DUBAI - Some investors in funds managed by Dubai-based Abraaj want to block the sale of assets to Colony Capital pending a review of Abraaj's handling of funds, according to a report seen by Reuters, potentially delaying a deal key to the survival of the investment management business.

United States-based Colony offered last month to buy the fund management unit that runs Abraaj's Latin America, Sub Saharan Africa, North Africa and Turkey funds after months of turmoil at Abraaj triggered by a dispute with investors over the use of their money in a $1 billion healthcare fund.

Abraaj denies any wrongdoing, but the row has weighed heavily on the Middle East and Africa's largest private equity firm, which filed for provisional liquidation in the Cayman Islands last month.

A review of Abraaj's handling of investor money is likely to delay the Colony transaction, according to a report by Abraaj Holdings' provisional liquidators, PwC.

The sale of some or all of Abraaj's fund management business, Abraaj Investment Management (AIML), is seen as critical to the business avoiding financial collapse.

However, the PwC report also said other potential bidders had expressed interest in AIML assets, and at least two of them were viable alternative deals. One of those suitors is Cerberus Capital Management, sources familiar with the matter said.

PwC and Abraaj said they could not provide any public comment on the report. Colony declined to comment. Cerberus did not immediately respond to requests for comment.

The PwC report said certain limited partners had expressed concerns over the Colony deal and that they wanted a review of the funds before agreeing to a sale of Abraaj Holdings' limited partners' stakes. It did not identify the limited partners.

The review is being requested to "understand if there has been any unknown misappropriation of cash in the funds", said the PwC report dated July 11.

It said the uncertainty was causing Abraaj's investment platform to be unstable and that there could be significant dilution in the value of Abraaj's limited partners' stakes in the short term.

"Time is of essence given AIML does not have any cash," the report said, adding AIML was reliant on Abraaj Holdings for funding and was accruing operational costs.

Abraaj has been battling allegations by investors including the Bill & Melinda Gates Foundation and International Financial Corp that it misused money in the healthcare fund. The Gates Foundation and IFC have declined to comment on the row.

The dispute has led to a halt in Abraaj's fundraising activities and a series of managerial shake-ups as it tackled ensuing debt repayment problems.

Abraaj's total debt stood at $1.07 billion, the PwC report said, including $501.4 million in unsecured debt and $572.4 million secured debt. It said Abraaj borrowed to cover a liquidity shortfall caused by insufficient management fee income and carried interest between 2014 to 2017.

Once Abraaj’s assets have been sold and debts cleared, the remaining value was estimated at $147.7 million, according to the report.

It added that Abraaj's total assets stood at $1.06 billion.

"It should be noted that certain creditors have security positions in excess of the principal debt due," it said.

"In this regard, it is possible that total unencumbered assets available to the provisional liquidation estate exceed this amount."

The report said Colony's offer was $229.3 million to buy the company's management rights and limited partner stakes of six funds and that, as there had been other expressions of interest, provisional liquidators were also looking for alternative solutions to stabilise the platform as quickly as possible.

The PwC report said Abraaj faced three broad outcomes.

One was to continue negotiations with Colony, another was to replace AIML with a new investment manager and the third was to discontinue AIML, it said.

The report also said the provisional liquidators had been unable to obtain standalone annual financial statements or management accounts for the company, adding that "it is highly irregular for there not to be standalone monthly management accounting reporting and standalone audit reports."

"This lack of financial record-keeping raises the question of how the company's directors were able to ensure the company was solvent and being effectively managed," it said.

(Editing by Mark Potter and Elaine Hardcastle) ((; +971 44536787; Reuters Messaging: