Abraaj Capital: The rise and fall of a Middle East star

While mega financial company scandals have taken the limelight in the past, with analysts wondering how bankers can be so gullible to extend multi-million loans based on pure name lending, the recent woes of Dubai-based Abraaj Capital have also shaken the closed knit Middle East community.

Founded in 2002 by Pakistani Founder and Chief Executive Arif Naqvi, Abraaj was truly a shining star, which pioneered the private equity industry in many of the markets around the world and was the envy of smaller rivals.

Their journey has been one of innovation and entrepreneurial drive but has come to an abrupt stop, as the firm which once managed almost $14 billion, filed an application for a court-supervised restructuring in the Cayman Islands.

The firm said it made the move “so that the rights of all stakeholders can be protected,” while it works with joint provisional liquidators to “promote a consensual restructuring” of the company’s obligations.

It took Naqvi about 15 years to build Abraaj into one of the developing world’s most influential investors, but it’s taken less than five months for the Dubai-based buyout firm to reach the brink of collapse.

Cause and effect

How did this come about and what are the consequences to other Middle East private equity firms, and more importantly, to the reputation of regional regulators?

By all accounts, Abraaj stood far above others in both its global market presence, investment portfolio and the successful realization of dozens of its investments in many sectors such as real estate, industrial, materials, logistics, consumer goods and services, energy, healthcare and education.

In Saudi Arabia it invested in a fast food brand and according to the firm, it had nearly $14 billion of assets under management, $8.1 billion deployed, 200 investments and had realized 100 investments. It has 20 offices spanning all continents from Africa, to Latin America, Asia, North America and the Middle East.

Since the dispute broke earlier this year, Abraaj has shaken up its management, suspended new investment activities and undertaken an independent review of its corporate structure, focusing on governance and control functions. And yet, Abraaj seemed to have one of the most robust board and management governance structures in place with board committees in audit, succession, nomination, compensation, governance, compliance and risk.

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The management committees seemed to tick the right boxes with a management executive, global investment, partner company review and partner council committees in place. To cap all these, there was a separate Committee to Good Governance.

By February 2018, the internal shake up had begun with the founder Arif Naqvi, stating that he will cede control of the fund management business, but will remain CEO of Abraaj Holdings. According to Mr Naqvi, the move was part of a planned restructuring, that was only accelerated by reports of misused funds.

Senior executive left the company including the chief financial officer of Abraaj's private equity unit, as well as the unit’s chief operating officer, just months after they were appointed to their respective roles as part of the wider reorganization. As pressure mounts, Abraaj is said to plan cutting about 15 percent of its total workforce of about 350 people.

Since the dispute went public early this year, Abraaj has split its investment management business and holding company, and founder Arif Naqvi stepped aside from day-to-day running of its private equity fund unit and the firm halted its investment activities.

Row with investors

The reason for the current state of affairs was that Abraaj has been bruised by a row with four of its investors, including the Bill & Melinda Gates Foundation and the World Bank affiliate, the International Finance Corp. (IFC), over how it used their money in a $1 billion health care fund. Abraaj has denied it misused the funds.

The four investors hired forensic accountants to examine what happened to some of their money in Abraaj’s healthcare fund and in turn, Abraaj hired KPMG to verify all receipts and payments in the healthcare fund. The buyout firm says all capital drawn from the fund was for “approved investments”.

Abraaj also says unused capital from its health fund was returned to investors. Abraaj was later forced to hire Deloitte to examine its business, including its healthcare fund, after investors questioned an earlier review by KPMG.

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Money from Abraaj’s $1 billion health-care fund was used to pay management fees and other expenses, Deloitte said. According to Abraaj, the fund in question played a significant social as well as economic role as the Abraaj Growth Markets Health Fund was marketed as one of the most innovative solutions to address the healthcare needs of tens of millions of people across South Asia and Sub Saharan Africa.

According to the company, the Fund has served almost two million people through 24 hospitals, 30 diagnostic centres and 17 clinics.The results of the audits have been less than complementary.

Two separate examinations into the alleged misuse of money at Abraaj are said to have found potential irregularities beyond the healthcare fund while the audit commissioned by the four investors suggested that money from the healthcare fund was being diverted elsewhere.

Potential discrepancies

Preliminary findings from a separate review by Deloitte at Abraaj’s request also throws up potential discrepancies in the accounting at some of the other pools of funds. Deloitte’s review found that Abraaj commingled about $95 million when it faced cash shortages.

The company has been scrambling to remain as a viable entity and was in talks to sell a majority stake in its fund-management unit to US asset manager Colony NorthStar Inc. to help stabilize the business, but which fell through, as well as with the Abu Dhabi Capital Management and New York-based private equity firm Cerberus Capital Management.

There is a race against time, as on June 29 a court hearing of a petition to liquidate the company by Kuwait’s Public Institution for Social Security is scheduled. The court-supervised provisional liquidation would allow Abraaj to restructure debt, negotiate with creditors and sell assets.

By mid-June Abraaj had appointed PwC Corporate Finance and Recovery, and PricewaterhouseCoopers, as joint provisional liquidators. The Dubai Financial Services Authority (DFSA) said it’s “aware of various matters” involving Abraaj Group but isn’t in a “position to comment on firm specific matters” but it was watching the situation closely to ensure that investors interests are protected.

ALSO READ: Founder of Dubai private equity firm Abraaj hands over control of fund

What is also important is that employees’ rights and accumulated benefits are also protected in any settlements. Presumably lessons will have been learned concerning regulating companies with multi global locations and different overlapping oversight jurisdictions – the same problems that plagued the now defunct third world banking giant BCCI – Bank of Credit and Commerce International – in the 1980’s before it was liquidated on charges of money laundering.

BCCI was founded in 1972 by Agha Hassan Abedi, a Pakistani financier and was registered in Luxembourg with head offices in Karachi and London and had over 400 branches in 78 countries, and assets in excess of $20 billion, making it the 7th largest private bank in the world.

With the demise of BCCI, there has not been any major banking corporation to emerge from outside the Western world to challenge the existing order. Hopefully, the potential liquidation of Abraaj Group and the damage to Arif Naqvi’s reputation may not yet affect investor confidence in the Middle East’s financial centres for years to come.
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Dr. Mohamed Ramady is an energy economist and geo political expert on the GCC and former Professor at King Fahd University of Petroleum and Minerals, Dhahran , Saudi Arabia and co author of ‘OPEC in a Post Shale world – where to next ?’. His latest book is on ‘Saudi Aramco 2030: Post IPO challenges’.