Inside the Fall of Dubai Private Equity Firm ‘Abraaj Holdings’: Lessons Drawn
Since earlier, corporate governance issues have attracted many academics, media and business attention. For example, issues such as corporate failure and collapse, abuse of management power, corporate fraud and the excess of executive remuneration, have all been the main topics in the companies’ annual general meeting (AGM), courts, academic debates, business reports as well as public fora. However, a number of corporate governance issues would not have been prominent in emerging economies, in particular, in the United Arab Emirates (UAE) if it had not occurred during the past global economic crisis of 2007, 2008, as well as the continuing collapses of giant companies. Perhaps, the collapse of private equity giant firm, Dubai-based Abraaj Holdings, is the recent example of support. Nonetheless, before drawing a conclusion in which claiming that the UAE’s corporate governance or in a wider picture of the Gulf Cooperation Council (GCC) practices is seen as dubious value and thus justifying a call for heavy reforms, assessment needs to be conducted, as relatively poorly researched, to address the issues of: (i) what exactly happened at Dubai private equity firm Abraaj and (ii) what lessons emerging economies, such as Dubai, might glean from the failure of Abraaj Holdings. To do so, this piece employs analytical tools of the Abraaj Holdings case study to search for the interactions between the UAE corporate governance and the failure of Abraaj Holdings. This piece focuses on (i) a renewed audit of corporate governance standards that may help to assess the inherent weaknesses of the continuation of the status quo in the UAE and generally in the GCC countries, and (ii) the importance of a robust corporate governance culture and practice in attracting international investors.
- What is behind Abraaj Holdings case study?
The Abraaj Holdings case study involves an up-close, in-depth and detailed examination of a subject of study and its related contextual conditions, which may help identify the weakness factors of the UAE corporate governance and regulations because the fears of corporate governance standards are emerging again after the failure of Abraaj Holdings, and international capital markets are waiting to see a response.
In 2002, Abraaj Holdings was established in Dubai. In the past 16 years, Abraaj Holdings became the largest investment fund that manages private assets worth more than $14bn in different emerging markets. Once seen as a trailblazer for the industry, Abraaj had grown from being a Middle Eastern company to a global emerging markets specialist, operating across Africa, Asia, Latin America, Turkey and Central Asia as well as its local market. The list of their investors includes, for example, the International Finance Corporation, an arm of the World Bank and the Bill & Melinda Gates Foundation. From its early beginnings, it has expanded through strategic acquisitions to create a market platform spanning 17 offices in New York, Lima and Lagos to Singapore. At the same time as Abraaj has expanded its regional business, its investor base has grown significantly from the management of family business funds to the management of institutions and institutional investor’s funds.
The company was, in short, spending beyond its means and ended-up using other people’s money to do it. However, could Abraaj survive the scandal? Its collapse, with its estimated assets of $1.1bn, is unlikely going to cover its debt, this underscores weaknesses in the broader industry as the long-running liquidity shortfall between the investment management fees and operating expenses. On the other hand, there are a number of listed companies in the Dubai and Abu Dhabi financial markets that have disclosed association with Abraaj Capital Group. This might be seen as a reason that the Dubai financial market partly affected by the Abraaj situation as the Dubai’s main stock market index DFMGI dropped down 15% in 2018, making it one of the worst-performing in the region.
- What exactly happened at Dubai private equity firm Abraaj?
The story began in early 2018 when The New York Times and The Wall Street Journal ran articles revealing the investigation into the alleged misappropriation of funds in the $1bn healthcare fund. The reports emerged that some of the 24 high-profile investors in a $1 billion healthcare fund owned by Abraaj Holdings had initiated an investigation, suspecting misuse of hundreds of millions of dollars of their money. This erupted when investors including the Bill & Melinda Gates Foundation and the International Finance Corp made allegations that Abraaj mishandled their money in the healthcare fund. The allegations triggered a solvency crisis at the fund, the biggest buyout fund in the Middle East and North Africa. The Abraaj Growth Markets Health Fund deployed capital from investors including the Bill & Melinda Gates Foundation, the World Bank’s International Finance Corporation, the UK’s CDC Group and Proparco Group of France. These four requested an audit of the health fund and engaged Ankura Consulting to find out what had happened to some of the money invested in the vehicle. While the company stated that they are highly focused on strengthening their corporate governance and internal controls and all along, Abraaj, and its founder Arif Naqvi, have denied any wrongdoing. The saga has, however, roiled the region’s private equity markets due to the vast pool of stakeholders with exposure to Abraaj, ranging from low-cost carrier Air Arabia to Kuwait’s Public Institution for Social Security. Creditors have sought liquidation of the firm and its assets in efforts to recover their funds in the wake of the allegations. However, the misappropriation of funds in the $1bn healthcare fund was not the only case that Holdings faced but the failure to sell a majority stake in Pakistan’s K-Electric to a Chinese group has all but crippled the Dubai-based private equity group. Had the $1.8bn sale gone through at the end of 2017, its parent, Abraaj Holdings, would have received almost $450 m but it didn’t, and within 6 months, creditors, including a Kuwaiti pension fund, filed to wind up Abraaj in the Cayman Islands in a desperate attempt to recover debts. Abraaj responded by filing for provisional liquidation which protected it against individual creditor action, allowing liquidators time to try to sell off assets. Mr Naqvi has since faced two court cases in Sharjah for issuing cheques with insufficient funds that underwrote the $300 m loan to Abraaj. A criminal offence in the UAE, the bounced cheque cases came amid fraught out of court negotiations to procure Mr Naqvi’s personal assets to cover part of the debt. The complaint was settled in late August 2018, ending criminal proceedings that had seen Mr Naqvi face three years in jail. Simon Conway of PWC Corporate Finance & Recovery (Cayman) Limited, Cayman Islands; Mohammed Farzadi of PricewaterhouseCoopers Limited (PWC), Dubai branch; and Michael Jervis of PWC, UK were appointed as joint provisional liquidators of Abraaj Holdings by order of the Grand Court of the Cayman Islands on 18 June 2018.
A court-appointed liquidator in June 2018 revealed that the company’s revenues had not covered core operating costs for several years. In order to compensate for the shortfall, Abraaj Holdings borrowed heavily, including its own funds, and exceeded the debts owed to borrowers by the threshold of one billion US dollars, PWC mentioned in its report that: (i) Abraaj Holdings lacked of full financial records, and also (ii) conflicts of interest were supposed to knock loud alarm bells, showing that the managing partner responsible for risk management in the Abraaj Holdings is the husband of the founder’s sister. The collapse of Abraaj Holdings also led to investigate with the company’s audited firm on its potential conflict of interest. KPMG has appointed to review mismanagement concerns expressed by investors when they appear for the first time. Though the audited firm acquitted Abraaj Holdings of any irregularities, still, the investigation showed that the chief financial officer of Abraaj Holdings had previously worked for the audited company. At the same time, summary findings of a review by Deloitte, appointed by Abraaj to audit its operations, said that a cash shortage at the firm led it to dip into investor funds. Deloitte said that was no evidence of misappropriation, but highlighted lack of ‘adequate governance’ and ‘overall weakness’ at Abraaj.
Dubai’s financial regulator starts investigating allegations of mismanagement at Abraaj Holdings, and halting fund-raising activities and shaking up management after a scandal over its use of investor money. As Abraaj has a regulated entity, Abraaj Capital, in the Dubai International Financial Centre (DIFC), the Dubai Financial Services Authority (DFSA) announced as a part of its general investigation that it has the power to fine or suspend individuals and companies from working in financial services within the DIFC and had in the past imposed penalties for rule breaches. However, the announcement of the DFSA itself may raise significant concerns of the UAE’s corporate governance, the general practices and compliance. To put it another way, does the announcement of the DFSA itself means recognition of the status quo problem? Whether the imposed penalties in the past mean a matter of problem? And are these punitive measures sufficient to prevent the recurrence of similar cases in the future?
- What lessons might emerging economies, such as Dubai, glean from the failure of Abraaj Holdings?
The fundamental story of the current turmoil is relatively easy to tell. However, providing solutions is not as easy as expected, as it requires more in-depth studies to identify the problem, its motives, causes and provide recommendations. The failure of Abraaj Holdings may indicate: (i) the need for corporate governance reforms, (ii) a robust corporate governance culture and practice and also (iii) compliance. Nonetheless, it does not necessarily mean that a significant increase of regulations, in particular, the practice, has shown that it is hard to see that excessive regulations will ever completely eliminate the odds of a future crisis. The Abraaj Holdings case study may well correspond with a previous report by Standard & Poor’s Financial Services LLC (S&P) which stated that corporate governance remains a critical weakness for GCC companies, and that strengthening management practices and governance would improve access to capital markets and reduces the cost of debt increases of companies in the Middle East and North Africa. Therefore, it is well-positioned to look at the best practices that already adopted in the developed markets, which have seen some of the most failures in corporate governance and draw significant lessons for GCC countries. Many lessons came from Abraaj Holdings; four stand out to me:
- Independent Board Members
The truly independent board members, who ensure adequate monitoring and scrutiny of the organisation’s main risks, must be ranked first among these managers. Board members in the GCC region are often linked to the administration, have government ties or work with board members. It may be necessary to expand the scope of recruitment outside the region in order to find suitable candidates.
- Transparency and data disclosure
S&P reported that corporate ownership, which is not closely monitored and lack of overall transparency, leaves investors vulnerable to weak management risks and, in extreme cases, fraud, as well as it could deter international investors. However, compared with their counterparts in the world, companies in the MENA region are reluctant to list their shares on the stock market, which requires a broad disclosure of data because in the absence of companies listing their shares for public trading, corporate governance standards responsible for disclosing non-listed companies are expected to go a long way to restore the trust Investors in the wake of the collapse of the Abraaj Holdings.
- Financial controls
Banks and companies have been criticised for lending on a reputable basis without doing the necessary research. Air Arabia, one of the main lenders to Abraaj Holdings, provided an unsecured short-term loan of $75 m to Abraaj Holdings with a personal guarantee from its founder who also was a member of the board of directors of the airline, and this type of loans to related parties violates the basic principles of corporate governance.
- Gender diversity
A growing body of research suggests that companies that adopt gender diversity tend to perform better than their peers. A recent study by indicator provider MSCI, entitled ‘’Women on Board: Global Trends in Gender Diversity in Corporate Boards’’, supported a set of previous research that showed that Strong female leadership generated higher returns on stocks. Interestingly, the study also found that the high proportion of female representation at the board level corresponds to a smaller proportion of corporate governance irregularities. However, women are still underrepresented in business and finance, with less than one in five female CFA holders.
In conclusion, OECD research shows that strong corporate governance is vital to sustainable productivity growth in emerging markets. This governance is necessary to attract capital, allowing international investors to define the quality of corporate governance and oversight of the board, otherwise, personal benefit to take root, resulting in the diversion of resources from economically productive activities to economically unproductive channels. In particular, as the focus of the MENA region shifts from dependence on petrochemicals to a more diversified and open economy, its success in transforming the corporate governance culture from a relational to a rule-based system is critical to its long-term development that will play a vital role in helping to bring about this change.
Many investors are already pushing for a more balanced approach to corporate governance and cross-border controls in GCC countries. GCC countries’ vision 2025–2035, which has made its financial sector development programme one of the main drivers, is an example. Aspirations, investors are in direct contact with companies to call for reforms. The Abraj Holdings case study shows that investors are increasingly willing to undertake interventions when they feel that they are not serving their best interests. Thus, one might also argue that the investor oversight that brought these issues into the open might prove to be timely. This finding may well support my research paper entitled ‘’Shareholder Empowerment Steps Forward and Steps Back: Comparative analysis of the US and UK regulations’’ which has been recently published at JFRC. It gives rise to the paradoxical question of whether shareholders ought to be further empowered to have a greater influence over the companies’ activities. The significant component of my research is actively involved in a comparative case-study-related work of five UK and US companies with a particular focus on Barclays Plc, AVIVA and Stores Co. v. Bozic. It offered two distinct contributions: (i) assessing whether in times of crisis shareholder empowerment represents a way to regulate corporate activities and also (ii) by assessing the distinction between the perception of shareholder empowerment and the reality in practice.
Saad Almohammed Alrayes
LLB (Hons), LLM, PhD Candidate & Tutor
School of Law,
Queen’s University Belfast
QUB Int’ Ambassador
PhD’s Law Rep
Keywords: Shareholders Empowerment, Corporate Governance, Bankruptcy, GCC, Corporate reforms, Insolvency, Good Governance
 Kenneth Rapoza, ‘Dubai Emerging Market Maverick Abraaj Gets a Lifeline’ Forbes (2018) <https://www.forbes.com/sites/kenrapoza/2018/11/26/dubai-emerging-market-maverick-abraaj-gets-a-lifeline/> accessed 4 August 2019.
 Landon Thomas Jr., ‘Leading Private Equity Firm Accused of Misusing Funds’ The New York Times (2018) <https://www.nytimes.com/2018/02/02/business/abraaj-naqvi-world-bank.html> accessed 2 August 2019. Also see, Simon Clark, William Louch and Nicolas Parasie, ‘Abraaj Founder Scrambles as Empire Teeters’ The Wall Street Journal (2018) <https://www.wsj.com/articles/abraaj-founder-scrambles-as-empire-teeters-1528635601?mod=e2fb> accessed 26 July 2019.
 ‘Abraaj Holdings – In Provisional Liquidation (“The Company”)’ (PwC, 2018) <https://www.pwc.com/ky/en/services/abraaj-holdings.html> accessed 5 August 2019.
 Saad Almohammed Alrayes, ‘’Shareholder empowerment, steps forward and steps back: Comparative Analysis of the US and UK Regulations’’ (2019) 27(2) Journal of Financial Regulation and Compliance169-196 <https://doi.org/10.1108/JFRC-03-2018-0054> 4 August 2019.