Abraaj scandal frightens investors off emerging market private equity

EDINBURGH — The failure of the Abraaj Group has sent ripples through emerging market private equity investment circles. It took almost 16 years to build Abraaj Group into one of the most influential emerging-market investors and the Middle East's biggest private equity dealmaker, but the Dubai-based firm's dramatic collapse took just four months, says Bloomberg news agency. The problems for the buyout firm and its founder, Arif Naqvi, began in February with allegations that money in the company's health fund had been misused, it notes. Now liquidators need to settle about $1bn in debt. Dubai-based Abraaj had $14bn of assets under management and was behind some of the biggest takeovers in the Middle East, according to the Financial Times, which provides an update on the fall-out from the Abraaj scandal. – Jackie Cameron.By Thulasizwe Sithole.Investing in emerging market private equity is about to become that bit tougher, warns the Financial Times. Abraaj, once the largest private equity firm specialising in regions such as Africa and the Middle East, has been accused by investors including the Bill & Melinda Gates Foundation and the World Bank of mishandling millions of dollars of their investments, it reports..___STEADY_PAYWALL___."Since concerns were first raised in autumn 2017, investor trust has further eroded and the firm's indebtedness has been exposed. The Dubai-based fund is under investigation by regulators in the city state. Abraaj's founder, Arif Naqvi, has reportedly been speaking with creditors in an effort to avert the company being liquidated. Its demise has sent shockwaves through the fund management industry," says the pink newspaper..Institutional investors in emerging markets — from pension funds to endowments and sovereign wealth funds — are now tightening their due diligence, notes the global business publication. It points out that Abraaj funds had some of the most conservative investors in them.."The fall of the private equity firm, which had $14bn of assets under management and was behind some of the biggest takeovers in the Middle East, has added a layer of complexity to dealmaking in what were already difficult jurisdictions in which to do business, say industry insiders.."Investors entering the sector will have to carry out more stringent checks and balances, says a former adviser to Abraaj in Dubai, speaking on condition of anonymity. 'Abraaj funds had some of the most conservative investors in them. They have layer upon layer of due diligence. And even then they failed to spot any issues,' says the adviser. 'They are going to be even more conservative now.'".Investors cannot be passive in private equity funds, Ludovic Phalippou, a finance professor at the University of Oxford's Saïd Business School, is reported as saying. He reckons Abraaj's unravelling came about in part thanks to investors being better informed.."The next step will be to have mechanisms in place so that these sorts of things do not happen in the first place," Phalippou told the FT..Abraaj has always denied any wrongdoing, says the publication..Read also: The controversy at Abraaj is the latest to involve KPMG – The Wall Street Journal."Attracting private equity investment to emerging economies has traditionally been challenging. By some measures, returns are more compelling in developed economies than in so-called frontier ones. The British Venture Capital Association, a private equity industry body, calculates that funds managed or advised from the UK produce an average annual internal rate of return — a closely watched measure of profitability — of 13.7%, after charges.."This compares with a cumulative IRR of 4.4% from African investments over a five-year period to the end of last year, according to the Africa Private Equity and Venture Capital Fund Index. Big names have retreated from some corners of emerging markets. KKR, for example, disbanded its Africa team because of a lack of sizeable deals last year.".Many investors have been put off emerging markets by recent currency volatility and political upheaval in some jurisdictions, according to the FT. "Yet some warn that being too downbeat on the sector risks missing out on opportunities. Private equity firms point to the high valuations of companies in the US and Europe as a reason to explore emerging markets now.".A major risk factor is the variable quality of managers in the sector, according to Rupesh Madlani, chief executive of GSCM, an investment firm focused on emerging markets. "But there are enormous opportunities to deliver returns because in developed countries the process can be more competitive than in emerging markets, which allows investors to get better prices," he tells the Financial Times..After Abraaj, though, investors are likely to proceed in dealmaking with far greater caution. The bottom line: "Investors wanted to believe in a story where one firm was big enough to take care of all of emerging markets and didn't take care of proper due diligence," says a manager at a rival private equity group based in Turkey, who declined to be named. "It was lazy investors who created this monster," he added.

Abraaj scandal frightens investors off emerging market private equity

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