this job became available. When I look at the landscape here in London, if you're interested in impact investment, then there is no bigger or better job here."
CEO of CDC Group plc
BA Economics, Trinity College Dublin
MBA from Wharton School of Business, University of Pennsylvania, US
Various investment banking roles at Goldman Sachs and JP Morgan - most recently Global Head of Research at the latter
Co-founder and CEO of Big Society Capital, London
Senior adviser to the Bill & Melinda Gates Foundation
Married to Stephanie, with a son and four daughters
Swimming, cycling, skiing
A Gentleman in Moscow, by Amor Towles
Favourite holiday destination
Favourite TV box set
What is the best piece of business advice you’ve ever been given?
If it looks too good to be true, it probably is.
What has been the most important lesson that you’ve learned in business?
The key to running any successful enterprise is hiring people who know more than you do and empowering them to get on with the job.
What is the next big trend in your business sector?
I am excited that so many people, particularly millennials, are embracing the idea of impact investment, recognising that the way we direct capital has huge impacts on peoples’ lives and therefore should be about more than just risk and return.
In terms of specific investment areas, I would highlight the rise of home solar systems in Africa, which have the potential to provide power to 400 million households and transform people’s lives in the same way as the mobile phone has done over the last 20 years.
Sunday Indo Business