Behind the spectacular collapse of a private-equity titan

Naqvi rode Dubai’s rise to build Abraaj with an unusual business model. Was it a house of cards?

By Dinesh Nair, Matthew Martin & Tracy Alloway / BLOOMBERG

Days before rubbing elbows with global business titans in Davos in January, Arif Naqvi (picture) set out to charm another circle of friends — Gulf Arab tycoons — in a last-ditch attempt to save his Dubai private-equity (PE) firm.

But things were already on the cusp of spiraling out of control. Dogged by allegations Abraaj Group had mismanaged investors’ money, Dubai’s star financier soon couldn’t pay the rent.

After Naqvi, 58, surrendered control of Abraaj in June, it was revealed that for years, its main revenues didn’t cover operating costs. Abraaj borrowed to fill the gaps and now owes creditors over US$1 billion (RM4.06 billion). Once lenders turned off the taps, the firm collapsed, leaving losses, lawsuits and shattered reputations in its wake.

Abraaj’s reliance on multiple levels of leverage created a “highly unstable” business model that’s unusual for the PE industry, the court-appointed liquidators that are dismantling the firm said in a report dated July 11 and seen by Bloomberg.

After analysing the documents they could get their hands on — since some went missing — investigators at PricewaterhouseCoopers (PwC) said Abraaj’s use of loans to cover operating expenses left it “sensitive to volatility and potential liquidity crises”. They are now selling Abraaj assets to pay creditors and investigating allegations of “mismanagement, comingling of funds and misappropriation of assets”.

Naqvi declined to comment, while the firm defended its use of leverage. Borrowing was a necessity because most of its clients, especially early on, were family businesses that weren’t always timely in making payments, according to an emailed statement from Abraaj.

“In hindsight, the pace of growth should have been more measured,” the statement said. “The back office was not keeping pace in terms of sophistication or best practice.” Back-office operations encompass things like record maintenance and accounting.

Abraaj’s spectacular demise has dealt a severe blow to Dubai’s reputation as a global financial centre. It rattled the trust of investors who included Bill Gates, the International Finance Corp and US and UK government agencies, triggered defaults on loans from at least 10 sources and set off lawsuits in the United Arab Emirates (UAE) and Turkey.

The chronology of the collapse, drawn from conversations with about a dozen people with direct knowledge of the company, lays out how rapidly things fell apart for Naqvi, the suave Pakistani entrepreneur who built Abraaj from the ground up in the past 16 years only to see it crumble in under 10 months.

A fixture at the annual World Economic Forum in Davos, Naqvi had crafted Abraaj’s image as the face of Middle East PE. Starting with US$3 million of capital and US$60 million of assets under management in 2002, it grew by leaps and bounds. At one point, it managed almost US$14 billion of assets for investors like the Bill & Melinda Gates Foundation and the retirement fund for teachers in the state of Texas.

Abraaj oversaw funds from 18 offices in emerging markets spanning Latin America, Africa and Asia — a network that several US investors have since tried to buy at fire-sale prices.

Former employees said Naqvi did everything he could to portray Abraaj as a powerhouse. He lavished staff with big salaries, had generous budgets for travel and leased a private corporate jet. He sponsored events like Abraaj Week, an annual business conference that featured gala dinners at Dubai’s luxury Armani hotel in the world’s tallest tower, the Burj Khalifa. An avid art collector, Abraaj even financed a coveted annual art prize that furnished the winner with a US$100,000 grant.

But the firm’s foundation was shaky: Fees earned from managing investments between 2014 and 2017 at some points barely covered half of costs, according to numbers released in the liquidators’ report.

While it’s true that the world’s PE firms thrive by borrowing money to fund acquisitions, they don’t typically use debt to pay for basic expenses, according to Ludovic Phalippou, associate professor of finance at Oxford University’s Said Business School.

“It is unusual for any PE firm to finance operations with a loan,” said Phalippou, author of Private Equity Laid Bare. “We could see this as Abraaj applying what they preach to themselves. In contrast, several major PE firms are actually publicly listed and have no leverage, the exact opposite of what they preach.”

Naqvi’s house of cards began teetering last September when investors in a US$1 billion healthcare fund raised in 2016 — including the Gates Foundation — asked questions about what happened to their money, according to four of the people.

In the course of monitoring investments, they grew suspicious that not all proceeds were deployed and wanted to know why, because a clause in the fund stipulated that any extra cash would be returned to them, one person said. A spokesperson for the Seattle-based charity declined to comment.

Starting about a year earlier, Abraaj did in fact begin pulling tens of millions of dollars from at least one flagship fund — the Abraaj Private Equity Fund IV — to prop up its finances, three people said. By the early months of 2017, it was moving money out of the healthcare fund, too, they said. Abraaj then deposited borrowed cash into both funds’ accounts just before the auditors, KPMG, compiled subsequent quarterly earnings statements, they said.

Earlier this year, Abraaj hired KPMG’s local office to verify transactions made by the health fund and said the auditor found no misuse of money. KPMG International said it’s now investigating the 2018 review with its legal advisors, Linklaters LLP. It said KPMG wasn’t hired to do an official audit or verify how the funds were used.

The cash crunch only got worse. Abraaj had planned to sell a stake in Pakistani utility K-Electric to Shanghai Electric in March 2017, which would have raised several hundred million dollars, but the transaction was delayed due to regulatory hurdles.

By the fall, Abraaj was trying to reassure the health-fund investors that everything was fine. But in November, four of them accused it of withdrawing cash without their consent. They hired forensic accountants to examine what happened.

The unused funds were later returned, which only deepened the liquidity crunch.

With pressure mounting, Naqvi’s inner circle started to unravel. In the final two months of 2017, key executives quit, among them Mustafa Abdel Wadood, who resigned, but agreed not to leave immediately, according to several people.

Naqvi’s Inner Circle
• Waqar Siddique, Naqvi’s brother-in-law, served as Abraaj’s managing partner and head of risk and compliance
• Mustafa Abdel-Wadood, former managing partner and global head of PE, previously founded Sigma Capital and headed the Dubai office of Egypt’s EFG-Hermes
• Ashish Dave, former CFO and partner, who moved jobs between the KPMG and Abraaj
• Wahid Hamid, managing partner. Before joining Abraaj in 2012, he was a senior advisor at The Boston Consulting Group and senior VP at PepsiCo Inc.
• Sev Vettivetpillai, managing partner who joined Abraaj after it acquired Aureous Capital in 2012. He sued Abraaj last month for US$2.92 million in unpaid compensation
• Muhammad Rafique Lakhani, the former MD who signed personal checks along with Naqvi as a security on a loan to Hamid Jafar.

Naqvi wasn’t about to give up. Before going to Davos — where he sat on a panel with Bill Gates — he tried to convince numerous members of the Gulf business elite to give Abraaj tens of millions of dollars in short-term loans, three people said.

One was Sharjah-based businessman Hamid Jafar, who offered a short-term loan of US$300 million — including US$100 million for Naqvi himself. Jafar later sued Naqvi and one of his directors, claiming personal checks they’d issued as security on the loan bounced. In the UAE, a seven-sheikhdom federation including Sharjah, that’s a criminal offence that can get you thrown in jail. A spokesman for the family declined to comment.

According to three people, Naqvi also got about US$75 million from Air Arabia, a discount airline that still lists him as one of its board members on its website. Up until a few months ago, Abraaj owned a stake in Air Arabia that a separate person with direct knowledge said was pledged as collateral with banks. They sold the shares when Abraaj defaulted. By June, the carrier disclosed a US$336 million exposure to Abraaj, equal to about a quarter of its current market cap. A spokesman said the carrier had nothing new to say.

Other business leaders declined to give Naqvi money, two people said. One was Damac Properties chairman Hussain Sajwani, the billionaire who’s partnered US President Donald Trump on Dubai projects, they said. Niall McLoughlin, Damac senior VP for marketing and corporate communications, said the assertion that Sajwani was approached for a loan “is not true”.

After Naqvi ceded control of the fund management business in February, things deteriorated fast. By the spring, more executives quit and job cuts ensued. Yet even in May, Abraaj was trying to reassure its creditors they’d be paid.

Just weeks later, one debtor, a Kuwaiti pension fund with US$200 million of exposure, sealed its fate by refusing to agree to a standstill on debt payments. Instead, it put pressure on Abraaj to wind down operations.

Naqvi capitulated not long after that, filing on June 14 for a court-appointed restructuring in the Cayman Islands, where the holding company and investment-management arm are based. The liquidators’ report valued Abraaj’s known assets at US$1.1 billion, including stakes in 12 funds and investments like the K-Electric holding.

That’s a full US$1.4 billion less than Abraaj’s total assets as of March, according to financial statements disclosed in the report. The liquidators suggested that either Abraaj’s solvency position had “declined markedly” or had been “overstated”.

Some former employees said the speed of the demise didn’t surprise them. They described Naqvi as “aggressive” and “competitive” and said he ran Abraaj like he was a king; little could happen without his approval and attempts to question his actions often drew furore.

Abraaj disputed the idea that Naqvi was that influential. In its statement, it said the firm “has always been run as a partnership” and that “dialogue and engagement has always been encouraged, both internally and externally”.

PwC said key financial statements were either missing or non-existent. In particular, the company produced only consolidated financials, not separate ones for the asset management and holding companies, making it difficult to analyse how money moved between the two.

While the Dubai Financial Services Authority hasn’t said what investigations — if any — it’s conducting, Abraaj’s legal troubles have already started. Aside from the case over the bounced check, which Naqvi’s lawyer has said was provisionally settled out of court, the firm is being sued by a founder of the Turkish dairy maker it bought with the European Bank for Reconstruction and Development in 2014. Abraaj wouldn’t respond to those accusations.