Promising African Development Fund Collapses; A program financed by the Agency for International Development is dissolving because of mismanagement, insider dealings and a lack of federal oversight.

Promising African Development Fund Collapses


Published: May 30, 2013

The initiative began two decades ago, with the best of intentions, after apartheid fell and southern Africa’s future brightened.

Today that program, the Southern Africa Enterprise Development Fund, is in its death throes, apparently victimized by mismanagement, insider dealings and a lack of oversight by federal officials. Current and former fund officials are fighting over money, and the eventual cost to American taxpayers of the fund’s missteps could run into the tens of millions of dollars, public filings indicate.

On one level, the plight of this obscure fund is a common tale involving the hazards of foreign aid. But on another level, experts say, it points to wider problems bedeviling the federal agency that financed the fund, the United States Agency for International Development, orU.S.A.I.D. In fiscal 2013, the agency had a budget of $1.6 billion and helped administer more than $40 billion in foreign assistance.“There is a primacy on getting money out of door and there is less urgency on how it is spent or how well it is spent,” said Jake Johnston, a research associate at the Center for Economic and Policy Research, a policy institute in Washington.

The Southern Africa fund was long led by the American civil rights leader Andrew Young. Its mission was to help start or expand businesses in Southern Africa in sectors including finance, manufacturing, communications and drilling by providing loans or other types of financing. Many of its current problems began in 2009 when agency officials approved a plan under which the organization was to transition into a private equity fund.

Since then, millions of dollars in management fees, legal expenses and other costs have been spent pursuing the failed plan. The fund’s value has plummeted by more than 60 percent since 2009, to $18 million from $48 million, the group’s tax filings show.

A spokesman for the aid agency, Raphael Cook, declined to make officials of the agency available for an interview about the Southern Africa fund. “We require all our grantees to use sound business judgment and uphold their fiduciary responsibilities,” Mr. Cook said in a statement.

The current chairman of the fund, Carlton A. Masters, and a director of the group, Peter V. Emerson, did not respond to interview requests. However, in a statement issued through a lawyer, John Q. Kelly, the fund said that the organization had succeeded in its mission. Agency officials called its track record “mixed.”

Three former top fund executives are claiming in an arbitration proceeding that the fund owes $1.4 million in fees to a management firm they had founded to pursue the privatization effort. The firm, Inflection Capital Partners, received some $4 million from the fund under a deal that a former fund director described as too lucrative. The fund is claiming in the arbitration proceeding that the former insiders violated the fund’s agreement with the aid agency by overpaying themselves more than $840,000.

Lars Liebeler, a lawyer in Washington who represents the former fund executives, described the fund’s claim as groundless. He declined to make them available for interviews.

The current fight is far from the first time that the fund has been involved in controversy or internal disarray. Over the years, government auditors have criticized its operations, and the group has chosen to deal with management problems in unusual ways.

Around 2008, for example, fund directors learned that an official of the group had solicited $100,000 in personal loans from the developer of the Mount Meru Hotel, a resort in Tanzania underwritten by the fund. The official then allowed the developer, a local businessman, to withdraw unauthorized funds from the hotel’s account.

But even after an internal investigation determined the officials’s actions had violated federal regulations and fund policies, he was not fired. Instead, Mr. Young decided to overlook the man’s actions and left him in charge of another fund-financed project in Tanzania.

“I am a pastor and I believe in giving people another chance,” said Mr. Young, the former congressman, United Nations ambassador and mayor of Atlanta, in an interview in 2009.

For years, Mr. Young and Mr. Masters, while directors of the fund, were also partners in a lobbying firm based in Washington called GoodWorks International that represented some African countries including Tanzania, a nation in which the fund did business.

Mr. Young, who did not respond to interview requests, retired last year from both the fund and the lobbying firm.

Usually, enterprise funds supported by the aid agency, like the one in Southern Africa, eventually unwind and go out of business. But several years ago, fund officials began a well-financed campaign aimed at persuading the agency to let them follow a path taken by few other agency funds. They proposed that the organization keep its taxpayer-purchased assets and use them to seed a new private equity fund managed by former fund executives.

In support of that campaign, the fund spent over $300,000 in lobbying fees, filings show. And in late 2009, officials at the agency agreed to a plan under which the fund would retain 75 percent of its current assets — a sum then equal to about $37.5 million — for use in the proposed private fund. But the agency also imposed a condition. The fund would need to raise an added $37.5 million from private investors.

Soon after, three fund executives — its chief executive, Malcolmn D. Pryor; its chief investment officer, Rafique Symonette; and its top lawyer, Layn M. Saint-Louis — left their posts and formed Inflection Capital. Mr. Symonette is the stepson of the fund’s chairman, Mr. Masters, from a previous marriage.

Typically, private equity fund managers are compensated in two different ways: they receive an annual management fee of 2 percent based on a fund’s value and also a 20 percent cut of any profits generated by a fund during a year. But public filings show that fund directors, who then included Mr. Young and Mr. Masters, agreed around early 2010 to pay Inflection Capital a 2.5 percent annual management fee based on a nonexistent asset base — $100 million, the size of the fund’s original grant from the federal aid agency in 1994.

The $100 million figure was about twice as high as the fund’s stated assets in 2009 of some $48 million, according to tax filings. In a statement, the fund said that officials from the aid agency had agreed to the fee arrangement because it mirrored a deal used when another agency fund went private.

A former director of the fund, Harold E. Doley Jr., an investment banker, said that its terms appeared to favor the three former fund insiders.

“They would have never put such a proposal before me,” said Mr. Doley, who resigned from the fund in 2008 before the deal because of other concerns about the organization’s management. “I would have rejected it.”

The relationship between the fund and Inflection Capital ended in mid-2011 when the aid agency ordered the fund to liquidate because of its inability to raise the required $37.5 million. Not long after, Inflection Capital filed its arbitration claim, charging breach of contract. The fund said it was hard to raise money during the financial crisis.

By last year, the fund’s finances had reached a state of emergency, filings in a Delaware federal court indicate. Starting in 2012, Mr. Masters began making a series of interest-free personal loans to the fund that now total more than $1 million to cover the operating costs of the Mount Meru Hotel, filings show.

To secure his future rights as a creditor, the fund has filed court judgments in his favor, according to filings.

Just how much would be left in the fund to be returned to taxpayers is anyone’s guess. In a statement, the fund said it was seeking a buyer for its assets, like the Mount Meru Hotel, which it has listed with a broker for $40 million. But based on the fund’s stated value of $18 million, much of that asset is apparently encumbered by debt.

In a statement, Mr. Masters said he had made the loans to the hotel to keep it open during a cash squeeze. “The last thing I wanted was for U.S. taxpayers to be hurt,” he said.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (, the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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