Private equity | The fall of Abraaj
Finance, like the money it deals in, is based on trust. Once this is broken, things can fall apart very quickly, and so it was with the downfall of Abraaj Group, a Dubai-based private-equity firm that at its peak had almost $14bn of assets under management. While the collapse was stunning, it was perhaps not that surprising in its swiftness.
Abraaj had invested more than $1bn in privately held companies in North and sub-Saharan Africa. Many of those companies are doing fine, as Abraaj largely held minority stakes, but the company’s implosion has set off a series of lawsuits in jurisdictions across the world as investors scramble to protect their funds.
On 25 January 2018, the company’s founder, Arif Naqvi, shared a stage with Bill Gates at the World Economic Forum in Davos for a panel entitled ‘A New Era for Global Health’. Just eight days later The New York Times and The Wall Street Journal reported that investors including the Bill and Melinda Gates Foundation had hired forensic accountants to comb over Abraaj’s finances. They wanted to know why $200m of their money had not been invested, as planned, in healthcare projects in countries including Kenya, Nigeria and Pakistan.
By the end of February, Naqvi resigned as head of Abraaj’s fund management business. The following month, 15% of the firm’s 350 staff members were reportedly made redundant, and investors were released from $3bn worth of commitments to a fund that had aimed to raise $6bn. Numerous executives left as audits revealed the company had dipped into funds to pay its own expenses. In June, as Abraaj tried to sell parts of its business, two creditors asked courts in the Cayman Islands to wind down the company. In response, Abraaj filed for a provisional liquidation.
It was a “house of cards,” says one former staff member who spoke to The Africa Report. Due to the ongoing litigation, the former Abraaj employees that we contacted would only speak off the record or on condition of anonymity. One described the working environment at the firm: “The overall culture of the company was very centralised and quite toxic in a way that it was being run as a family office, with all the control in Arif’s hands and him treating it as if it was his baby and he was the only one taking care of it. And that’s why he kept all the control with himself and his circle of people that were close to him […]. And that, at a more senior level, pissed people off I think.” The Africa Report put these accusations in an email to Abraaj, but the company’s representatives declined to comment.
Abraaj’s story is one of hubris, fuelled by investors willing to believe the company’s narrative of making money while doing good in emerging markets. It is also a story of overreach and poor corporate governance. However, it is not a damning indictment of investing in Africa and other supposedly risky regions. As a result of Abraaj’s failure, Africa-focused private equity firms will face more scrutiny from investors desperate to ensure they are not blindsided again.
A marketing machine
Naqvi was born in Karachi, Pakistan and started advising on investments in Dubai in 1994. After pulling off a series of lucrative deals, he founded Abraaj in 2002. Abraaj was initially focused on the Middle East, and the acquisition of Aureos Capital in 2012 enabled it to expand into Latin America, Asia and Africa. In 2013, it bought 51% of Fan Milk International, a Ghana-based frozen dairy products company. French food giant Danone took the remaining stake in a deal reportedly worth more than $360m.
“We have taken the risk out of investing in what the West mistakenly calls ’emerging markets,'” Naqvi told Forbes magazine in 2015. “They’re growth markets.” The same year, Abraaj raised almost $1bn for its third sub-Saharan Africa fund.
The former Abraaj analyst added: “Abraaj was a marketing machine. Arif Naqvi wanted to be ‘the guy who has changed the narrative’, who has done something unique, who moved into impact investing and made it a sexy asset class. That was the platform that Arif wanted to create. In order to grow that way, Abraaj really focused on its story and marketing its story first.”
But it is impossible to avoid risk when investing, as Abraaj found out. In 2008, it bought a controlling stake in K-Electric, a Karachi-based power firm, for $360m, according to Forbes. In October 2016, it announced it was selling that share to a Chinese buyer for $885m. But the sale was repeatedly delayed by bureaucracy. That led to a cash shortage, according to accountancy firm Deloitte, which Abraaj commissioned to look at its finances and which presented its findings in early June.
As liquidity dried up, investors began asking questions. The Abraaj Growth Markets Health Fund raised $1bn between 2015 and 2016. Its aim was to invest in healthcare in South Asia and sub-Saharan Africa. The Overseas Private Investment Corporation, a US government agency that helps US firms to invest abroad, put in $150m. The Gates Foundation contributed $100m.
More than half of the pledged money was sent to Abraaj between October 2016 and April 2017, according to The Wall Street Journal. But by September 2017, Abraaj had only spent $266m. This seemed strange because private-equity firms usually invest money soon after receiving it. Four of the fund’s 24 investors – the Gates Foundation, Britain and France’s development finance institutions and the World Bank’s investment arm – demanded to know why.
Abraaj’s Naqvi blamed the recent troubled elections in Kenya and regulatory issues. Abraaj had planned to build a 17-floor hospital in Karachi, but the city’s government had banned new buildings of more than two floors. Two hospitals in Lagos were held up by delays with imports and government approvals. But this was not the full story, and the four investors were not convinced. In December 2017, Abraaj returned more than $100m to investors. It hired KPMG to audit the healthcare fund and said in February that the accountants – which also audited Abraaj and many of its largest funds – found no problems.
But Deloitte’s review begged to differ. It said Abraaj had used the healthcare fund to pay expenses. It also found the firm ‘commingled’ $94.6m from its fourth buyout fund with the healthcare fund when strapped for cash. There wasn’t any evidence money was embezzled or misappropriated.
But, Deloitte said, Abraaj lacked ‘adequate governance’. A report prepared for a Cayman Islands court by Abraaj’s provisional liquidators, PwC, on 12 July was even more damning. The accountants could not find financial statements for the holding company. But they did find that, as well as dipping into its healthcare fund, Abraaj also borrowed money from two other funds, to which it still owed $171m. Meanwhile, Abraaj’s monthly income from management fees was $800,000 less than its $3m salary costs.
At the heart of Abraaj’s house of cards was its ‘unusual’ levels of debt, as PwC put it. Abraaj made a $100m, 10% commitment to its healthcare fund. Private-equity professionals say they usually put up 1-2%. It needed lot of debt to fund such commitments, reportedly at least $1bn. “Just a staggering amount,” says an Africa-focused private-equity executive. “What do you really need debt for? You’re effectively an adviser.”
As its cash squeeze tightened, the debt came back to bite Abraaj. In May, Kuwait’s pension fund filed a petition in the Cayman Islands for Abraaj to be liquidated, after it defaulted on a $100m loan. Kuwait was joined a few weeks later by Auctus Fund, a vehicle created by Hamid Jafar, whose family owns Crescent Petroleum, a Sharjah-based conglomerate. Jafar had loaned Abraaj $300m in December 2017.
The screws turned further when a criminal case was filed against Naqvi in the Emirates state of Sharjah in June, after cheques issued as partial security for the loan bounced. “The loan was a reflection of the trust placed in Arif Naqvi,” Jafar’s lawyers told reporters at the time. “It has emerged that the promises were not made in good faith, and that there was no intention of repaying the debt.” The loan was due on 28 February, with an interest rate of 6%, Jafar’s lawyers told The Africa Report.
In an interview with The Africa Report at the end of June Naqvi’s lawyer disputed that claim: “There were no conditions or terms at the time when the loan was given,” said Habib Al Mulla of Baker McKenzie. “Mr Naqvi is committed to repayment of these cheques […] and the Jafars know that.” He added: “They had enough trust between them for the Jafars to provide the loan without discussing the terms of payment.”
When The Africa Report went to press, a settlement was still being discussed. Discussions were also ongoing about various offers for parts of Abraaj. Some of the bidders are said to include US-based York Capital Management and the Abu Dhabi Financial Group. The liquidators rejected Colony Capital’s offer to buy some of Abraaj’s assets in early July and started a new round of bidding.
What’s the damage?
Most companies connected with Abraaj have stayed quiet, too, but not all. “Abraaj are just managers, not shareholders,” Wole Oshin, the managing director of Custodian & Allied, a Nigerian insurer in which an Abraaj fund has a minority stake, told local reporters. “The strength of our company will not be deterred.”
The turmoil at Abraaj “hasn’t in any way affected us,” Paul Smith, the chief executive of Kenyan coffee-shop chain Java House, told Bloomberg in July. “At the moment, it’s business as usual.” Abraaj bought a 90% stake in Java House from Emerging Capital Partners, another private equity firm, for a reported sum of $100m in February 2017. The chain is planning to increase the number of its outlets from 60 to as many as 200 over the next four years, Smith said, including in Nigeria and China.
Another of Abraaj’s Africa investments is in Nigerian fertiliser company Indorama. It announced in June that it had scored a $1bn financing deal from the World Bank’s International Finance Corporation for the construction for a new production line that will have the capacity to produce 2.8m tonnes of fertiliser per annum.
Some observers argue that competition between large private equity firms in Africa has led to Abraaj and others overpaying for deals of $100m and above. “There are fewer deals and there’s just more dollars chasing those deals,” says the head of a smaller private-equity firm who asked to speak off the record.
African deals last year were worth half of the total recorded in 2014, when there were 154 transactions worth $7.9bn, according to the African Private Equity and Venture Capital Association. Sentiment has improved this year, dealmakers say, thanks to the nascent economic recoveries in Nigeria and South Africa. Most analysts, though, say that Abraaj’s problems were of its own making rather than the result of a frenzied industry.
The collapse of one of the largest emerging-market investors is by no means a positive, though. “It’s not great for the private-equity industry, to be honest,” said an Africa-focused private-equity executive. “Quite rightly [it] will make investors ask some stronger questions.”
Another player from the media-shy sector concluded: “Those who are actually raising money right now are those who are facing the brunt of it […]. I suspect a couple more investors are saying, ‘Na, I think I’ll just pass on investing in Africa’.”
Caption:The higher you climb, the harder you fall: abraaj founder Arif Naqvi is now watching his empire get sold off in pieces
Credits: ANGEL FRANCO/NYT-REDUX-REA
From the September 2018 print edition