Track­ing the down­fall of Dubai’s star in­vestor, Abraaj’s Naqvi

The Daily Star (Lebanon) - - BUSINESS - By Tracy Al­loway, Di­nesh Nair and Matthew Martin

Pak­istani fi­nancier Arif Naqvi shared a stage with Bill Gates at the World Eco­nomic Fo­rum in Davos, Switzer­land, in Jan­uary for a panel on global health.

Even along­side the bil­lion­aire phi­lan­thropist and two med­i­cal pro­fes­sion­als, Naqvi stood out for his en­thu­si­asm: “Like Bill, I’m an op­ti­mist,” he said. “So I be­lieve the glass is half full, very firmly. I don’t be­lieve it’s half empty.”

Un­be­knownst to the au­di­ence, four in­vestors in Naqvi’s Dubaibased $1 bil­lion health care fund, in­clud­ing the Bill & Melinda Gates Foun­da­tion, had re­cruited foren­sic ac­coun­tants to in­ves­ti­gate where their money had gone. The ex­is­tence of the in­quiry was first re­ported less than a week later by The Wall Street Jour­nal. A sub­se­quent re­view by Deloitte LLP, made at the re­quest of Abraaj Group, Naqvi’s hold­ing com­pany, found it had dipped into money re­served for the health care fund as well as a pri­vate eq­uity fund, ac­cord­ing to a draft sum­mary sent to cred­i­tors and seen by Bloomberg News. Abraaj’s se­nior man­agers shared “col­lec­tive re­spon­si­bil­ity” for “lapses in gov­er­nance and con­trol,” Deloitte said.

In March, Naqvi halted fresh in­vest­ments and re­leased in­vestors from com­mit­ments to a new fund, what would have been Abraaj’s largest to date. Later that month, the com­pany be­gan slash­ing jobs and down­siz­ing its busi­ness to bet­ter pre­pare it for “sus­tain­able growth,” ac­cord­ing to a state­ment.

Abraaj was still push­ing cred­i­tors to agree to a stand­still on debt pay­ments as of mid-June. Now it’s con­sid­er­ing fil­ing for pro­vi­sional liq­ui­da­tion ahead of a June 29 court hear­ing on a pe­ti­tion from Kuwait’s Public In­sti­tu­tion for So­cial Se­cu­rity seek­ing to dis­solve its hold­ings, ac­cord­ing to peo­ple with knowl­edge of go­ings-on in­side the com­pany.

“We should have re­acted to the kind of ques­tions that in­vestors were ask­ing, ar­guably, in a dif­fer­ent way,” Naqvi said. “The fact that we didn’t, the fact that we took a par­tic­u­lar per­spec­tive and stuck to that is in hind­sight not the smartest thing we could have done.”

For the UAE, the swift col­lapse of Naqvi’s rep­u­ta­tion and trou­bles at the Mid­dle East’s big­gest pri­vate eq­uity firm threaten its rep­u­ta­tion as a busi­ness hub. Abraaj has grown along with Dubai’s de­sire to cre­ate a world-class fi­nan­cial cen­ter. When it peaked at $13.6 bil­lion worth of as­sets un­der man­age­ment last year, it ap­peared to have lived up to the lofty name Naqvi chose for it years be­fore: Abraaj means “tow­ers” in Ara­bic.

“Pri­vate eq­uity is still a nascent in­dus­try in the re­gion, so it’s a shame to see the big­gest name fall­ing apart,” said Ali Al-Salim, co­founder at Arkan Part­ners, which ad­vises in­ter­na­tional as­set man­agers on in­vest­ments in the re­gion. “The Mid­dle East wants to be­come a des­ti­na­tion for for­eign cap­i­tal, and things like this don’t help.”

Naqvi, 57, built his rep­u­ta­tion as the Gulf’s buy­out king pro­duc­ing stun­ning re­turns in places few were brave enough to ven­ture, snap­ping up stakes in a dairy com­pany in West Africa, an up­scale of­fice build­ing in Cairo, a food-maker in Colom­bia. In charis­matic con­fer­ence ap­pear­ances, he in­sisted on re­fer­ring to emerg­ing mar­kets as “growth mar­kets” – a nod to the re­turn po­ten­tial of such places as In­dia and Egypt, but also a sly dig at a de­vel­oped world stag­nat­ing un­der the weight of an ag­ing pop­u­la­tion and moun­tains of debt.

In re­cent years he pro­moted the con­cept of “im­pact in­vest­ing,” the no­tion that pri­vate cap­i­tal can be de­ployed to al­le­vi­ate some of the world’s most in­tractable prob­lems: poverty, cli­mate change, inequal­ity.

Abraaj held out its health care fund as a prime ex­am­ple of how pri­vate money could be prof­itably and vir­tu­ously used in Africa and South Asia, where it had in­vested in com­pa­nies rang­ing from a di­ag­nos­tics busi­ness based in Islamabad to hos­pi­tals in In­dia. It was this pitch that helped reel in the Gates Foun­da­tion, among other promi­nent in­vestors.

Born in Karachi, Naqvi was an immigrant out­sider in the coun­tries where he made his name. Be­fore his ar­rival in the UAE, he worked at the Olayan Group, the dy­nas­tic Saudi Ara­bian con­glom­er­ate founded by bil­lion­aire Suli­man Saleh Olayan.

His ori­gin story as a Gulf power player be­gins in 1999, when he and his lit­tle-known in­vest­ment firm, Cupola In­vest­ments Ltd., fought off es­tab­lished pri­vate eq­uity gi­ants to win Inch­cape PLC’s Mid­dle East port­fo­lio, worth $150 mil­lion. It was the first lever­aged buy­out in the Mid­dle East and marked Naqvi’s ar­rival on Dubai’s nascent in­vest­ment scene, more than 10 years be­fore glit­ter­ing sky­scrapers such as the Burj Khal­ifa crowded the sky­line.

The deal also turned Naqvi and his up­start firm, founded with $75,000 of Naqvi’s own money, into grist for the fi­nan­cial ru­mor mill. So strong was the gos­sip swirling around Cupola and its au­da­cious buy­out – done with just $5 mil­lion in eq­uity – that the com­pany hired Kroll LLC to in­ves­ti­gate its own back­ers and put the mar­ket’s col­lec­tive mind at ease, ac­cord­ing to a book writ­ten by Im­tiaz Hy­dari, Naqvi’s part­ner in the ac­qui­si­tion.

Hy­dari de­clined to com­ment for this story, and a spokesper­son for Abraaj called the book “an act of fic­tion.” By the time Naqvi ex­ited the in­vest­ment, gen­er­at­ing a $71 mil­lion profit, his rep­u­ta­tion for bold moves in ob­scure mar­kets had been sealed.

More deals fol­lowed af­ter Naqvi founded Abraaj in 2002. He and his team moved quickly to ac­quire Aramex In­ter­na­tional Courier in the wake of the Sept. 11 ter­ror­ist at­tacks, shortly af­ter the Mid­dle East­ern com­pany lost more than 15 per­cent of its value. Abraaj paid for the com­pany with $25 mil­lion in eq­uity and $40 mil­lion in debt and made 6.6 times its in­vest­ment when it took the busi­ness public in 2005. The com­pany chalked up more than half a bil­lion dol­lars in profit in 2007 when it sold a 25 per­cent stake in Egyp­tian in­vest­ment bank EFG-Her­mes to Dubai Fi­nan­cial Group. “I led those deals, I did those deals,” Naqvi said. “The rea­son I stopped be­ing a deal­maker is be­cause the busi­ness grew so I couldn’t over­see ev­ery­thing.”

The com­pany’s 2012 ac­qui­si­tion of London-based pri­vate eq­uity firm Aureos Cap­i­tal gave Abraaj a foothold in emerg­ing mar­kets be­yond the Gulf, then roiled by the Arab Spring, and ac­cess to an in­vestor list that in­cluded the Gates Foun­da­tion.

For large in­sti­tu­tional in­vestors such as the Teachers’ Re­tire­ment Sys­tem of Louisiana or the pen­sion fund for the Essex County Coun­cil in the U.K., Abraaj of­fered ac­cess to rapidly ex­pand­ing mar­kets, all con­ve­niently pack­aged in a blue-chip pri­vate eq­uity firm.

But it also put Abraaj in an un­com­fort­able po­si­tion, ac­cord­ing to a per­son fa­mil­iar with the firm’s de­ci­sion­mak­ing at the time: To at­tract and keep big in­ter­na­tional play­ers, Naqvi would bor­row money to in­vest in Abraaj’s own funds and ex­pand the as­set base. Abraaj’s spokesper­son said the com­pany is un­able to com­ment on “the con­fi­den­tial terms of its fund­ing con­tracts.”

Trou­bles at Abraaj be­gan late last year, when in­vestors in the health care fund tapped Ankura Con­sult­ing Group LLC to track their money.

The in­ves­ti­ga­tion turned up ir­reg­u­lar­i­ties, in­clud­ing the di­ver­sion of funds from that pool to un­re­lated in­vest­ments. A KPMG re­view com­mis­sioned by Abraaj in re­sponse found no mis­use of money at the fund, the firm said in Fe­bru­ary. By then the dam­age was done. The firm was un­able to con­tinue ser­vic­ing its debt, roughly $1 bil­lion, as deals dried up and fundrais­ing was halted.

The sub­se­quent in­quiry by Deloitte found that the com­pany had com­min­gled money in the health care fund and a pri­vate eq­uity fund with its hold­ing com­pany, a move likely made af­ter en­coun­ter­ing “liq­uid­ity prob­lems” caused by de­lays in the com­ple­tion of cer­tain deals, in­clud­ing the sale of Pak­istani util­ity K-Elec­tric. Peo­ple fa­mil­iar with the mat­ter say that KPMG’s U.K. branch is con­duct­ing an internal re­view into its orig­i­nal in­ves­ti­ga­tion. KPMG de­clined a re­quest for com­ment.

While all the money has since been ac­counted for and there’s no ev­i­dence of “em­bez­zle­ment and/or mis­ap­pro­pri­a­tion,” ac­cord­ing to the sum­mary of Deloitte’s re­port, the ac­coun­tants did ob­serve a “lack of ad­e­quate gov­er­nance, in­clud­ing seg­re­ga­tion of du­ties, and the over­all weak­ness in the con­trol frame­work.”

“It looks like the cul­ture in­side Abraaj was never built up to pre­vent this from hap­pen­ing,” said Sabah al­Bi­nali, chief ex­ec­u­tive of­fi­cer of Uni­ver­sal Strat­egy, an Abu Dhabi-based turn­around spe­cial­ist and in­vest­ment man­ager. “You see it any­where in the world where some­one has been hugely suc­cess­ful very quickly. Peo­ple con­fuse ben­e­fit­ing from their cir­cum­stances with hav­ing a suc­cess­ful busi­ness model.”

Cur­rent and for­mer em­ploy­ees de­scribe a work­ing en­vi­ron­ment at Abraaj more char­ac­ter­is­tic of a fam­ily of­fice than a pow­er­house of pri­vate eq­uity. The com­pany’s head of risk and com­pli­ance, Waqar Siddique, is also Naqvi’s brother-in­law. The key to un­der­stand­ing Abraaj is know­ing that “it is Arif’s baby,” the per­son fa­mil­iar with the com­pany’s de­ci­sion-mak­ing said.

The spokesper­son for Abraaj said Siddique is a “pro­fes­sional pri­vate eq­uity ex­ec­u­tive of many years’ stand­ing, highly re­garded in his field and with an un­blem­ished record.”

In public, Naqvi cham­pi­oned mod­esty and grat­i­tude, for­mer staff say. In pri­vate, he was ar­ro­gant and con­trol­ling. “We’ve gone from a small stand­ing start 15 years ago to the point where we are to­day the largest in­vestor in the world in emerg­ing mar­kets,” Naqvi said at last year’s “Abraaj Week,” the firm’s an­nual Davos-like gath­er­ing for em­ploy­ees and clients. “We do not take this with ar­ro­gance, we take it with hu­mil­ity.” The event was can­celed this year. Dubai’s fi­nan­cial reg­u­la­tor has said it’s “aware of var­i­ous mat­ters” in­volv­ing Abraaj. No in­ves­ti­ga­tion has been an­nounced. Any dis­cov­ery of mis­man­age­ment at Abraaj risks tar­nish­ing reg­u­la­tors’ rep­u­ta­tion and dent­ing con­fi­dence in the UAE’s wider fi­nan­cial in­dus­try. Al­ready ex­ec­u­tives at ri­val re­gional pri­vate eq­uity firms say they’ve had dif­fi­culty rais­ing cash and com­plet­ing deals.

“It seems that Abraaj’s is­sues mostly stem from op­er­a­tional fail­ures rather than in­vest­ment per­for­mance,” Salim said. “What’s fright­en­ing is it has taken in­ter­na­tional in­vestors to find these is­sues that lo­cal in­vestors have ei­ther been un­aware of or un­con­cerned by.”

By early May, Abraaj’s one­time com­peti­tors – Cer­berus Cap­i­tal Man­age­ment LP and Colony NorthS­tar Inc. – were cir­cling. Colony aban­doned the idea of buy­ing the hold­ing com­pany a month later af­ter its due dili­gence raised fur­ther con­cerns about the com­pany, ac­cord­ing to peo­ple­fa­mil­iar­with­the­mat­ter.It­mayyet snap up some units, the peo­ple said. TPG Cap­i­tal is said to still be in­ter­ested in buy­ing the trou­bled health care fund out­right, while Cer­berus has made a $125 mil­lion bid for the en­tire fund man­age­ment busi­ness.

“I’m to­tally fo­cused, to­tally ob­sessed on one thing only,” Naqvi said, “which is to make sure that no­body loses money in Abraaj. I deal with things with dig­nity and honor. The world of im­pact in­vest­ing isn’t go­ing away, the im­por­tance of do­ing good isn’t go­ing away, and that’s what keeps me go­ing.”

Among Dubai’s fi­nanciers, the joke now is that the “Gold­man Sachs of the Mid­dle East,” as Abraaj was once known, risks be­com­ing its Lehman Broth­ers in­stead. Naqvi, who so of­ten es­poused the im­por­tance of trans­parency and good gov­er­nance, may have un­der­mined con­fi­dence in the re­gion for years.

“The whole in­dus­try re­lies on trust,” said Lu­dovic Phalip­pou, a pro­fes­sor at the Univer­sity of Ox­ford’s Said Busi­ness School and au­thor of “Pri­vate Eq­uity Laid Bare.”

“If Abraaj did some­thing that in­vestors did not ex­pect, the va­lid­ity of the trust ar­gu­ment will be ques­tioned not just for Abraaj, but for the whole Mid­dle East PE in­dus­try, and prob­a­bly for the world PE in­dus­try as well.”

Naqvi may have un­der­mined con­fi­dence in the re­gion for years.

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