Al-Abraaj: A Hollow Success Story

The recent events at Abraaj Group are turning into a fiasco to say the least. Since last few months, every week there is some troubling news from Middle East regarding the scandal at Abraaj Group offices.

On Monday this week, the private equity company managers met with its key stakeholders and creditors to discuss a sale of its investment management business and to seek a ‘stand-still’ agreement in a bid to buy some time to solve its financial problems.

Abraaj Groups's financial failings have implications on the entire region's financial sector considering the unique position it holds in the Dubai and Gulf's financial sectors. Since 2002, when Karachi born Arif Naqvi launched the firm, it has become a private equity pioneer in the Middle East paralleling itself to the money managers of New York and London.

Abraaj Group did not only provide phenomenal returns to its investors but the group's investments were largely concentrated within its operating region - MENA and South Asia - more risk prone than others making them more lucrative.

The Group was a trendsetter on multiple fronts. In an investment shy region, the fund was able to attract money from the likes of Bill Gates and other notable royal families in the Gulf Region.

Mr. Naqvi in particular had a progressive approach towards his investments. His portfolio included health care, education, urban mobility, power generation and investments in a range of other growing sectors. His investments were exactly what the "middle-class" investors were looking for. He campaigned extensively in a privacy-minded region and was a regular feature at the World Economic Forum at Davos.

His investment philosophy coupled with the shrewd ability to generate returns put Abraaj Group and Mr. Naqvi at the top of Dubai's financial scene.

However, the recent turn of events paint an entirely different picture altogether. The Group has been tainted with allegations of mis-allocating funds.

It all began with some investors worrying over their investments - $200 million in total - not being allocated in their destined countries such as Pakistan and Nigeria in the health-care sectors. They initiated an investigation to find out what happened to their money. Abraaj responded to this by citing the regulatory interruptions and other technicalities as the root cause for delay in investments.

Found in Karachi during the year 2002, the firm grew into an investment giant with more than $13 billion in assets held throughout the world on behalf of wealth funds, pension funds, foundations and companies.

Investors, however, were not taking any of these excuses. Despite a review by accountants at KPMG, separation of funds from group's control and stepping away of founder Mr. Naqvi from investment management position, investors were adamant on investigating further into the group's use of funds.

These audits commissioned by four high-profile investors including the Bill & Melinda Gates Foundation suggested that the funds destined for health care were being diverted elsewhere.

Initial findings from another accounting firm, Deloitte - commissioned on the request of Abraaj Group - found further discrepancies going beyond the health care fund. According to latest reports, Deloitte is currently sharing its findings with the region's regulator 'Dubai Financial Services Authority' which is presently investigating into the group's allocation and use of funds.

The firm ever since the allegations surfaced have been in talks with its investors, creditors and stakeholders in an attempt to sign restructuring deals with its creditors. The embattled fund is essentially looking for a 'stand-still' agreement with its creditors in order to buy some time to resolve its financial problems. The announcement came after the firm held negotiations with creditors and investors in London and UAE on the future of the equity-firm.

However, one of the group's creditors, a Kuwaiti Pension Fund - Kuwait's Public Institution for Social Security or Piffs - pushed ahead with liquidation proceedings against the firm in Cayman Islands, where Abraaj Holdings is parked - upending the firm's efforts to buy some more time from its creditors.

Abraaj Group in response to Piffs liquidity proceedings released a statement saying, "we are aware of the filing in Cayman Islands by a single creditor and we continue to engage closely with them to reach a consensual outcome for the benefit of all parties."

“We are laser focused on concluding the standstill agreement with our creditors, the vast majority of whom recognize and endorse the commercial rationale and collective financial benefit of such an approach, to ensure that maximum value is realized by each party,” it added.

The group with majority stake still owned by Arif Naqvi is currently in talks with US based capital firm Cerberus Capital with valuations for the investment management business of the group at $135 million. Experts warn the valuations could fall further below this estimate. The firm is currently in discussions and carrying out its own due diligence.

Another firm, Colony NorthStar, ended talks to buy a majority stake in the Abraaj’s fund management business after its due diligence raised concerns about the company.

Despite the firm’s success in its ability to generate profits for its investors the company has become a pariah in Gulf’s financials sectors. However, the final answer to the problem lies with Mr. Naqvi who owns a majority stake in Abraaj Holdings. But there is an increasing belief that for any progress to be made, Mr. Naqvi will have to give up his baby.