This story is featured in the 4Q issue of the PitchBook Private Market PlayBook.
While private equity has expanded over the past decade to include new firms, more strategies and different deal types, the industry has yet to see widespread adoption of impact investing. By definition, PE firms have a fiduciary obligation to their LPs to maximize returns, but that often leaves little wiggle room in sourcing opportunities that can make both a tangible social good and substantial profit.
That hasn’t kept giants like Bain Capital, TPG Capital, KKR and others from launching impact investing funds in recent years. But one firm, in particular, has long had a reputation in the PE world for social impact deals: The Abraaj Group.
In early 2017, news broke that Abraaj planned to raise as much as $8 billion for its latest flagship fund. The vehicle was, in essence, a game-changer for a Dubai-based investor that specialized in making deals in higher-risk regions such as Asia, Africa and Latin America. Founded in 2002 by Pakistani businessman Arif Naqvi, Abraaj went where many other firms dare not, including locales where government corruption and other unforeseen factors could derail investments. Now, with its newest vehicle, Abraaj would get to expand its niche strategy on an even larger scale.
A year later, the fund collapsed. Abraaj was pressured into returning the $3 billion it had collected from LPs, telling Reuters that it no longer intended to proceed with the vehicle “in its current form.” More than anything, the news signaled that investors had lost confidence in Abraaj, which had built its AUM to nearly $14 billion. In the ensuing months, Abraaj has unraveled completely, with Naqvi leaving day-to-day operations and the firm unable to pay its debts. Now, liquidators are trying to sell off Abraaj’s funds one by one—all while the future of its portfolio companies remain in limbo.
What started the downfall?
The drama began in early February, when reports emerged that investors including the Bill & Melinda Gates Foundation and the World Bank suspected Abraaj had misused capital from a $1 billion healthcare fund that invested in hospitals and clinics across Africa and Asia. Abraaj maintained no wrongdoing and had already returned more than half of the $200 million that was unspent, per The New York Times. Naqvi, who just months earlier served on a panel with Bill Gates at the World Economic Forum in Davos, Switzerland, stepped down from running the firm’s fund management arm in late February and investment activities stopped.
There was now suspicion that Abraaj used investor money for its own corporate purposes, a practice known as commingling. It isn’t necessarily illegal, but in a PE context could be viewed as unethical and a violation of fiduciary duty. So, an LP group of the BMGF, the World Bank’s IFC, the UK’s CDC and France’s Proparco hired Ankura Consulting to look at the firm’s financial statements.
In May, it was revealed that Ankura found irregularities that indicated some portions of the $1 billion healthcare fund went elsewhere. The damage was irreversible. Key Abraaj executives resigned. There were multiple rounds of layoffs. The firm had reportedly racked up $1 billion in debt it could not pay.
By that point, Abraaj seemed all but doomed. And in June, the firm’s holding company filed for provisional liquidation in the Cayman Islands, similar to a Chapter 11 bankruptcy filing for a company headquartered in the US. PwC and Deloitte were appointed as provisional liquidators.
So far, no deals have been reached for Abraaj’s assets. Cerberus Capital Management and Colony Capital had expressed interest in acquiring the fund management business, with the Financial Times reporting in July that Cerberus was in “pole position” to buy it after liquidators rejected Colony’s bid. But a week later, Cerberus withdrew a reported $25 million offer that Abraaj investors reportedly didn’t want. In September, TPG Capital reportedly entered exclusive talks to buy the embattled healthcare fund and merge it with the Rise Fund, TPG’s $2 billion vehicle focused on social impact investing.
Actis, a fellow emerging markets investor, bid $1 for the firm’s North Africa and Middle East PE operations in September, an offer reportedly favored by backers that don’t want to see the business crumble altogether. And according to a Bloomberg report that month, Brookfield had offered to buy Abraaj’s Turkey-based PE funds and Colony Capital had emerged as a favorite to buy Abraaj’s Latin America PE funds.
Over the past couple months, Abraaj has mostly stayed out of headlines as the attempted selloff continues. In a November interview on CNBC, Naqvi’s lawyer, Habib Al Mulla, continued to deny any wrongdoing by Naqvi or Abraaj, instead placing blame on regulators like the Dubai International Financial Centre and the media for the firm’s collapse. Naqvi recently made a last-ditch plea to limited partners and creditors to avoid liquidation, with the Cayman Islands ultimately agreeing to an extension to restructure the debt load, per reports.
It was the first sign of hope that Abraaj could ultimately survive, even if it still looks like a longshot.
Learn more about our editorial standards.
