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Abraaj founder Arif Naqvi scrambles as empire teeters

Simon Clark, William Louch & Nicolas Parasie | The/ 12 Jun 18 | 02:05 AM

Arif Naqvi wooed the likes of Bill Gates, the World Bank and U.S. pension funds with an ambitious pitch: Invest in his emerging-markets funds to make money—and help poor people, too.

Now some investors in the funds of Abraaj, the Dubai-based private-equity firm he founded, are alleging the company misused some of the nearly $14 billion it managed, and a lender is suing for an unpaid debt. Mr. Naqvi is trying to keep his firm afloat and defend his reputation.

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The 57-year-old Pakistani deal maker was in crisis talks last week. Buyout firm Cerberus Capital Management offered $125 million for Abraaj’s fund-management unit, people familiar with the offer said.

A regulatory delay in the sale of a $1.77 billion stake in a power plant Abraaj controls in Karachi, Mr. Naqvi’s native city, has made his cash-flow problems worse.

“We have been working relentlessly with all our investors, creditors and regulators round the clock," Mr. Naqvi said in a written response to interview questions from The Wall Street Journal. “We remain committed to working through this in a confidential and coordinated way, towards a satisfactory outcome for all parties."

He denies wrongdoing.

His woes began this year when the Bill & Melinda Gates Foundation and other investors hired a forensic accountant to look into possible misuse of money they had put into a $1 billion Abraaj health-care fund, according to people familiar with the audit.

The audit found that Abraaj didn’t spend all of the money on hospitals in countries including India and Nigeria as promised, two of these people said. Instead, the audit showed, it transferred some money out of the health-care fund, these people said. The audit didn’t show what the money was specifically used for, they said.

Abraaj has said money moved out of the fund, the Abraaj Growth Markets Health Fund, was used for its stated purpose or returned to investors.

The firm also said that a separate audit it commissioned, carried out by KPMG, found that all the money in the health-care fund was handled “in line with the agreed upon procedures."

Mr. Naqvi said in a telephone interview that the dispute was caused by differing interpretations of Abraaj’s agreement with investors. “We felt we were within our rights to interpret it the way we wanted," he said. “In hindsight would we have done things differently? Possibly."

Abraaj told investors in May that it used money invested in another fund for general corporate purposes, people familiar with that fund said.

Also in May a Kuwaiti pension fund asked a court in the Cayman Islands to declare an Abraaj company based there insolvent, alleging that it was unable to repay a $100 million loan. A spokesman for Abraaj said the firm is trying to reach a “consensual outcome" with the lender. A court hearing for the bankruptcy case in the Cayman Islands is scheduled for late June.

Some former employees said in interviews that as Abraaj’s leader, biggest shareholder and its driving force, Mr. Naqvi had a dominating attitude that laid the groundwork for trouble.

Several of these former employees blame the problems on what they say was Mr. Naqvi’s overly ambitious expansion beyond Middle East deals.

In response, Mr. Naqvi said he is proud of the firm’s recent attempt to raise the biggest emerging-markets private-equity fund. Mr. Naqvi said Abraaj “has always been a partnership, a winning team," rather than a “one-man-show."

“People who interact with Arif love him or hate him," said Fayez Husseini, a former Abraaj manager.

The reversal of fortune is a startling turn for Mr. Naqvi, whose rise came by challenging the perception that emerging markets are riskier than Western markets as places to invest, a view he called patronizing.

“Dare I say it, cheekily, that when risk came into the global financial system and into all our lives it came from right here, in New York City, in 2008 with the Lehman Brothers crash," he said at a conference in New York in September.

Mr. Naqvi studied at the London School of Economics, where he was once reprimanded for smoking in a common room, he said in a lecture in 2013. Acknowledging the power of money, he said he returned to the university after 25 years to make a donation and asked to smoke during a dinner. “Absolutely," he said he was told.

After graduation he joined the now-defunct accounting firm Arthur Andersen. Stints at American Express Co. and Saudi Arabia’s Olayan Group followed. He set up in Dubai as an investor in 1994, and in 2002 he founded Abraaj, which means “towers" in Arabic.

Abraaj’s first investors were wealthy Middle-Eastern families who, Mr. Naqvi said, “often sent us money in large chunks and said, deploy it as you wish." He raised bigger funds on the back of successful investments and hired hundreds of staff, including butlers.

Abraaj earned more than four times its investment in five companies sold by 2007 and reported net annualized returns through 2016 of 17.9%, company fundraising documents show.

To expand Abraaj’s investor base and geographical reach, in 2012 Mr. Naqvi led the takeover of Aureos Capital. The London-based private-equity firm had raised funds from Western institutions including the Gates Foundation. Soon afterward, the Gates Foundation joined with Mr. Naqvi’s foundation in Pakistan on a family-planning project.

Mr. Naqvi gained prominence sponsoring Dubai’s art exhibition and by entertaining investors lavishly with performers including Tina Turner. He signed the Giving Pledge—a charitable drive by Bill and Melinda Gates and Warren Buffett —after starting a $100 million charity in Pakistan.

Honors rolled in, including Pakistan’s Sitara-i-Imtiaz award and the Oslo Business for Peace Award.

He traveled by private jet and bought a yacht, a Dubai home with billionaire neighbors and a $12.7 million mansion near Blenheim Palace in England.

His competitive streak showed in a onvocation address last July to students in Pakistan. He told a story about a lion that encountered two people, prompting one to put on running shoes and say, “‘I’m only putting them on so I can run faster than you’—and that’s an important point," Mr. Naqvi said, according to a copy of his speech.

By 2017, he was seeking to seal his legacy by raising $6 billion for what would have been the biggest emerging-markets private-equity fund. Teachers’ Retirement System of Louisiana and Washington State Investment Board agreed to invest.

Then everything changed. News of the investigation into the health-care fund in February caused “turmoil" as it “unleashed the floodgates" of investors asking Abraaj what was happening at the firm, Mr. Naqvi said in the telephone interview.

Mr. Naqvi released investors from their pledges to the new fund. James Napper, a trustee of the Louisiana teachers’ pension plan, when asked whether he would consider investing in a future Abraaj fund, said he has a “personal unwritten rule" when considering investments: “If the fund has had some kind of prior problem that I don’t fully understand, no I wouldn’t."

Amid such concerns, Mr. Naqvi stepped back from managing Abraaj’s fund-management unit and put it up for sale.

He remains the largest shareholder in the Cayman Islands-based company that owns the fund-management unit. Deutsche Bank AG , among the investors in the Cayman Islands company, declined to comment. Mr. Naqvi said sale talks are “advanced."

                                

It is a challenging situation, even for a man who frequently emphasizes the importance of humility with a remark he repeated to the Journal. “Today’s peacock is tomorrow’s feather duster."

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