UAE’s biggest private equity firm and major investor in Africa is falling apart

The Dubai based group Abraaj is currently going through turmoil. According to reports its holding company could face a possible liquidation, its investment management group has been put up for sale and most of its executives are leaving the company. This is really a huge cause for concern for a company which was once celebrated for its various investments in companies in emerging markets most especially across Africa. They have helped build several economies in different ways such as investing in several infrastructural developments. Abraaj has invested about US$3.2bn in over 80 companies in Africa over the past 15 years.

Beginnings of Abraaj’s Troubles

It all started towards the end of last year when investors in Abraaj’s healthcare fund, which includes Bill & Melinda Gates Foundation, the World Bank’s International Finance Corp unit, CDC Group and CDC’s French peer Proparco Group hired U.S. advisory firm Ankura Consulting Group to trace what happened to some of the money they invested in a $1 billion health-care fund for developing economies. The investors wanted to know why some of it had not been used for its stated purpose of building hospitals and clinics. The investigation found out irregularities, including the diversion of funds from the investment to unrelated investments.

Abraaj was founded in 2002 by Arif Naqvi, a former American Express executive and an early player in the Middle Eastern buyout market. Naqvi has worked with Gates for years on Abraaj’s healthcare projects in Africa and Asia. Abraaj began raising the health-care fund in 2015. “Bill was instrumental in that vision because it all started with a discussion with him,” Naqvi said during a panel discussion at the World Economic Forum in Switzerland in January.

According to a fund document reviewed by the Wall Street Journal, in December 2016, Abraaj asked investors in the health-care fund for $414m to pay for a slew of planned deals. By March 2017, Abraaj had acquired an Indian hospital chain, a Kenyan health-care provider and a diagnostics business in Pakistan. It also agreed to finance a hospital in Lahore Pakistan and acquired 1.5 acres of land for a hospital in Karachi Pakistan. However, construction in Karachi was delayed by a ban on new buildings more than two storeys high while the planned hospital had 17 storeys. This delay was communicated to investors in a fund report. A planned hospital in Lagos, Nigeria was also delayed.

Due to the concerns raised by investors, Abraaj appointed KPMG to conduct its own audit. The firm in February this year said that the KPMG review found no misuse of money at the fund. As a result of this issue, a lot of damages had already happened, they could not service their debt and the fundraising was halted. However, another inquiry by Deloitte found that the company had mixed money in the health-care fund and a private equity fund with its holding company. This move was thought to be likely made after encountering “liquidity problems” owing to the delays in the completion of certain deals.

Employees of Abraaj both past and present have also described the working environment at Abraaj as a family office than a powerhouse of private equity. This is because most of the executives are family members even the head of risk and compliance, Waqar Siddique, is also Naqvi’s brother-in-law.

Apart from the health fund, Kuwait’s Public Institution for Social Security on May 22 filed a case in a Cayman Islands court against Abraaj. They are claiming that the company was unable to repay a $100 million loan and $7 million interest by the agreed date.

From all indications, it seems like Abraaj did not build a structure in place to avoid commingling of funds or using money meant for a project for another one. This is an issue that most businesses with similar practice face. We hear of a business doing well and then the next thing the business is filing for bankruptcy. This is an operational failure. Investing in a business also requires trust and from what has happened to Abraaj shows that the trust that investors have in him have gotten to zero level and might take years to rebuild. If care is not taken the story of Abraaj might be like the story of the Lehman Brothers. This trouble by Abraaj may also affect other private equity investors in raising funds because investors will be scared of putting their money in an investment company like Abraaj.

A look at some of Abraaj’s investments in Africa

Abraaj invested in Fan Milk, alongside Danone in November 2013, to capitalize on growth in the local West African dairy and juice markets. At the time, the transaction was the largest private equity FMCG transaction in Sub Saharan Africa, outside of South Africa.

In October 2014, Abraaj invested in Libstar Holdings (‘Libstar’). Libstar is one of the largest unlisted food and personal care manufacturers in South Africa, employing about 6,700 people and operating under three verticals including private label, own brands and contract manufacturing.

In October 2016, they acquired a minority stake in Indorama Fertilizers B.V., the largest urea fertilizer manufacturer in Sub-Saharan Africa. Indorama Fertilizers operates a world-class, 1.4 million metric tons per annum urea manufacturing facility based in Port Harcourt, Nigeria, with direct access to a dedicated and purpose-built, state of the art port facility.

Abraaj in 2017 acquired East Africa’s leading casual dining chain, Java House Group. The company was established in Nairobi in 1999, and has since expanded its regional footprint to 60 stores across 10 cities in Kenya, Uganda and Rwanda. Java House Group is today a household name among East African consumers. The company has three flagship brands: Java House, the largest coffee-led, all day casual dining concept, Planet Yogurt, the region’s first self-service frozen yogurt chain: and 360 Degrees Artisan Pizza, an upmarket Italian pizzeria concept.