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(The date of the start of the Arab Spring in Tunisia in paragraph six has been changed).
The downfall of the Middle East’s biggest private equity fund this year will most likely have a negative impact on investment flowing into the region’s private equity funds over the coming years, according to experts.
“Definitely, this one is going to remain for the next three, four, or five years… But there are other players. It is not one industry, one player,” Anthony Hobeika, the chief executive officer of Dubai-based MENA Research Partners told Zawya on the sidelines of the Super Return Middle East conference. The conference, held in Abu Dhabi last week, is part of an international series discussing regional trends in the private equity and venture capital markets.
Abraaj’s story started 24 years ago, when an ambitious Pakistani businessman, Arif Naqvi, came to Dubai in the early 1990s with a positive outlook on emerging markets. He set up the Abraaj Group in 2002, and for many years it was the Middle East’s biggest and most respected private equity fund manager until its collapse earlier this year, which followed allegations that it had misused investor’s funds.
Click here to view a timeline on Abraaj’s downfall.
“From the private equity players’ perspective, there is a global fight for capital, to attract LPs, (limited partners, who are the main investors into private equity funds), investors especially during hard, tough economic times. So you are in the worst case, to be able to attract (investments) and now Abraaj has stamped the MENA region,” he added.
Over the past seven years, many Arab countries have struggled with their economies, mainly due to the eruption of the Arab spring protests starting in Tunisia in 2010, then in Egypt and Libya in 2011, as well as a sharp drop in oil prices in 2014 and 2015 that has negatively affected the economies of Gulf Cooperation Council (GCC) countries.
Ziad Al-Qaimi, chief investment officer in the Dubai-based, family-owned Kimera Middle East group and a partner in London-based investment firm Calibrate Capital, said that the Abraaj case has generated global attention, but it has not shaken investors’ confidence in the market, or its regulations.
“This caught a global attention on Bloomberg, internationally and everywhere… It will blow away after a year or two,” Al-Qaimi said.
“It will not affect the family business(es)…. But for LPs investing in the region, I don’t think it will stop them but they are going to be perhaps even more diligent when they are looking at funds from here (the Middle East region),” Al-Qaimi told Zawya on the sidelines of the Super Return Middle East conference.
Better oversight
Hobeika argued there could be one positive outcome on the industry as a result of the Abraaj case.
“Its direct impact (will be) to enhance the standards of the private equities in the region,” he said, adding that it will lead to more transparency and potentially new committees being formed to better supervise the private equity funds.
One thing that is not required is any significant change to Dubai’s legal framework, according to one banking and finance lawyer. Abraaj Group’s operational base was in Dubai International Financial Centre, which is regulated by the Dubai Financial Services Authority (DFSA).
Umera Ali, a partner at law firm DWF’s Dubai office, said that the DFSA “is really a good regulator and a very hands-on regulator”.
“Is there a room for improvements? I think if you look at any jurisdiction, I think there is room for improvement in every jurisdiction and that is what regulators do… This is the reason every law is amended and revised and looked at again and again and we hear about this all the time… because obviously as the markets change, the requirements change and the rules are constantly updated,” Ali said in a phone interview with Zawya on Wednesday.
“But I think DFSA actually follows very closely what FSA (The United Kingdom’s Financial Services Authority) has in England, so it is a pretty strong jurisdiction,” she added.
According to DFSA’s website, private equity funds are only open to specialist investors, and are led by managers who are not necessarily required to “entrust the fund property to an eligible custodian”, but they do have to appoint an investment committee to oversee the funds. They are also required to make certain disclosures on how the fund’s assets are held.
According to Ali, fund managers are appointed at the point of the incorporation of a fund and are usually a regulated entity supervised by one of the regulatory authorities such as DFSA. Asked if that meant that DFSA was in some way at fault for Abraaj’s fall, Ali said no.
“You don’t blame the SEC when there is a bad player in the U.S.,” she said. The SEC, or the Securities and Exchange Commission, is the regulator overseeing stock markets and other financial securities in the United States.
“You don’t say that the SEC has not done its job because it is the (entity) responsible that has committed the crime and that entity is to be blamed. It is not the regulator’s fault that this has happened…The responsibility of that is on Abraaj, it is the entity that commingled the fund,” she added.
Ali added that there is currently no proof that any crime has been committed at Abraaj, as there have not yet been any cases brought against the firm regarding its management of funds.
Al-Qaimi said regulations cannot guarantee that things will never go wrong.
“At the end of the day, we can’t ensure…. There is nowhere more regulated than the United States and you get things happening there all the time. See, you want to keep the balance between having good regulation that promotes good governance and transparency that attracts the people here, but not be too restrictive and then people won’t want to open funds in this region,” he said.
Abraaj’s History
According to an interview with Forbes in 2015, Abraaj Group’s founder and former chief executive said that he came to Dubai in 1994 with $50,000 in savings to start an investment advisory firm called Cupola. He raised $8 million for his first client, which was a duty-free kiosk and received $800,000 in advisory fees.
Naqvi, 58, a graduate from the London School of Economics, completed a deal to purchase another company for $102 million in 1999, broke it up and sold parts of the business for $173 million, according to the Forbes interview. After this, he founded Abraaj Group in Dubai in 2002.
Abraaj became a giant of the regional private equity scene, with $8.1 billion under management in over 200 different investments spread across four continents - in the Middle East, Sub-Saharan Africa and North and South America. Its investments ranged from a 500 megawatt natural gas power station in Mexico to an Indian online grocery company. Naqvi was not an exponent of what the west typically class as developed markets.
"We have taken the risk out of investing in what the west mistakenly calls 'emerging markets,'” Naqvi told Forbes during the interview. “They're growth markets," he said.
Now, only time will tell if the Middle East’s private equity market is resilient enough to shake off the impact of Abraaj’s collapse.
(Reporting by Yasmine Saleh; Editing by Michael Fahy)
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