Story of the year: Abraaj’s downfall and what it means for PE governance

The firm's swift fall from grace this year provides a compelling reason for LPs to conduct thorough scrutiny of governance practices.

If there is one story that continuously made the headlines this year it is the downfall of Abraaj Group.

Once the darling of emerging markets private equity, the Dubai-headquartered firm took just six months to go from the Gulf region’s largest private equity firm with around $14 billion in assets under management, to facing provisional liquidation with its various regional fund platforms being sold off to global buyers.

Reports emerged in February that limited partners in Abraaj’s $1 billion Global Healthcare Fund had hired auditors to trace capital that was to be invested in medical projects in India, Pakistan, Kenya and Nigeria. Within three weeks, founder Arif Naqvi had stepped aside and the following month the firm had suspended fundraising.

Numerous private markets investors including TPG and Cerberus Capital Management then threw their hats into the ring for Abraaj’s fund platforms. As of late November, Colony Capital, Brookfield Asset Management and Actis were the latest firms to be eyeing Abraaj’s regional investment teams and their assets, according to creditor documents seen by Private Equity International.

So how could emerging markets private equity’s biggest and best-known firm implode within such a short amount of time, and what lessons have been taken from the episode? Market sources point to the need for increased due diligence on managers – both developed and emerging markets alike.

“Abraaj’s issues are not about markets, they’re about governance and GP structure,” said Neil Brown, head of Actis‘s investor development group. “Most sophisticated LPs get that.”

Regardless of how thorough their governance scrutiny was before, further transparency about manager overheads must be inevitable, as we wrote in July.

Of course, as Ahmed Badreldin, Abraaj’s former head of MENA, wrote in a guest commentary for PEI in October: “you can have all the processes and systems in place, but in the end it’s all about the people implementing these and the appropriate third-party checks to make sure what is being preached is being practised.”

The way that LPs work with GPs has to change, and while it may at times seem that investors are not in a position to do this, Abraaj’s swift fall from grace this year provides a compelling reason to try.