Abu Dhabi, UAEThursday 25 April 2019

The Abraaj saga is far from over and questions need answering in 2019

Private equity firm’s downfall is call to action for corporate governance reform, experts say

Abraaj Group founder Arif Naqvi. The private equity firm is still undergoing a provisional liquidation in the Cayman Islands. Sarah Dea / The National
Abraaj Group founder Arif Naqvi. The private equity firm is still undergoing a provisional liquidation in the Cayman Islands. Sarah Dea / The National

The collapse of Abraaj Group, once the Middle East’s biggest private equity firm, was a market-roiling business story of 2018, and it is far from over.

“Given the challenging legal and governance complexities of the case, compounded with multiple geographies in terms of assets, I think this will take at least a few years to conclude,” said Khalid Howladar, managing director and founder of Acreditus, a boutique risk and regulatory advisory firm based in Dubai.

“Nonetheless, there are probably some attractive assets on the balance sheet and a sale of one or more of these over 2019 is likely,” he told The National.

Abraaj managed nearly $14 billion (Dh51.42) of assets at its peak, but has faced a liquidity and reputational crisis since February, when four investors in its $1bn-healthcare vehicle alleged mismanagement of funds and hired investigators to find out where the money had gone.

Since June, the company has been undergoing a court-supervised restructure in the Cayman Islands, where most of its business is incorporated, and trying to sell off parts of the business to pay off an estimated debt of $1bn .

According to leaks from the investigation, the company was reliant on short-term borrowing and suffered financial troubles months before the story broke. Abraaj and its founder, Arif Naqvi, who is currently outside the UAE, deny any wrongdoing.

The high profile of the investors that sounded the alarm – the Bill & Melinda Gates Foundation, the World Bank’s International Finance Corporation, the UK’s CDC Group and Proparco Group of France – propelled the story into the international spotlight.

Abraaj’s sizeable portfolio and the sheer number of parties affected by the scandal has further increased the level of scrutiny the firm faces. Abraaj’s portfolio companies include Indian online grocery BigBasket, Southeast Asian logistics firm NinjaVan and African restaurant chain Java House Group, among others, according to Bloomberg. It managed funds from its 20 offices in emerging markets spanning Latin America, Africa, the Middle East and Asia.

Abraaj assets include stakes in 12 funds and holdings in companies such as Pakistani utility firm K-Electric, which it tried to divest to China’s state-run Shanghai Electric Company in 2016 but hit regulatory hurdles, and UAE supermarket chain Spinneys.

It has previously held a 50 per cent stake in GCC discount voucher platform The Entertainer, which was acquired by Bahrain’s GFH Capital in May, holdings in low-cost carrier Air Arabia and an initial investment in venture capital firm Wamda Capital.

To date, the company with the biggest financial exposure is Air Arabia, which in June disclosed a $336 million exposure to Abraaj through funds and short-term loans.

Since provisional liquidation proceedings commenced, several companies have been named in the media as interested parties in talks to buy the group’s asset management division, Abraaj Investment Management Limited, its funds management business, or stakes in various funds.

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These include US asset manager Cerberus Capital Management, York Capital Management, Colony Capital and British emerging market investment firm Actis, which have reportedly all since walked away from possible deals. Other prospective buyers have included Kuwait’s Agility and Abu Dhabi Financial Group, however no sale has taken place and analysts say the complexity of the firm’s operations, multiple competing interests and the level of due diligence required make the process especially lengthy.

“There isn’t much incentive to wrap things up completely and quickly, and I wouldn’t be optimistic about the timing of the liquidation, but it can take place eventually without impacting those close to the situation, and some piecemeal sales are likely,” said Richard Segal, senior analyst at Manulife Asset Management.

Dubai’s DIFC Courts appointed provisional liquidators in August to oversee the winding up of Abraaj’s Dubai entity, Abraaj Capital Limited, and the emirate’s financial services regulator has restricted the activities it is allowed to undertake.

However, Abraaj’s other global offices are subject to the requirements of their respective jurisdictions. The cross-border nature of the group’s operations has sparked concerns among investors and others over what levels of corporate governance are being adhered to – which analysts say must be addressed in 2019.

The governance issues that need addressing in 2019 are related to due diligence, disclosure and oversight to avoid co-mingling and accounting irregularities, and contagion from the weak links of a fund to the strong parts, Mr Segal told The National. “This can cause severe outflows from any fund from quite modest reputational issues, as the Abraaj saga attests to."

Abraaj serves as "a lesson that global governance standards are far higher [than in regional markets] and that if you raise international funds, be prepared for international standards”, Mr Howladar told The National.

In the short term, the GCC risk premium for lenders will have climbed post-Abraaj, making it harder to raise private equity funds, he added. “Given the cautious sentiment in today’s volatile and tightening markets, such events give yet more rationale to reduce or remove exposure [to high-risk investments and markets].”

Updated: December 29, 2018 06:13 PM

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