In early March, at a town hall meeting in Dubai, Arif Naqvi told the 220 colleagues present that a year after the 2012 merger with Aureos Capital, Abraaj Group had gone past an all-important milestone. “Our integration process is complete. Now it is time to execute,” the firm’s founder and group chief executive declared.
In private equity, corporate M&A is a rarely used franchise expansion tool, and the Abraaj-Aureos combination certainly was an unusually audacious bid to create an international growth capital provider. It gave birth to a new business with numerous investment funds and around $7.5 billion in capital under management.
The new firm currently manages 25 separate funds, including the $2 billion Infrastructure & Growth Capital Fund raised by Abraaj in 2007; the $183 million Latin America Fund (Aureos, 2007); the $380 million Africa Fund (Aureos, 2008); and the $105 million Africa Health Fund (Aureos, 2009).
It has 33 offices, 150-plus investee companies, more than 170 professionals and approximately 300 investors. Make no mistake, the new Abraaj Group is a big, multi-layered organisation.
When the deal was first announced, it would likely have struck outsiders as a union of two very different entities: on the one hand Abraaj Capital, a large Middle East, North Africa and South Asia-focused buyout firm which was founded in Dubai in 2002; and on the other hand a smaller, global SME investor set up in 2001 by UK development agency CDC Group together with Norway’s government-owned Norfund, and operating in a multitude of early-stage private equity markets including Costa Rica, Zambia and the Philippines.
Not that this perception would have been incorrect (albeit that pre-merger Abraaj Capital was not just doing private equity buyouts but also growth capital and investments in real estate and infrastructure). But what the deal’s architects would likely have told you at the time, and will certainly seek to draw your attention to today, is that the transaction was always intended to create a globe-spanning investment platform capable of delivering a differentiated private equity product across the relevant regions.
Put simply, Abraaj Group’s ambition today is to be the foremost mid-market investor in what it calls the world’s ‘growth markets’. In terms of equity ticket size, the sweet spot is in the $20-80 million bracket. Substantially larger deals have been made – such as the $361 million acquisition in 2009 of a majority stake in Pakistani utility Karachi Electric Supply Company – and continue to be possible too, with LP co-investment included where appropriate.
In late March, on the eve of an investor meeting at the Corinthian hotel in London, several of the firm’s senior executives met with Private Equity International to explain how the unified firm is going about the pursuit of its goals.
LOCAL AND CENTRAL
Abraaj’s ‘growth markets’ are not just the BRIC countries, although the firm does have offices in the Indian cities of Mumbai, Chennai and Kolkata, as well as in China’s Shandong Province. They also include many smaller markets in Latin America, Sub-Saharan Africa, Central Asia, MENA, South Asia and East Asia. Thanks to the merger, Abraaj has a more expansive collection of local representations in these territories than any other private equity firm.
In creating such an extensive infrastructure, Abraaj has placed a bet that private equity is well placed to benefit from the long-term growth that its target economies are forecast to generate.
According to Naqvi, there is no question that investors around the world are increasingly drawn towards investing in high-yielding strategies: “There is now a widespread quest for absolute returns, and with it comes a necessity for investors to move off their benchmarks. More capital will be allocated to growth strategies, which will also drive greater allocations to private equity in global growth markets.”
If you accept that growth-focused private equity is set to play an increasingly important role in investor portfolios, the next question to ask is which models and structures at the investment manager level are best suited to generate the intended results. Abraaj’s contention here is twofold.
The first point is that a manager needs to be physically present in all the markets it wants to do business in. “For firms without the local presence in a given market, it’s a harder push to go into the $25-35 million growth capital opportunities that we’re able to access because we are there,” says former Sev Vettivetpillai, now a partner based in London and serving on the investment and executive committees.
The second principle Abraaj subscribes to is that to enable each investee company to realise its potential, regardless of where in the world it is situated, it helps if the investor can deploy a set of standardised value creation and performance management tools consistently. Abraaj says it can do this well: “Because of the scale we’ve created, we can support the local investment teams with higher-level execution and operational capabilities from our regional centres,” adds Vettivetpillai.
The point is not that other modern-day private equity houses don’t focus on value creation, portfolio optimisation, risk management and socially sustainable investment too; they do. The point as far as Abraaj is concerned is that no-one else has put resources in place to do it in so many different emerging markets.
As a result of the integration work done during the past year, there are now six regional centres, or ‘hubs’ in Abraaj parlance, each led by a regional head: Bogota, Dubai, Istanbul, Nairobi, Mumbai and Singapore. From each of them a number of globally oriented ‘functional’ teams provide a variety of value creation, risk mitigation and portfolio enhancement services to the local deal teams and the businesses they manage.
For example, the firm has a dedicated performance acceleration group with a mandate to support each investee company from the due diligence stage through to exit (see ‘Connecting dots’, p. 37). It also has a focus on ESG-compliant investment management techniques and, since 2008, has measured their impact on portfolio businesses using a proprietary sustainability index. There is a central risk and internal audit team, a compliance team, as well as a finance and support services division.
Mustafa Abdel-Wadood, who is based in Dubai and chairs the firm’s management executive committee, says the combination of local knowledge in the six regions with globally consistent processes has also created an environment where the firm’s professionals share knowledge across markets, for instance by helping each other with their exit planning: “Being present on the ground across growth markets means proximity to the acquirers and consolidators that are now coming from within these markets.”
To make it all work, the firm has a governance structure that provides oversight both at the group and the funds level, while at the same time aiming to let the investment teams at the local level go about their investment work with as much autonomy as possible.
Josh Lerner, a professor of investment banking at Harvard Business School who joined an Abraaj advisory board in 2007 and was appointed Dean of the Abraaj Academy in 2010, says watching the firm “institutionalise” over the years has been compelling viewing. “When I first met them their manner was a lot more informal, the decision-making more dynamic and ad hoc. Since then they’ve obviously shifted geographically, and they’ve also made a huge investment in the kind of processes and capabilities you’d associate with the largest global firms.”
Diana Noble, CEO of Aureos’ co-founding investor CDC Group, says: “Abraaj has been very thoughtful about how they allocate resources and where they place their people to allow them to both keep the local networks and knowledge that were so effective in the Aureos days, yet be operationally effective in supporting their local teams. Of course this is a change and we’re staying close through this evolution.”
Naqvi, whose responsibilities include chairing the investment committee that approves all investments everywhere, says he has visited all 33 offices since the merger and keeps desks in London and Singapore as well as Dubai. He believes that the model ultimately satisfies the two most important requirements for success: “Everything depends on having clarity about the markets you’re in, plus the quality of the engine you use.”
Ask any of the firm’s regional heads about how the new structure is working in practice and what the merger has done to their ability to do business, and the likely answer is that improvements to the pre-merger days are already evident.
Davinder Sikand, who is based in Nairobi and heads the hub for Sub-Saharan Africa, says his team can now participate in a much broader range of mid-market transactions, from $10 million to $100 million of equity. He says: “Competition in the region has increased enormously relative to when we started 15 years ago, and I expect it to increase further. This is why we had to create a business that was relevant, and the coming together of Aureos and Abraaj has created a relevant player that can take on future competitors.”
Ashish Dave is the regional head for South Asia, where the firm has invested about $164 million to date and is looking to invest more. He says: “What the transaction has enabled us to do is to differentiate ourselves in competitive bid situations. Currently, we’re considering an investment in a specialist healthcare business in South India for example, and our experience of having invested in a similar business in Africa gives us a significant advantage when analysing the opportunity and credibility with the entrepreneur.”
Ahmed Badreldin, who heads the MENA hub and is based in Dubai, also notes how the firm’s global network gives it differentiation potential in the dialogue with prospective investee companies. “In MENA, given our heritage, we’ve always been the dominant private equity provider. But we can now help regional businesses diversify away the country or regional risk by expanding into new markets, which others in the region cannot access as easily and effectively as we can. Post-Arab spring, that’s an important advantage.”
WHAT DO LPS WANT?
Just like Abraaj says it can take “a business in Papua-New Guinea all the way into a new market in Peru if needs be” (Vettivetpillai), it also wants to give investors access to its full geographic reach.
As Abdel-Wadood describes it: “Think of us as a conduit for LPs into these markets: one reliable counter-party with one set of reporting; one firm which has invested substantially in both the teams on the ground and globally shared resources, which for the beyond-BRICs markets very few people have done.”
It is clear that with its emphasis on different funds deploying capital in different regions and industry sectors across private equity, as well as related strategies such as infrastructure and real estate, Abraaj wants to help investors structure their growth market exposure depending on their specific needs and appetites. Rather than bundling individual LP commitments into a one-size-fits-all global vehicle, the firm aims to offer a mix-and-match approach, where the LP is invited to decide which Abraaj fund or funds can add value to the already existing portfolio.
“We believe we can be a proxy to how LPs think they want their money invested,” is how Naqvi makes the point. “If an investor says to us, ‘I’m interested in sub-Saharan real estate, and I want Asia but not India’, then we can probably help with that. We’re like a virtual fund of funds, without the extra layer of fees.”
Harvard’s Lerner says this approach chimes with the trend in private equity of investors pulling away from the industry’s traditional way of doing things, where the general partner was given maximum discretion over the committed capital. “Nowadays LPs want much greater control over their destiny: direct investment, co-investment, separate accounts, the ability to opt in and opt out.” Abraaj’s multi-fund strategy is designed to appeal to these desires.
MORE TO COME
No corporate expansion push ever quite finishes, and Abraaj’s will be no exception. With only a relatively small outpost in China at present, and none in Brazil and Russia, there are some white spots on the growth markets map still left to colour in.
At this point, its appetite for growth by acquisition is well proven (in 2011, before the Aureos transaction, Abraaj took over a team managing North Africa-focused funds from Amundi; prior to that deal, the firm had reportedly considered an equity purchase in Citadel Capital, a MENA-focused private equity house listed on the Egypt Stock Exchange; Abraaj also purchased MENA-focused VC firm Riyada Ventures in 2009, forming the basis of its SME platform). And with several hundred emerging markets-based managers currently pondering their future in a hardening fundraising environment, it seems inevitable that further add-on opportunities will come along.
“We’re constantly looking to enhance the platform, constantly looking to enhance the quality of the team,” says Naqvi.
Arguably the most important challenge facing the firm today is to build up its asset base to match the expansive infrastructure. Any back-of-the-envelope reflection on basic industry metrics would suggest that a platform as wide and as deep as Abraaj ‘s can carry more than $7.5 billion of capital before it is fully utilised. The investment the firm has made in its architecture has evidently been a forward-looking one, so the next step is to demonstrate to investors that the result is indeed a superior investment machine capable of delivering market-beating returns.
MENA head Badreldin describes the task thus: “It’s a matter of demonstrating in dollar terms our value-add to portfolio companies.”
With every additional dollar it raises, the firm will have to demonstrate not only that it can invest it better than other private equity groups, be they single-country or of the pan-regional variety; it must also cope with competition from other types of investors with big ambitions in growth markets such as multinationals, family enterprises and sovereign funds – especially those with strong local connectivity and a lower cost of capital.
These are no small tests. An awareness of them is implicit in what Naqvi told the firm at the March town hall meeting in Dubai: time to execute, everyone.
The Abraaj Portfolio Acceleration Group is there to drive the firm’s value creation strategy in all markets
Wahid Hamid joined Abraaj in 2012, after working for many years in senior management roles at PepsiCo and Boston Consulting Group, to build and run the Abraaj Portfolio Acceleration Group (APAG). How important the firm considers the role to be is reflected in Hamid’s status as one of only four permanent members of the firm’s investment committee, alongside Naqvi, Vettivetpillai and Abdel-Wadood.
Hamid says: “It’s all about growth and scaling businesses rapidly but in a sustainable way. After the merger with increased scale across the group, it’s much easier to connect the dots across regions and sectors and make the teams operating in different parts of the world even more effective than before.”
Hamid believes that at this point in the firm’s development, some more education may still be needed to make sure different types of investor understand the APAG concept equally well. “At the moment there is generally good receptivity to it since the industry overall has moved in this direction over the years, and LPs investing in OECD private equity know all about the merit of globally consistent processes. Some investors on the other hand need some convincing that you can get the right balance between local autonomy and global support, and the more we demonstrate that we are enhancing local effectiveness while accelerating value creation, the more comfortable they get.”
APAG has three main objectives to fulfill. The first is to develop and implement the portfolio management tools and processes for the local deal teams. Secondly, the group engages directly with the individual portfolio businesses on the ground, and thirdly, it helps discover and exploit synergies between portfolio companies in different geographies and sectors.
To do this work, APAG is headquartered in the Dubai office where it has a core team of eight staff. In addition, between two and three APAG specialists sit in each of the firm’s other regional centres in Bogota, Istanbul, Mumbai, Nairobi and Singapore. Hamid spends roughly half his time shuttling back and forth between the six hubs.