London/Dubai/Abu Dhabi: Days before rubbing elbows with global business titans in Davos in January, Arif Naqvi set out to charm another circle of friends—Gulf Arab tycoons—in a last-ditch attempt to save his Dubai private equity firm.
But things were already on the cusp of spiraling out of control. Dogged by allegations Abraaj had mismanaged investors’ money, Dubai’s star financier soon couldn’t pay the rent. After Naqvi, 58, surrendered control of Abraaj in June, it was revealed that for years, its main revenues didn’t cover operating costs. Abraaj borrowed to fill the gaps and now owes creditors over $1 billion. Once lenders turned off the taps, the firm collapsed, leaving losses, lawsuits and shattered reputations in its wake.
Abraaj’s reliance on multiple levels of leverage created a “highly unstable" business model that’s unusual for the private-equity industry, the court-appointed liquidators that are dismantling the firm said in a report dated July 11 and seen by Bloomberg.
After analysing the documents they could get their hands on—since some went missing—investigators at PricewaterhouseCoopers said Abraaj’s use of loans to cover operating expenses left it “sensitive to volatility and potential liquidity crises." They are now selling Abraaj assets to pay creditors and investigating allegations of “mismanagement, commingling of funds and misappropriation of assets."
Naqvi declined to comment, while the firm defended its use of leverage. Borrowing was a necessity because most of its clients, especially early on, were family businesses that weren’t always timely in making payments, according to an e-mailed statement from Abraaj. “In hindsight, the pace of growth should have been more measured," the statement said. “The back office was not keeping pace in terms of sophistication or best practice." Back-office operations encompass things like record maintenance and accounting.
Abraaj’s spectacular demise has dealt a severe blow to Dubai’s reputation as a global financial centre. It rattled the trust of investors who included Bill Gates, the International Finance Corp. and US and UK government agencies, triggered defaults on loans from at least 10 sources and set off lawsuits in the UAE and Turkey.
The chronology of the collapse, drawn from conversations with about a dozen people with direct knowledge of the company, lays out how rapidly things fell apart for Naqvi, the suave Pakistani entrepreneur who built Abraaj from the ground up in the past 16 years only to see it crumble in under 10 months.
A fixture at the annual World Economic Forum in Davos, Naqvi had crafted Abraaj’s image as the face of Middle East private equity. Starting with $3 million of capital and $60 million of assets under management in 2002, it grew by leaps and bounds.
At one point it managed almost $14 billion of assets for investors like the Bill & Melinda Gates Foundation and the retirement fund for teachers in the state of Texas. Abraaj oversaw funds from 18 offices in emerging markets spanning Latin America, Africa and Asia—a network that several US investors have since tried to buy at fire-sale prices.