The Downfall of Dubai’s Star Investor
(Bloomberg Businessweek) -- 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 Dubai-based $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 says. “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 United Arab Emirates, the swift collapse of Naqvi’s reputation and troubles at the Mideast’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,” says Ali Al-Salim, co-founder 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, and 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 Mideast 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 says. “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 decision-making 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,” says Sabah al Binali, 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-in-law. The key to understanding Abraaj is knowing that “it is Arif’s baby,” says the person familiar with the company’s decision-making. The spokesperson for Abraaj says 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,” says Al-Salim. “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 people familiar with the matter. It may yet 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 says, “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,” says 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.”
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