The ongoing collapse of the giant Abraaj platform in the world’s biggest private-equity insolvency has hit flows into Africa-focused private-equity funds. Former Abraaj managing partner Mustafa Abdel-Wadood is cooperating with New York prosecutors after pleading guilty in a Manhattan court 2 weeks ago. He could face up to 125 years in prison.
Abraaj was founded in 2002 and based in Dubai. It was one of the world’s most influential emerging-market investors and acquired the Aureos private equity funds in 2012 (as reported in this blog) with the support of key Aureos investor CDC. At the time of the collapse Abraaj managed almost $14 billion on its platforms with 30 funds and holdings in health-care, energy, lending and real estate in Africa, Asia, Latin America and Turkey.
Abdel-Wadood, age 49 years and a citizen of Egypt and Malta, was arrested in April in New York while taking his wife and son to look at universities, according to this 28 June report on Bloomberg news. In a prepared statement in a Manhattan Court on 28 June he choked back tears as he said: “I knew at the time that I was participating in conduct that was wrong.. I ended up drifting from who I really am. For that, I am ashamed.” He is under house arrest subject to $10m bond.
He is one of six former Abraaj executives facing racketeering and securities-fraud charges. Founder and chief executive Arif Naqvi, from Pakistan but a UK resident and regular participant at Davos conferences, was arrested in London in April and detained at Wandsworth Prison. In May he was released on conditional bail of £15m ($19m) in May while fighting extradition to the US (see this report in the Financial Times . Other former executives charged were Chief Financial Officer Ashish Dave and managing directors Sivendran Vettivetpillai, Rafique Lakhani and Waqar Siddique.
Anonymous warnings had been sent to potential investors in September 2017, according to a 5 May Bloomberg report . The email, entitled “Abraaj Fund 6 Warning” stated: “The governance is not what it appears but employees are afraid to speak or partners entrenched so don’t speak,” the email read. “There is no smoke without fire. Be the hero in your firm and uncover the truth by asking simple questions.”
However, Abraaj answered queries to investors’ satisfaction although the $6bn fund eventually did not go ahead.
According to press reviews of the governance lapses that had led to the collapse, expenses at Abraaj had been running higher than income from management and performance fees on the funds leading to multimillion dollar operating losses. The group borrowed, and in the 9 months to March 2018 financing costs came to $41m. It hoped to sell assets to avoid a cash crunch but the deals were repeatedly delayed, according to The Economist.
Money had been moved out of funds to cover losses, according to the US Securities and Exchange Commission (SEC). It says that Naqvi and Abraaj Investment Management Limited (AIML) misappropriating $230m from the Abraaj Growth Markets Health Fund (AGHF), which closed at $1 billion in 2016, between Sept 2016 and June 2018. The funds were supposedly for acquisitions but the SEC says Naqvi commingled the assets with corporate funds of AIML and its parent company, Abraaj Holdings – essentially moving them into the company’s bank accounts.
Four limited partner (LP) investors in the Abraaj Healthcare fund, including Bill & Melinda Gates Foundation and the International Finance Corporation, raised concerns, hired investigators and commissioned an audit. The news broke in February 2018 and Abraaj went for liquidation in the Cayman Islands and the United Arab Emirates in April 2018. It decided to restructure, so AIML was set up to manage the funds in 2018 and Naqvi was moved from being CEO of the funds, according to Private Equity Africa news website, which has been covering this story extensively.
According to the 28 June Bloomberg report Abdel-Wadood described the alleged conspiracy, which related to hiding Abraaj’s poor financial condition and convincing new investors to put up more cash, including lying to U.S.-based investors during meetings in Manhattan in 2016 as they sought to raise $3 billion for a new fund. The money they raised wasn’t spent the way investors were told, he said: “Put simply, money was co-mingled that should have been separated, and investors were not told the truth.”
Liquidators have been seeking other fund managers to take over the funds but in each case a share of LPs must approve the change of manager and Abraaj works with 500 LPs.
At the end of 2018, private equity house Actis was cleared to acquire 16 Abraaj funds covering Africa and Asia, including sub vehicles and legacy funds taken over from Aureos, and according to The Economist talks continue on the African funds, while Franklin Templeton is talking about taking over the Turkish fund. In May, US-based TPG said it would become custodian for the healthcare AGHF fund and in 2018 Abraaj returned the money it owed, plus interest.
The Economist quotes Linda Mateza of South Africa’s Government Employees Pension Fund, an Abraaj investor, saying: “We cannot afford not to invest in private equity because of the potentially higher returns.”
According to the 5 May Bloomberg report the audit into AGHF “had a ripple effect on private equity activity in emerging markets, and local buyout activity in the Middle East came to a near standstill”. The Economist magazine commented in May “Many large institutions have stopped investing in Africa and the Middle East, its home turf. In the year after its troubles became public, buy-out funds focused on the region raised just $1bn, a third of their annual average in the previous five years” citing figures from Private Equity International.
“The firm’s problems were real. Its collapse last year consumed millions of dollars of investors’ money, the reputation of Dubai’s financial regulator and Abraaj itself. Even as rivals divide up the firm’s former empire, it threatens to cause yet more damage.” The article says Abraaj still owes over $1.2bn to investors. A letter by lawyers for investors in the $1.6bn Abraaj Fund IV is reported to claim that at least $300m went towards “wrongful transactions” and other funds could be owed tens of millions.
Do auditors help investors?
The Financial Times suggests that Abraaj’s auditor KPMG, which “exonerated the firm just a few weeks after the scandal broke” may have had a conflict of interest: “It transpired that KPMG had close ties to senior people in the business: the chief executive of KPMG’s Dubai arm had a son who worked at Abraaj, and one executive, Ashish Dave, had spent time at both Abraaj and KPMG”. KPMG also worked for companies that Abraaj invested into.
PwC, which became the liquidator for Abraaj, found a large funding gap and that the firm spent beyond its means and used other people’s money to fund the gap. The article interviews various experts. Eamon Devlin, partner at MJ Hudson, an asset management consultancy that advises private equity investors, suggests changing auditor every 3 years, much like a listed fund has to, so that a 10-year fund gets through up to 3 different audit firms. He also says that investors should get “more investigative powers and responsibilities to look into these potential conflicts”.
One private equity executive says the industry should introduce requirements already used in US, UK and other places that an auditor working on one part of the business is not allowed to provide services to another part. Ludovic Phalippou, a finance professor at the University of Oxford’s Saïd Business School who authored the textbook Private Equity Laid Bare said; “[The Abraaj case] shows how much freedom there is for investors to be proactive. If they had been more proactive, [the alleged mishandling of funds] would not have gone unnoticed.”
Affiliate link: Phalippou writes on Amazon “The intention is to have a book that can be read more like a novel than like a regular textbook. In order to have long-lasting impact on readers, I believe in making things as simple as possible, boiling everything down to the essence, going straight to the point, and, most importantly, writing in an informal and hopefully entertaining way. The objective is for the reader to open this book with anticipation of having a good educational time. “