10/11/2018 Private equity: inside the fall of Abraaj | Financial Times

The Big Read Private equity

Private equity: inside the fall of Abraaj

Once a trailblazer for emerging market investment, the group is now being picked over by liquidators

Simeon Kerr in Dubai and Henny Sender in Hong Kong SEPTEMBER 9, 2018

It was a deal that should have provided Abraaj Group with one of its biggest ever paydays. Instead
the failure to sell a majority stake in Pakistan’s K-Electric to a Chinese group has all but crippled
the Dubai-based private equity group.

Had the $1.8bn sale gone through at the end of 2017, its parent, Abraaj Holdings, would have
received almost $450m. It didn’t. And within six months, the holding company had filed for
provisional liquidation — a Cayman Islands court-driven restructuring process — to protect itself
against a winding up order brought by two creditors. It had debts of over $1.1bn, and faced
allegations of misusing investor money held in Abraaj’s $1bn healthcare fund to support the
business of founder Arif Naqvi.

Abraaj claims that it had followed procedures, but the loss of confidence sent the firm into a death
spiral.

Arif Naqvi was a familiar figure at the World Economic Forum in Davos © Bloomberg
Once seen as a trailblazer for the industry, Abraaj had grown from being a Middle Eastern
company to a global emerging markets specialist operating across Africa, Asia, Latin America,
Turkey and Central Asia as well as its home market, with $14bn under management. Its investor
list included the Bill & Melinda Gates Foundation and the International Finance Corporation, an
arm of the World Bank.

But for many investors, its collapse, with its estimated assets of $1.1bn unlikely to cover its debt,
underscores weaknesses in the broader industry. Investment firms have exploited access to cheap
debt to leverage funds and make acquisitions, and — in the case of Abraaj — to compensate for the
fact that spending was running ahead of revenues at the company itself.

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“Abraaj could have survived the scandal,” says one adviser to the firm. “But, as usual, over leverage
is the number one reason why companies fail.”

Both Abraaj spokespeople and Mr Naqvi, the company’s largest shareholder, deny any wrongdoing.
Liquidators are now in the process of assessing bids for Abraaj’s business as it seeks to raise funds
to repay creditors and staff. Firms such as Brookfield Asset Management and Actis have tendered
offers for parts of the Abraaj empire, people aware of the matter say.

At the centre of this tale of rise and fall is Mr Naqvi. Until recently he was a powerful symbol of
what a financial entrepreneur could achieve beyond the money capitals of the US, Europe and Asia.
His decision to position Abraaj as an impact investor — combining social returns with a financial
one — resonated with investors, and helped turn the articulate, Karachi-born, Mr Naqvi into a
celebrity in investment circles.

Yet Abraaj executives now blame the company’s founder and fellow board members for what PwC,
the liquidator of the holding company, refers to as “the long running liquidity shortfall between the
investment management fees and operating expenses”. Insiders estimate this gap to have run to
between $30m and $60m a year — the company was, in short, spending beyond its means and
towards the end using other people’s money to do it, say executives and investors.

“What he built had never existed in the Gulf, or in emerging markets generally,” says the head of
one investment firm close to Mr Naqvi. “Yet today, he is accused of being a crook and his investors
want to hang him.”

In March last year, Abraaj hosted 500 guests for a week of discussion, including a dinner at
Dubai’s Burj Khalifa, the world’s tallest building. Among those who addressed investors and
portfolio managers was John Kerry, the former US secretary of state.

“We are delighted you find our presence and resonance in markets to be compelling,” Mr Naqvi
said in another talk. “We don’t take it for granted, and we thank you daily for the trust and support
you give us.”

The long delays on a signature deal to sell a stake in K Electric of Pakistan helped to push Abraaj into provisional liquidation © Bloomberg
The lavish dinner was a symbol of how high Abraaj had risen. But behind the scenes, even as the
speeches were being made, the K-Electric deal — agreed in 2016 — was in trouble. Bogged down by
new regulations on electricity pricing that made it less attractive to buyers, political support for the

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deal was also dwindling. Nawaz Sharif, who had backed the agreement, was ousted as Pakistan’s
prime minister just four months later.

By December 2017, Shanghai Electric Power, the buyer, was seeking an extension to complete the
purchase but Abraaj was running out of time.

As well as the $450m shortfall due to the delays on the Pakistan deal, the Financial Times has
discovered that there were other financial pressures last year. The firm had been buying back
$350m of its own shares over the years, a sign of optimism that future prospects were strong,
senior executives say. It was also in talks with two buyers to sell $250m of excess holdings in its
own funds, but the deals subsequently
collapsed.

That combined $1bn in receivables and spending had been exacerbated by years of extravagant
staff and travel costs, including large entourages surrounding Mr Naqvi. In 2015, Abraaj made a
$97m loss, according to financial statements.

Abraaj had over the years used limited-partnership stakes in its own funds to guarantee bank
loans, the PwC report showed, restricting the group’s room for manoeuvre. And as cash flow issues
worsened last autumn, Abraaj dipped into funds held by global investors in the $1bn healthcare
fund, including the Gates Foundation and the IFC, both of whom asked for their money back.

The subsequent realisation that the cash had been lent to another fund sparked a loss of confidence
that eventually brought Abraaj down.

Mr Naqvi, who has argued this unusual practice was permitted under their agreements, gave short
shrift to investor concerns. And while Abraaj repaid the money with interest, the investors
appointed the consultancy Ankura to carry out an independent audit to trace the money.

Believing that management fees from Apef VI, a $6bn buyout fund that had already attracted $3bn
by 2017, and share sales would cover debt repayments, Mr Naqvi remained confident, telling
partners concerned about the brewing row with investors there was “nothing to worry about”.

In December, Hamid Jafar of the Sharjah-based conglomerate Crescent Group, a founding

shareholder in Abraaj, loaned the business $300m. Mr Naqvi also negotiated share sales to raise
funds, including a $50m sale to an unnamed board member.

“The whole thing got away from him,” says one Hong Kong-based Pakistani banker. “He was in a
trap. He kept hoping that cash would come in [whether from the new fund or K-Electric], that
would allow him to cover his position.”

But investor concerns made that all but impossible and opened the floodgates on Abraaj, which
had for years marketed itself as a safe gateway into emerging markets.

Mr Naqvi in late February announced that he was stepping away from day-to-day running of
the asset management business. The firm also released investors from $3bn in commitments to
Apef VI. That release sparked a default in a capital facility provided by Société Générale, which
responded in March by withdrawing $45m from Abraaj accounts held by the lender, sparking a
further cash crunch, say people aware of the matter. The French lender declined to comment for
this story.

Dozens of staff were made redundant and others resigned. In May and June unsecured creditors,
including a Kuwaiti pension fund and Mr Jafar, filed to wind up Abraaj in the Cayman Islands in a

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desperate attempt to recover debts. Abraaj responded by filing for provisional liquidation which
protected it against individual creditor action, allowing liquidators time to try to sell off assets.

Mr Naqvi has since faced two court cases in Sharjah for issuing cheques with insufficient funds that
underwrote the $300m loaned to Abraaj by Mr Jafar.

A criminal offence in the United Arab Emirates, the bounced cheque cases came amid fraught out
of court negotiations to procure Mr Naqvi’s personal assets to cover part of the debt. The complaint
was settled in late August, ending criminal proceedings that had seen Mr Naqvi face three years in
jail.

Timeline
How investors lost faith in Abraaj

FOUNDED BY ARIF NAQVI IN 2002, ABRAAJ EXPANDED TO BECOME A SPECIALIST IN EMERGING

MARKETS WITH ALMOST $14BN UNDER MANAGEMENT:

OCTOBER 2016:
Abraaj agrees to sell its 66.4% shareholding in Pakistan utility Karachi Electric to Shanghai
Electric Power Company for $1.8bn

AUTUMN 2017:
Investors in the $1bn Abraaj healthcare fund, including the Bill & Melinda Gates Foundation, raise
concern over the misuse of their money

FEBRUARY 2018:
Arif Naqvi steps down from running the asset management arm Abraaj Investment Management
after reports of investor anger

MARCH 2018:
Deloitte appointed by Abraaj to probe its funds after investors questioned earlier audit

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APRIL 2018:
Abraaj offers to resign as manager of the healthcare fund to assuage investor concerns

MAY 2018:
A Kuwait pension fund files a winding up petition for Abraaj to cover a $100m loan default

JUNE 2018:
Abraaj files for provisional liquidation in the Cayman Islands

AUGUST 2018:
Arif Naqvi settles debt claims from shareholder Hamid Jafar, ending threat of criminal conviction
over bounced cheques

SEPTEMBER 2018:
Liquidators shortlist bids for Abraaj’s asset-management business, that operates much of the
group’s investing, and individual funds

Abraaj’s debt gave it “a highly unstable business model sensitive to potential liquidity crises,
particularly where the cost base could not be funded by ongoing revenues,” PwC noted, adding that
it was an “unusual practice for a structure operating in a private equity capacity”.

Several portfolio managers and investors have told the FT they were unaware of the extent of the
debt at the parent. Mr Naqvi “kept everything close to his chest. He was a one man show”, says the
head of one investment firm. But others inside the group say that, while fund investors were
oblivious to Abraaj’s indebtedness, partners and shareholders were told.

“Everyone knew what was going on,” says one person who works at Abraaj. “They are just running
for the hills now.”

PwC and Deloitte are trying to assess whether the assets can offset the debt. The election of
Imran Khan as Pakistan’s prime minister has renewed hope that the K-Electric sale can be
completed, which would help repay creditors. Mr Naqvi has previously donated to Mr Khan’s
campaigning. But the new prime minister has questioned the value of Chinese investment in the
country before. Even without that, bankers say the transaction faces significant hurdles.

PwC identified $1.1bn of debt against roughly the same amount of assets held by the parent
company, including the K-Electric stake and those limited-partnership holdings in its own funds.

Abraaj’s fund management business also has funding deficits of at least $170m, including $92m
borrowed from its fourth buyout fund, Apef IV, and $78m related to its infrastructure unit, the
review found. Apef IV investors have since claimed they are owed up to $300m, increasing
pressure on the restructuring process.

SoftBank, the Japanese conglomerate, made a discreet approach towards the end of February to
discuss buying 50 per cent of Abraaj’s holding company for $400m. The deal never materialised.

It was an offer that could have stabilised the firm. Instead by May, the value of bids was tumbling
towards zero after offers for all, or part, of the business from Cerberus Capital Management and
Colony Capital collapsed.

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Air Arabia, where Arif Naqvi was a board member © Pedro Aragao/CC
The Dubai Financial Services Authority, the regulator for the city-state’s financial zone, is
investigating Abraaj, the most damaging corporate collapse in the centre’s history. But Industry
executives are critical of the Dubai authorities for inertia during the crisis, saying they have failed
to protect the financial hub from any reputational damage.

“The onus, whether we like it or not, is for the region’s private equity but also listed companies to
demonstrate that Abraaj was an isolated case,” says Alissa Amico, managing director of Govern, a
governance advisory firm. “Regulators need to be attuned to the international interest in the case
and communicate their investigation findings.”

Mr Naqvi has expressed regret and admits he could have handled the situation better, pledging to
strive to pay back creditors and staff. “To my knowledge there was no intentional wrongdoing,” he
wrote to colleagues in June.

But he also has privately complained of what he describes as his public “immolation” claiming it
was sparked by resentment of him.

Recommended Mr Naqvi had positioned himself as a philanthropist

as well as an investor. He established the Aman
Foundation in Pakistan with $150m of his own
money to help foster development in the country, and funded a decade’s worth of research at the
London School of Economics’ Middle East Centre.

His diminished standing now hinges on the manner of Abraaj’s break-up, the ability of liquidators
to monetise assets and the extent of the regulatory and legal backlash.

“It is a bad story,” says the Pakistani banker. “When you have been so successful, it is hard to admit
failure.”

Additional reporting by Javier Espinoza in London

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