Abraaj: the story of a man who set out to change the world, or at least the part of it that he was interested in, and succeeded up to the stage where he had to bend the rules to breaking point to fulfil his vision.
Background
Arif Naqvi was born in Pakistan in 1960, took a degree at the London School of Economics and trained with Arthur Anderson in London. After an early return to Pakistan with American Express, he joined a private conglomerate company in Saudi Arabia and made the Middle East his chosen field of business. Clearly a natural entrepreneur and businessman, he then set up an investment company in Dubai and five years later, in 1999, he bought part of Inchcape Group’s interests in the Middle East, a grocery chain, in a highly leveraged buyout, selling it off in parts to make a substantial profit, nearly doubling the original investment. In 2002, with the money he had made, he founded Abraaj Capital with $3m capital. The history of Abraaj and the story of Arif Naqvi are intertwined, as Naqvi used the wealth he was creating through Abraaj to fund a decade or more of philanthropy, and changed the way business opportunities in private equity investment were seen in the Middle East. For instance, in Pakistan he set up a not for profit trust which supported health and education initiatives, and in the UK he established an innovation scholarship at the Royal College of Art. He also established a Growth Markets Grant to support projects to tackle socio-economic problems in growth markets. In recognition of his philanthropic efforts, he received awards from the Pakistan government and a major French bank.
In 2006, a key colleague, Mustafa Abdel-Wadood, joined and later became managing partner. The investment business thrived, and the links with Pakistan were established from an early stage, exemplified by the purchase in 2008 of a controlling interest in K-Electric, distributor of electricity to Karachi. This was one of the biggest investments in Pakistan at that point.
Over the next years the business was showing a 17% annual return, and by 2015 could point to 13 exits realising $450m. One example, thriving today, is Integrated Diagnostics, providing medical diagnostics services in Egypt, Jordan, Sudan and Nigeria, which listed on the London Stock Exchange for $668m. At its peak, Abraaj operated in six continents and had local offices in 25 countries. It made over 200 investments in global growth markets and can be said to have virtually started the private equity industry in the Middle East. It was a pioneer of impact investing in hospitals and education in developing countries that declared themselves as wanting to promote social progress.
So confident was it of its success that over the years it bought back $350m of its own shares.
Sadly, it emerged that Naqvi’s ambitions were, from an early stage, running ahead of the cash generation needed to fund them. One way he balanced the books was to borrow from Fund A which had cash to rescue Fund B which needed cash, repaying Fund A by raising new money in Fund C. Governance processes to protect investors’ money were ignored by the charismatic founder, presumably on the assumption that continuing rapid growth would provide the answers in due course. It couldn’t go on indefinitely, of course, and this is the story of how it all went wrong, and parallels are being drawn in some quarters with the career of Agha Hasan Abedi and Bank of Credit and Commerce International (BCCI).
The success story starts to unravel
By 2015, Abraaj was declaring a loss of $97m and attempting, but failing, to sell $250m of holdings in its own funds. At this stage it was assumed this was just a blip, and the company was continuing successfully to raise investment in new funds, borrowing to cover cash shortfalls.
In 2016, Abraaj started trying to offload part of its stake in K-Electric, a shareholding valued at $1.8bn, and it was later alleged, per a US indictment in 2019, that he had authorised the payment of $20m to two senior government officials (identified as the Prime Minister, Nawaz Sharif and his brother) to expedite the deal as “advisers”.
By 2017, Abraaj’s Apef VI Fund had gained commitments of $3bn towards its $6bn target, but later in the year two independent whistleblowers came out to warn potential investors to take great care before putting their money into Apef VI. One whistleblower, in an email to an American fund manager, was quoted as advising “do due diligence first, and don’t believe what you are told by the partners”. It went on to say the “funds all have very overvalued unrealised valuations on most metrics to increase track record which are manipulated by the teams, and help the firm manipulate its P&L so that it appears profitable, although it is losing money”. It accused them of inflating the value of investments by more than $500m, and manipulating the carried interest. It warned that breaking the rules was facilitated by the fact that none of the funds raised before 2013 had independent third party administrators.
The company’s reassurance encouraged them and other investors to commit up to $900m into Fund VI, but Abraaj’s cash shortfall continued to get worse. By autumn, Naqvi had found it necessary to dip into the $1bn Healthcare funds, an act which alerted the Gates Foundation and IFC Investors to ask what was going on, to set up a consultancy enquiry, and to demand the money be paid back.
The money was, indeed, paid back fairly promptly, with interest, but by borrowing from another friendly source. It later emerged that Hamid Jafar, an Emirati businessman and founder of conglomerate Crescent Group (and co-founder of Abraaj) personally loaned $300m to Abraaj, and Air Arabia, on whose board Naqvi sat, made a $75m loan, personally guaranteed by Naqvi.
By the end of the year, the hoped-for sale of a $450m stake in Pakistan’s K-Electric to Shanghai Electric Power Company still hadn’t completed, and the Chinese were seeking an extension.
Restructuring leads quickly to liquidation
Things were now getting out of control, and in February 2018, Naqvi decided he had to step down as CEO of Abraaj Investment Management, appointing co-heads to replace him, and said he would focus on Abraaj Holdings. He appointed consultants to advise on the business structure, and the investors in the Apef VI fund were released from their commitment, thereby, as it transpired, preserving their money. However, this triggered a default in a facility Société Générale had given Abraaj, and the bank withdrew $45m from accounts. This was accompanied by the departure of the CFO and the start of staff redundancies and a wave of voluntary departures.
By the middle of the year worried creditors started moves to wind up Abraaj in the Cayman Is to try to recover their funds, in response to which, Abraaj filed for provisional liquidation to protect itself from its creditors, and a Cayman Is court appointed a liquidator to commence a restructuring.
The loans from Hamid Jafar and Air Arabia were clearly looking vulnerable, evidenced by the fact that Hamid Jafar had caused a Sharjah court to file charges after an interest cheque for $48m had bounced – a criminal offence. However, the loan was paid off and the charges dropped.
By the autumn, Abraaj’s fund management business had a funding deficit of $170m, comprising $92m borrowed from the Apef IV fund and $78m relating to the Infrastructure unit. Apef IV investors claimed they were owed $300m.
At this point, Abraaj’s fund management rights were being redistributed, and Actis of the UK gained the rights to manage the Africa funds, while negotiations were proceeding with Colony Capital (US) for Latin American funds and Brookfield (Canada) for Turkish funds. Selling off the rights to manage the legacy Middle East funds was proving complicated as the partnership structure involved over 200 limited partnerships and these required 75% approval to proceed. But the TPG Rise Fund (US based and the biggest in impact investing) was negotiating to take over the Health fund, and in the following year TPG Growth agreed to take over Abraaj’s Growth Markets Health Fund, renaming it The Evercare Health Fund. There had been no success in trying to sell the platform, Abraaj Investment Management Ltd.
By the end of the year, the figures were frightening. Financing costs came to $41m and PwC’s investigation indicated that Abraaj’s fees and other income hadn’t covered costs for years. By now, borrowing amounted to $1bn, with $501m owed to unsecured creditors and $572 to secured creditors.
Come the New Year, Naqvi was using his contacts in the new Pakistan government, led by Imran Khan, whom he said he’d known for many years, to push the negotiations forward for the deal with Shanghai Power, albeit at a discount, giving hope for a major cash injection into Abraaj. However, despite further expressions of intent in October 2019, the deal had still not been concluded in February 2020.
The law steps in
The legal processes now got under way, and in April 2019 Naqvi was arrested on London, and released on bail pending extradition to the US, while his erstwhile colleague Mustafa Abdel-Wadood was also arrested in New York. The US authorities accused Naqvi of bribery of Pakistani officials, and also accused him of taking hundreds of millions of dollars from Abraaj for personal gain. The US investigators were looking at possible bribery of Pakistan politicians in relation to the K-Electric deal referred to above, and the Abraaj liquidators accused Naqvi of transferring $199.5m from Abraaj to Silverline Holdings Ltd, a Cayman Is company owned by Naqvi. Later, Mustafa Abdel-Wadood admitted that he lied to investigators to hide losses and raise money, saying that money was co-mingled that should have been segregated and investors were not told the truth.
In July 2019, the Dubai Financial Services Authority fined two Abraaj companies $315m for deceiving investors and misappropriating funds. “Misconduct and deceit were pervasive and persistent” and management “rode roughshod” over its compliance function, the authority said.
By the end of the summer, six former Abraaj executives were facing racketeering and securities fraud after the New York prosecutors’ investigation, and Naqvi was effectively under house arrest in the UK, having been sentenced in absentia to 3 years imprisonment by a UAE court for the case involving Air Arabia.
At the time of writing, in early summer 2020, Naqvi was still awaiting extradition proceedings, having been hit by the Corona virus, and the sentencing of Abdel-Wadood had been postponed by the New York judge till August or later pending the outcome of the request to extradite Naqvi.
The broad fall-out from the sorry tale is indicated by the fact that prior to its collapse, Abraaj had $13.6bn under the management of its Middle East based business. Since its collapse, almost no funds have been raised by private equity firms in the states comprising the Gulf Cooperation Council.
Conclusions 
How do we analyse this tale of woe using the holistic approach of ACG, and our Five Golden Rules?
Ethics
Clearly Arif Naqvi has a view of ethics which allows behaviour which most of the rest of the business world would regard as definitely unethical. To dip into funds to support other activities which Naqvi favoured, and which were under pressure, albeit with the expressed intention of paying back these “borrowings” and with interest, might enable him to square his conscience, but still broke the rules of those funds.
Goal
Naqvi’s goal of building a major force in private equity investment, based in the Middle East, but with activities around the globe, and focusing on developing countries’ infrastructure, health and energy, in a sustainable and ethical way, couldn’t be faulted. And he made significant progress in achieving this goal, to the extent that he provided an example for others to follow, and his achievements were recognised by awards in different countries.
Strategy
The strategy he adopted was faulty, in that it entailed massive public engagement, a very high public profile, and spending on a large scale, without the financial resources to match. The failings should have been evident to insiders from an early stage, with income always lagging well behind spending, and covered increasingly by borrowing. When this became progressively unsustainable, he resorted to breaking the rules by “borrowing” money from funds unrelated to the activities being sustained by these “borrowed” monies.
Organisation
The organisation of Abraaj seems not to have been generally criticised except as far as systems and controls to protect good governance were concerned. Thus, Naqvi’s management paid scant regard to the wishes and interests of investors, except in terms of the results declared by their funds’ performance. But clearly the financial structure of Abraaj wasn’t remotely up to the demands that Naqvi placed upon it. Hence his need to break the rules.
Accountability
The first significant public inkling that things were going wrong was probably the action of the Bill and Melinda Gates Foundation and IFC action to look into the suspected wrong-doing in the Health Fund in which they had invested. Naqvi seems to have kept his cards very close to his chest, while all the time maintaining a high public profile. When portfolio managers and investors later denied any knowledge of what was going on, one calls to mind the disclosures of the whistleblowers, and the fact that the staff – presumably the leavers – said that everyone inside the company knew about it.
So, as far as the partners involved in the management were concerned, the charge must be that, like most of these situations, either they knew what was going on and did nothing about it, or they didn’t know because they weren’t provided with the necessary information to check about such misbehaviour. And in the latter case, they ought to have known that they lacked such vital control systems and so couldn’t know about misbehaviour, and therefore ought to have insisted that they be provided with such systems.
For investors, the same applies, and the only investors to probe were arguably nearly too late.
Again, an obvious case for the continuous stakeholder feedback system we at ACG have advocated for so long.
