Abraaj: a different perspective

Ever since news broke of irregularities at Abraaj, many articles, social media posts and WhatsApp messages discussing the collapse of the firm have been circulated. I don’t know how much of this has been fact vs. speculation, but what is abundantly clear is that in an industry where trust is paramount, the firm fell short. That said, I am uneasy at joining the many that seem to be taking pleasure at the turn of events. I am hugely concerned that this episode will result in a reactive, disproportionate pullback away from the markets in which Abraaj invested and from UAE/the DIFC as a financial hub for the Middle East, Pakistan, Africa and Central Asia. The measured response would be to treat Abraaj as a cautionary tale, not let this crisis go to waste, and instead ask the right questions that will help us continue to direct capital to these worthy markets.

Abraaj reinvented itself several times, focusing on buyouts in MENA, then MENASA, then minority equity investments regionally, and finally growth capital in global growth markets. Led by its ambitious founder and team, the firm quickly outgrew the initial opportunity where they had initial success, seeking a model and platform that would attract global investors. In doing so, they successfully shed light on a large yet underserved segment of international finance. For the first time, it seemed, businesses across the Middle East, Pakistan, Africa, Levant, and Egypt were able to access international private capital. 

This benefitted companies, helped diversify LP investor portfolios, advanced development goals, and no doubt enriched the general partners. At various points there were rumors of poor culture, staff turnover and questionable performance, but the headlines were on fundraising and on hobnobbing at Davos. The perceived brashness and hubris were at odds with the image of the “usual” EM investors, and while this bothered some, it may also have attracted others.

While I can’t say I’m surprised at how quickly this has unraveled, I am concerned that a funding gap will result for good businesses in these markets, the people they employ and the cities and countries they serve. Many of these markets are at a critical development juncture where they need access to an array of financing tools and alternative sources of capital. There is already a concern that public sources of funding (DFIs, EXIM banks etc.) might be curtailed given a more protectionist agenda in developed economies, while the global retrenchment of traditional lenders continues and broader quantitative tightening takes hold. 

Abraaj, to give them credit, identified that urban centers and the consumer class are the powerhouse of emerging markets, and the future world. They argued passionately that while macroeconomics and geopolitics must be considered, there are strong players in these markets that are largely insulated through growth and hedged by business-model innovation. They realized that investments need to be sourced and managed locally by people who know the markets, personalities and cultural nuances best. They also recognized early that the UAE can serve as a base from which to raise and direct investor capital, taking advantage of transport links, tax efficiency, infrastructure, and a pro-business agenda.

Going forward, everyone can do better.  New managers need to emerge, learn lessons from Abraaj (good and bad) and innovate to provide investors access to the opportunity while not compromising on ethics, corporate governance or other global standards. The funds that Abraaj manages/managed own some strong companies that will need more funding and support. Who will provide this? There were and are plenty of good, solid people at Abraaj. Who is going to back them? How should investment teams be structured and compensation distributed? It is possible that the GP/LP structure that is common in developed markets where there is greater transparency (reporting, valuation), liquidity (exits), and alignment (institutional ownership) is not best-suited for these markets. What fund structure would work best? It is possible that private debt / mezzanine is a superior alternative to private equity in these geographies. How can this asset class be expanded for these markets?

These are the discussions that we should be having as we build from here.

Note: These views are my own. I don't have any inside information or knowledge etc., but am merely an interested market participant. I am not absolving Abraaj of blame or wrong-doing, instead I am proposing a more constructive and measured approach as we make sense of it all.