Fall of Abraaj jolts African private equity

The collapse of one of the best-known fund managers operating in sub-Saharan Africa has shaken investor confidence in the continent’s once booming private equity industry. Shoshana Kedem reports.

In 2018, the collapse of one of the world’s largest emerging market investors, the Dubai-based Abraaj Group, sent shockwaves through the private equity industry.

Once the Middle East and North Africa’s largest manager of buyout funds, Abraaj’s collapse has led to uncertainty over the future of millions of dollars worth of its African investments, and shaken investor confidence in emerging markets.

As one of the largest fund managers operating in sub-Saharan Africa, allegations that it mismanaged funds have left high-profile investors reeling and some funds on the continent struggling to raise cash.

As liquidators continue picking over the remnants of the firm’s sprawling empire, experts say the affair may cause lasting damage to the private equity investment climate.

“It has done damage to the investment environment in Africa. In the old days we used to say the aristocrats of private equity investing were Helios, Actis and Abraaj, and one of those has imploded – that can’t be good for African private investing,” says Rob Hersov, the founder of Invest Africa, which supports private and institutional investors and funds looking for opportunities in Africa.

Towers of debt

Abraaj, meaning “towers” in Arabic, started out as a small Middle East investor founded by Pakistani businessman Arif Naqvi with $3m in capital in 2002.

Over 16 years of operations, the firm carved a name for itself as one of the developing world’s most influential investors, closing a US$990m Sub-Saharan Africa fund in 2015.

The group’s fortunes started to unravel in early 2018 when allegations that the firm was mismanaging funds were leaked to the press, shattering investor confidence. Four months later Abraaj filed for liquidation in the Cayman Islands, owing a combined $1bn to creditors and becoming the world’s largest private-equity insolvency case.

US prosecutors have launched a criminal probe into the collapse. Charges against three senior executives on 14 June followed the earlier arrest, charging and bailing of three other executives, including Naqvi, who is alleged to have misappropriated $250m.

Winding up

As liquidators PwC and Deloitte continue the process of recovering the assets of Abraaj’s sprawling empire, the futures of some of its Africa holdings remain uncertain.

At the time of its collapse Abraaj had funds spanning Africa, Asia and Latin America with over $14bn in assets. Its sub-Saharan Africa investments totalled over $2bn, spanning Nigeria, Ghana, Côte d’Ivoire, South Africa and Kenya. Abraaj had a shareholding in eight Nigerian companies including Indorama Eleme Fertilizers and mattress manufacturer Mouka Ltd.

Accounting giant PwC, appointed as liquidators of Abraaj Holdings, did not respond to requests from African Business for comment on the process or its timing.

One of Abraaj’s former rivals, emerging markets investor Actis, launched a bid to take over Abraaj’s Africa funds in September.

Two months later, in November, Hamilton Lane, an investment management and advisory firm that invested in certain Abraaj funds said London-based Actis was still “collecting consents” from Abraaj investors for the acquisition of 75% of Abraaj’s assets.

The UK firm needed the approval of a significant majority of Abraaj’s fund investors to take over the management of the funds.

“The remaining 25% of the assets are in two underlying funds; one of which is in the process of selecting a replacement fund manager. And the second is a fund with only two remaining assets, both of which are in process of being monetized,” a Hamilton Lane executive said during the firm’s 6 November earnings call, as reported by Pensions and Investments newspaper.

When African Business went to press Hamilton Lane had not responded to requests for an updated timeline, with the liquidation of Abraaj’s remaining assets shrouded in mystery.

Actis was also poised to buy Abraaj’s $1.6bn Private Equity IV fund, operating in Asia and Africa. However, the firm ran into resistance from rival bidder Falcon Flight, who are looking to block Actis’s bid. Falcon, who are investors in Abraaj IV, said in a letter to fellow investors in the fund dated 8 February, “we strongly recommend that you reject Actis’ offer”.

In an email to African Business, Actis said they were unable to comment on anything surrounding the Abraaj transaction due to confidentiality clauses.

In May US private equity firm TPG was appointed to take over the management of Abraaj’s $1bn healthcare fund, operating in South Asia and Africa. The newly named Evercare Health Fund will continue providing healthcare across the regions, the members of a Limited Partner Advisory Committee said in a written statement at the time.

Limited partners in the fund include the Bill & Melinda Gates Foundation, the Overseas Private Investment Corp, IFC, CDC Group, Proparco, Philips and Medtronic.

This year Actis also got the nod to acquire Abraaj’s Kenyan assets, including a 90% stake in East African coffee shop Java House, and a 10% stake in Brookside Dairy Africa.

Limited damage

Since the announcement, the coffee house has injected KSh1bn ($10m) into its growth plans in a bid to cement its position as the number one restaurant chain in East Africa.

Building on its 63 stores across the region as well as an Italian Pizza chain, 360 Degree Pizza, and self-service frozen yoghurt store, Planet Yogurt, Java House is also following through with expansion plans to bring 25 new restaurants to Uganda and a dozen to Rwanda over the next five years, suggesting that the affair’s damage may be temporary for some companies. 

But the scandal has left investors sceptical about entering the continent’s once booming private equity industry, says Rob Withagen, the CEO of Asoko Insight, a database of African private companies used for due diligence.

“LP’s [Limited Partnerships] were already sceptical about their first interaction with a new fund, and are now going to be even more sceptical given that Abraaj, a really established, respectable brand name, were severely mismanaging the funds.”

The affair will add another layer of scrutiny to already stringent due diligence checks, limiting the supply of capital going into new funds in Africa for some time, he says.

“The main damage is on the ability for new funds to raise money. They’re just going to be regarded with an extra scepticism that already they were struggling to overcome, but that’s a temporary thing.”

Keeping the flag flying

While some investors in Abraaj have been burned, Hersov says firms like Helios and Actis have “kept the flag flying” for private equity in the region.

As Actis consolidates its position as one of the biggest fund managers on the continent, rival firms such as Africa-focused private equity investors Helios have unveiled plans for their biggest pan-African fund yet, which hopes to raise $1.25bn for African investment.

“We’ve seen a number of new funds announcing themselves since then – LeapFrog just raised another fund, Actis is consistently raising funds – all these guys are ploughing along, and I think that is starting to take dominance over the Abraaj affair,” Withagen says.

The affair has created a vacuum for fund managers on the continent, giving rise to the emergence of smaller funds to bridge the gap, Withagen says.

“We’ve seen a very interesting rise of smaller fund managers, particularly focused on parts of the continent rather than covering everything under one fund. They are much more adapted to the opportunity that exists and have put in place tremendous corporate governance standards…

“Abraaj was an exception. It’s encouraged everybody in the industry to work a little bit harder, just to distinguish themselves from the potential stigma that Abraaj might be inspiring.” 

Following the publication of this article in African Business Magazine’s July Issue Actis released the following statement:

Actis has assumed management rights on Abraaj Private Equity Fund IV (APEF IV), a global buyout fund, and Abraaj Africa Fund III (AAF III), a fund for investment in sub-Saharan Africa

The transaction includes 14 portfolio companies and strengthens Actis’ existing market position and team in Africa and the Middle East

“Actis was invited to step in to help provide a solution that would be acceptable to both the Limited Partners (“LPs”) of the two funds and the liquidators of the Abraaj estate. Following a process that was extremely complex with multiple stakeholders, the solution put forward by Actis garnered strong support and received official approval from LPs in July.

“The transaction, which includes investments in 14 portfolio companies across the two funds, further strengthens Actis’ existing market position and team in Africa and the Middle East. The combined private equity team is now 40 strong, having added investment professionals to the Nairobi, Johannesburg, Lagos offices in addition to Singapore and London and a new office in Dubai to the network.

This Abraaj transaction further bolsters Actis’ footprint in the growth markets and follows the addition and integration of Standard Chartered’s Principal Finance Real Estate business in Asia in 2018 which included 20 new team members and new offices in Shanghai and Seoul.

Actis now has US$12 billion under management and over 250 people across 16 offices.

Andrew Newington, Actis’ Chief Investment Officer, who led the process, commented: “When a number of investors asked us to step in to be part of a solution in mid-2018, we sought to respond constructively. A dedicated team from the Actis platform put forward a comprehensive and flexible proposal. We are pleased that investors have entrusted us with the stewardship of their portfolio and our focus is now on delivering on our plan to drive value on their behalf.”

Torbjorn Caesar, Senior Partner at Actis, said: “We are pleased to have arrived at the best solution for investors and for our markets after a long, complex process. Going forward, we look forward to drawing on our 70-year heritage in Africa and across the growth markets, and fulfilling both our fiduciary duties to our new and existing investors and our responsibilities to the countries, cities and communities in which we operate.”