Statements missing as report tells of ‘unusual’ Abraaj business model

Abraaj Holdings had an “unusual” business model reliant on short-term borrowing, and key financial statements are missing or non-existent, according to one of the firms tasked with salvaging the Dubai private equity company’s assets.

In a report seen by Bloomberg, PricewaterhouseCoopers said it has “been unable to obtain stand-alone annual financial statements or management accounts for the company”. It noted “multiple layers of leverage” as the company borrowed to offset a “long-running liquidity shortfall between the investment management fees and operating expenses”.

This is “an unusual practice for a structure operating in a private equity capacity,” PwC said. “It creates a highly unstable business model, sensitive to volatility and potential liquidity crises, particularly where the cost base cannot be funded by ongoing revenues”, according to the report, which was filed to a Cayman Islands court on Wednesday.

Deloitte and PwC were hired as the provisional liquidators of Abraaj, once one of the biggest private equity firms in the Middle East, which owes its creditors more than $1 billion. After an audit demanded by Bill Gates’s charitable foundation and others, the buyout company ran into trouble after being accused of mingling investors’ money with its own in a healthcare fund, setting in motion a series of events culminating in a voluntary liquidation filing in the Caymans last month.

PwC said that under Cayman rules, companies like Abraaj, which was founded by Pakistani executive Arif Naqvi in 2002, do not need to file standalone financials, but it is “highly irregular” for such a company not to do so.

PwC, which listed about 10 institutions among Abraaj’s creditors, also said in the filing that the buyout firm failed to maintain stand-alone audit reports.

“This lack of financial record-keeping raised the question of how the company’s directors were able to ensure that the company was solvent and being effectively managed,” the report said.

Abraaj Holdings posted a loss of $188 million at the end of March after dipping into investors’ money to run its operations, the filing shows. The company owes lenders $1.1bn after the delayed sale of K-Electric in Pakistan led it to tap its healthcare fund without investor consent, according to the report.

From 2014 to 2017, “management fee income and carried interest was insufficient to meet the Abraaj Group’s significant operating costs, with the result that any liquidity shortfall was largely funded through new borrowings”, PwC said.

Although the company has total assets of $1bn, more than $900 million of secured debt is attached to that pool, leaving the net residual asset value at just $147.7m, according to PwC estimates.

Since the firm’s initial liquidity crisis, allegations of mismanagement in other funds emerged. An audit by Deloitte found that Abraaj still owed $94.6m to its Private Equity Fund IV after combining investor funds with its own, according to a review seen by Bloomberg.