Dubai should get a grip on Abraaj before somebody else does
The unfolding events at Abraaj Group are taking on an air of fiasco. Not a week passes, it seems, without another high-profile executive departure from the Middle East’s biggest private equity investor, or another allegation of misuse of funds, or another investigation into the firm’s practices.
It is becoming a drip-feed of bad news that now threatens much more than the firm itself, or the position of its founder and chief executive, Arif Naqvi.
To understand how damaging it is — actually and potentially — you have to understand the unique position Abraaj occupies in Dubai, and in the Gulf’s financial services sector. Since 2002, when Naqvi launched the firm in Dubai, it has become the regional champion in private equity, showing the slick money managers of New York and London that the Middle East could match them.
Not only did it consistently produce a healthy return for its investors, it did so with a regional focus, allowing it to claim an altruism unusual in the financial business.
Naqvi, in particular, painted Abraaj as much a vehicle of social change as an investment institution, directing funds into health care, education, urban mobility and a range of other things the aspirational middle classes of the “fast growth” markets wanted.
And he did this also with a campaigning stance that singled Abraaj out in the region’s privacy-minded investment environment. He regularly drew applause at the World Economic Forum in Davos and other worthy arenas for his thoughts on governance, transparency and sustainability.
That philosophy, and a shrewd ability to make money, attracted big-name investors from the region and beyond. Some of the most respected people in Dubai and the UAE put their money in Abraaj, as well as global investors such as the Bill and Melinda Gates Foundation and the World Bank.
Abraaj became a cornerstone of the Dubai investment scene and its hub, the Dubai International Financial Center, as well as a generous patron to the regional cultural scene via its sponsorship of Art Dubai.
But a very different picture has emerged over the last few months. In February, some investors made it known they had become sufficiently worried about their money — in particular $200 million destined for medical facilities in Pakistan and Nigeria — to hire investigators to find out what had happened.
Abraaj responded with an explanation that regulatory hold-ups had prevented the cash being invested but that the money had been retuned to the investors.
Investors and stakeholders in Abraaj urgently need a firm public indication of the cause and scale of the problems, and a roadmap toward a solution.
That was not the end of the story, however, as further inquiries and a review by accountants KPMG failed to calm investor fears. A restructuring of Abraaj’s business, leading to a separation of the funds from group control and the “stepping away” of Naqvi from day-to-day investment management, similarly failed to stop the noise.
A second review — this time by accounting firm Deloitte — is nearing completion. But whatever its findings, a great deal of damage has already been done. Private equity investors in the region have snapped their wallets shut, and fundraising has ground to a virtual halt, according to many Dubai financiers.
The regional investment business has been mostly getting its information from the international media. Reports come and go of departures from the firm, of more unhappy investors, and of possible solutions to the increasingly dire situation.
Most recently, a big US investor, Cerberus, was said to be in talks to take over the private equity business, while Abraaj has agreed to hand the controversial health fund over to new management to calm the big international investors.
Another crucial transaction is the contentious sale of a power station in Karachi, Pakistan, which could return up to $500 million to Abraaj.
But still the exodus of executives who could help complete these deals continues. Just this week there were reports that Matt McGuire, who had been appointed as chief operating officer in February and who some saw as the next “new broom” CEO, had left the firm. Other big name recent hirings have also thrown in the towel.
Amid all this, there has been virtual silence from the regulator, the Dubai Financial Services Authority, other than a statement saying it is “aware of various matters.” The DFSA, which regulates firms in the DIFC — including Abraaj — has a long-established policy of not commenting on current investigations, and you can be sure it is treating the affair seriously.
But what investors and stakeholders in Abraaj urgently need now is some firm public indication of the cause and scale of the problems, and a roadmap toward a solution.
If they do not get it from regulators in Dubai, the action is likely to move outside the UAE’s borders, and control. Already there are reports of investor discontent in the Cayman Islands, where the Abraaj holding company is incorporated.
Abraaj has a New York office, big American investors and most of its business is dollar denominated. The US financial authorities, never hesitant to interfere, might also have a fair claim to legitimate interest.
After all that Abraaj has done to put Dubai on the world financial map, the authorities in the UAE should be the appropriate ones to help deal with its current urgent problems.
- Frank Kane is an award-winning business journalist based in Dubai. Twitter: @frankkanedubai