Abraaj’s unravelling tells us due diligence must change

The troubles at the Middle East’s biggest private equity firm are relevant to investors in any private asset class.

As you read this, liquidators from PwC and Deloitte are poring over the remnants of the Middle East’s biggest private equity firm. The story of what was once a powerful force in emerging markets private equity has a bearing on anyone investing in private markets through traditional fund models.

While the wider damage the Abraaj case causes to Middle Eastern private equity is grounds for debate, relevant to all private fund managers is the need to revisit manager due diligence methods.

The lessons apply across any asset class subject to investment via limited partnerships or other third-party vehicles. Since its founding in 2002, Abraaj has enjoyed the support of many institutional investors heavily engaged with private markets funds: the now cancelled Abraaj Private Equity Fund VI attracted commitments from US pensions Washington State Investment Board, Teacher Retirement System of Texas, Teachers’ Retirement System of Louisiana and the Employees’ Retirement System of the State of Hawaii.

Regardless of how thorough their governance scrutiny was before, further transparency about manager overheads must be inevitable. While managers are often open about fund fees and costs, non-listed private managers are not obliged to share their P&Ls, even if some do.

But how many are even asked for these numbers? Two prominent consultancies told sister publication PERE last week how they have dedicated operational due diligence units, with assessing manager overheads a big part of what they do. Nevertheless, we understand that another consultancy funnelled more than $1 billion of advisory and discretionary capital into Abraaj’s cancelled global mega-fund – it would be hard to imagine that consultancy is not also re-evaluating its diligence processes. It may well be subject to greater scrutiny from its clients, too.

Managers may well be uncomfortable explaining where their fee income is deployed. Some may even try branding the Abraaj case as a reflection of engaging with emerging market strategies – which would probably be unfair. But managers giving investors and their consultants clear guidance on what it costs to run their operations is a minimum requirement and the Abraaj case should serve as a prompt to visit, or revisit, a proper evaluation of those costs.

To contact the author, email jonathan.b@peimedia.com