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Will Private Equity return to the Middle-East?

After the antics of Abraaj Group investors have been reluctant to seek other opportunities in this region of the world.

Will Private Equity return to the Middle-East

With a record penalty for the Persian Gulf of $315m and the largest collapse the DFSA have ever dealt with, Abraaj Group have been found guilty of deceiving investors and carrying out unauthorised activities.

Abraaj Group were the largest private equity firm in the Middle-East with $14b in assets prior to their collapse. Investors included The Bill & Melinda Gates foundation, Bank of America Corp, The U.S Governments Overseas Private Investment Corp and UK Government agencies.

Abraaj’s behaviour

Abraaj were found to be misusing investors funds to pay expenses and send money to some of its executives. Additionally, they provided misleading financial information to hide this activity.

With such large-scale investors, you do wonder how they were able to get away with this. Investigations found that Abraaj;

  • Borrowed money just before financial reporting dates to produce temporarily inflated bank balances
  • Changed reporting periods for funds to disguise shortfalls
  • Deflected demands for information
  • Lied about delays in cash distributions

Abraaj had a complex structure with hundreds of companies and funds incorporated in jurisdictions around the world making the company very hard to regulate.

Ironically Mr. Naqvi the former CEO, sent documents to other Abraaj executives claiming; “Our choice was to operate in a regulated environment” and “Abraaj has adopted a holistic framework that embraces corporate governance, regulation and compliance.”

Cayman Islands

Abraaj had “offices” in the Cayman Islands very much like a lot of major organisations. The DFSA said that this unit wasn’t authorised to operate in Dubai.

The Abraaj Investment Management Ltd company based in the Cayman Islands was slapped with a $299.3m fine.

Further research unsurprisingly found that these offices were mere paper offices and no physical offices or staff were in the Cayman Islands.

This fund was used as a cloak to transfer money to other funds. Example; In 2015 when stakes were sold in Payment Company Network International for $330m, instead of proceeds being sent to investors, Abraaj transferred the money to the Abraaj Investment Management bank account. From there they transferred the money to a company owned by an unnamed Senior Abraaj Executive.

The aftermath

In short, the firm is now insolvent, and its creditors and investors are negotiating how to repay its debts.

But its never as simple as that;

  • Mustafa Abdel-Wadood a former managing partner admitted in court that he lied to investors to hide losses and raise more money
  • Five of his fellow former executives are also facing charges related to racketeering and securities fraud after an investigation by New York prosecutors
  • Arif Naqvi the 59-year-old former CEO of Abraaj Group is under house arrest and fighting extradition to the US in the same case his colleagues are involved in. On May 3rd he was granted conditional bail in the UK but had to surrender his travel documents. He has also been sentenced in absentia to 3 years in prison by UAE court

Once lenders stopped contributing, all was revealed and Abraaj collapsed. For a lengthy period, main revenues could not cover operating costs. Abraaj borrowed to plug the holes and now owes Creditors over $1b.

Right up to the last Naqvi insisted everything was okay. Weeks before the collapse he was in Davos sitting on a panel with Bill Gates where he tried to convince multiple members of the Gulf business elite to provide Abraaj tens of millions of dollars in short term loans.

The future

Abraaj’s failings have destroyed investor confidence in private equity companies from emerging markets.

Since Abraaj’s unravelling, private equity firms in the six Arab nations of the Gulf Cooperation Council have raised almost no money.

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