A lowdown on the Abraaj Capital saga
US fund Colony Capital had earlier agreed to buy some of its key funds
F. Scott fitzgerald, the literary king of Jazz Age New York and the author of the Great Gatsby, wrote "there are no second acts in American life". The traumatic events of the past month prove there are no second acts in emerging markets private equity either.
Abraaj Capital, once a global private equity colossus founded in Dubai, filed for liquidation in the Cayman Islands after pressure from creditors that included Kuwait's pension fund and a major Wall Street distressed debt fund.
Abraaj's financial meltdown was as swift as it was brutal. A decade ago, an Abraaj partner boasted to me that the firm was worth $1 billion in an IPO and the GCC's top family offices were invited to invest in its holding company at two or even three times book value. As CIO of a major family office, I preferred to invest in the New York-listed shares of Blackstone Group, which manages $345 billion in assets and has global standards of governance and investment best practices. A decade later, Abraaj Capital's alpha males, the Gulf's own Great Gatsbys, violated the sacrosanct trust of investors like Bill Gates and the World Bank by "commingling" funds without their consent or knowledge.
A Deloitte's audit (as reported in the Press) later found that $95 million was "commingled" from another Abraaj fund. At that point, I knew the firm was doomed as a viable manager of institutional investor funds in global capital markets. Several close friends in the Gulf will see their entire equity stakes or unsecured debt to Abraaj wiped out while the firm's managed funds will see dramatic falls in NAV at a time of distress in emerging markets.
I cannot see how the firm escapes punitive fines from the US Justice Department (the US taxpayer keeps the World Bank and IFC afloat) or regulators in all the other markets where Abraaj had offices - Dubai, London, Cairo, Istanbul, Nairobi, etc. A tsunami of lawsuits and counter-suits is now inevitable. Abraaj's shareholders and fund investors are the crème de la crème of the Middle East's financial elite - pension funds, family offices, sovereign wealth funds, merchant dynasties, royal offices and public companies (note Air Arabia shares were slammed due to its $336 million Abraaj exposure). This is just the tip of the iceberg. It is probable that $3-$4 billion in Gulf financial wealth would be decimated in the de facto bankruptcy of Abraaj Capital.
I am still amazed at how "commingling" on such an epic scale could have happened at Abraaj Capital without the knowledge of its regulators, auditors, board of directors, compliance officers and fund administrators? KPMG, Abraaj's auditor, is also auditor for dozens of regulated firms in the DIFC. Arif Naqvi, Abraaj's founder, gave wonderful speeches on governance and transparency and the potential of emerging markets (which he rebranded as growth markets).
Abraaj's leadership team had degrees from the LSE, Harvard, Georgetown and, yes, Wharton, and decades of experience in the world's top banks, management consulting companies and public corporations. Surely they know that "commingling" investor funds is a crime - I repeat, a crime - for a regulated fund manager. What could have led to such a colossal act of corporate self-destruction and a violation of investor trust? How could executives who spoke so passionately about governance and transparency at Davos be guilty of such a colossal failure of governance and basic client ethics?
Dozens of Abraaj deal-makers, partners and analysts have lost their jobs. The firm will be remembered for the surreal flameout of its death, not the money making windfall of its birth and adolescence. I lived and profited from some of Abraaj's famous deals - Aramex, Air Arabia, EFG Hermes - in the time of Hassan and Yasser. Why did it have to end this way? If ever there was a Sophoclean tragedy in emerging markets finance, this is surely it.
Colony Capital, a $43 billion US fund whose founder is a close friend of Donald Trump will buy Abraaj's Funds in Africa, Latin America, Turkey and the Maghreb. Significantly, the Karachi Electricity asset is not included in the Colony Capital deal. Why?
The writer is a global equities strategist and fund manager. He can be contacted at email@example.com.
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