Abraaj problems pose threat to MENA fundraising

Developments at Abraaj Group mean LPs should conduct even more rigorous due diligence when considering MENA commitments.

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MENA is a region that could have done without its biggest and most prominent private equity firm in the spotlight for alleged accounting inconsistencies.

Fundraising for MENA-focused private equity vehicles fell to around $711 million last year, down 64 percent from the roughly $2 billion raised a year earlier. Managers in the region, eager to attract LP capital from a broader range of institutional investors, have been keen to help show the area in a positive light and emphasise its economic and political stability, which negative headlines can sometimes make challenging.

Now the region – in particular the Gulf and the Middle East – must contend with another headwind given recent developments involving Dubai-headquartered Abraaj Group. In February, media reports emerged claiming four LPs in Abraaj’s $1 billion Global Healthcare fund had hired an auditing firm to help trace capital that was to be invested in medical projects in Africa and Asia. Abraaj responded by appointing KPMG to audit the vehicle, and concluded that all payments and receipts had been verified and that unused capital had been returned to investors.

The audit did little to allay concerns. Over the following two months key investment professionals began to depart the firm including its CFO and several senior executives, as well as its energy team. Founder and chief executive Arif Naqvi also stepped aside as the firm paused fundraising and certain deployment activities. It cancelled its annual investor meeting in Dubai, and as of early May was understood to be seeking buyers for some or all of its assets, including the firm as a whole.

“Has it harmed the region? Unquestionably yes,” says one veteran fundraiser who has raised capital for vehicles there. Abraaj is the biggest player in MENA and the face of emerging markets private equity. GPs there would do well to wait until after the summer or even as late as early 2019 for the air to clear before seeking capital from global LPs, he says.

Other market sources stress that while levels of transparency may not be the same as in the west, the troubles at Abraaj are not symptomatic of all managers in the region. A senior executive at one Gulf-based private markets firm says that while developments at Abraaj are “sad”, Abraaj doesn’t represent the region. Abraaj may be Dubai-based but it is not a Gulf or MENA-focused investor. For example, problems at a London-headquartered firm needn’t tarnish UK fundraising as a whole, he adds.

Yet, the Abraaj developments do raise questions about governance, fiduciary responsibility and transparency for private equity investments and managers themselves in MENA. While emerging markets are evolving rapidly, LPs must conduct rigorous due diligence and not just invest with managers so they can tick their asset allocation boxes, says the veteran fundraiser.

One repeat investor with Abraaj, however, is largely unconcerned by the firm’s struggles. “I’m happy with my portfolio, that’s the most important thing,” the LP says, adding that certain teams there are “impressive”. Abraaj’s struggles could lead to outflows of LP capital from the MENA region, particularly from more cautious US investors, the LP says. This gap is likely to be filled by development finance institutions, which would be a backward step.

With at least 43 MENA-focused funds seeking a combined $4.2 billion, and 23 funds targeting a combined $3.98 billion being raised by MENA-based managers, there’s a lot at stake.