NICHOLAS WALLER: Abraaj was once a trailblazing private equity fund, the largest in the world operating in emerging markets. Its staggering trajectory was unprecedented in a sector that, until then, was dominated by large incumbent players such as Blackstone, Carlyle and KKR. In its early days, the firm’s funds under management growth occurred at rates upwards of 100% year on year. Abraaj has turned over a 17% annual net return to investors since its inception sixteen years ago, and at its stratospheric heights managed a staggering US$14 billion worth of assets across Africa, Asia, Latin America, the Middle East, and Turkey.
Whether you call them ‘emerging’, ‘frontier’ or ‘growth’ markets, Abraaj embedded more than 300 staff in over 25 cities from Kenya to Colombia. Almost all of those working in local offices had roots in local communities – so by knowing exactly how to operate in those markets, Abraaj took the risk out of risky investments.
But Abraaj, led by its charismatic founder and chief executive Arif Naqvi, had its wings well and truly clipped in February 2017 when reports emerged of cash being drawn down from its billion-dollar healthcare fund, leading to investors demanding their money back.
Even though Abraaj had duly obliged by December and requested a forensic audit by KPMG to put everything in order, the requests had entered the public knowledge, eroding investor confidence and setting off a domino effect of similar demands that effectively pulled the plug on the group – especially in a sector driven by reputation. Allegations of “co-mingling” of cash between the parent company and funds derailed confidence, sending the firm into free-fall and eventually filing for liquidation.
The latest chapter to unfold in the Abraaj saga has been the publication in the Wall Street Journal of leaked emails to and from Naqvi. The WSJ alleges personal and professional misconduct, which Naqvi refutes outright. The manner of the leaking led some to speculate that the ongoing revelations are an orchestrated hatchet job to derail the sale of one of Pakistan’s biggest utility companies to Chinese owners.
Everything was going according to plan for Abraaj until 2016. By that point, it had one simple mission, which was to find a buyer for its jewel in the crown – a $1.8 billion majority stake in Pakistan’s K-Electric. This utility company serves the 22 million people of Karachi, Pakistan’s economic and cultural epicenter.
In 2008, it was a corrupt and unsustainable enterprise that had failed to make a profit in nearly two decades. It hemorrhaged billions in revenue and a significant amount of theft stopped energy from reaching the market – often in the poorest areas of the city. But ten years later, and after over $1 billion of investment through Abraaj, K-Electric had been transformed into a beacon of transparency and operational efficiency that had doubled its generating capacity.
When Abraaj announced in September 2016 that it had agreed to terms of the sale of K-Electric to Shanghai Electric Power, the deal suddenly became obstructed by stonewalling regulators and the refusal of authorities to rubber-stamp the deal on unspecified national security grounds. Shanghai Electric Power sought to extend the deadline to secure a deal. But for Abraaj, time was running out, because the government at the time was resigned to being kicked out of office at the next election.
The protracted wait had huge ramifications for this landmark deal – both for Pakistan and Abraaj. At stake was not just the balance sheet of a private equity firm, but also the essential national infrastructure for a country in dire need of further development. Without a new owner to consolidate its progress and advance its prospects, the prospect of turning around K-Electric was not assured and risked serious damage to the broader development prospects of Karachi and Pakistan as a whole.
Whether large and sinister geopolitical forces made Arif Naqvi the fall guy in the K-Electric saga remains to be seen.
In a recent statement, Naqvi said, “It appears that unidentified individuals who are unfairly biased against me and Abraaj are seeking to undermine the sale of K-Electric, damage my and Abraaj’s reputation, and thereby prejudice the creditors of the Abraaj Group. I am a patriot of Pakistan and the sale was and remains in the best interest of the country.”
K-Electric is a sobering reminder of the tough realities of operating in emerging markets and holds important lessons for European investors. Recent studies reveal how private equity investment in Europe has gone from strength to strength: in 2017, fundraising jumped by 12% to nearly €92 billion. Emerging markets are often characterized by strong growth and a rapid expansion of an entrepreneurial class. But persuading European investors to commit to emerging-market private equity is not easy.
Much more work needs to be done to ensure that investments in countries like Pakistan, including those coming from the EU, will have an impact in the long term. This message was recently reiterated by the World Bank’s regular Pakistan reviews, which called for urgent reforms to revive growth.
New reports suggest the K-Electric deal may be going ahead after all, and this is an encouraging development. But if Imran Khan, Pakistan’s new Prime Minister, is to deliver the “new dawn” he has promised, he must ensure major deals like this are made in a transparent manner and in the public interest. Only then will he earn the trust of international partners who can help make the investments the Pakistani economy needs so badly.
(The writer is Managing Editor of New Europe, a weekly newspaper published in English founded in 1993. The headquarters is in Brussels, Belgium. The newspaper reports on the activities of the key European Union institutions: the European Commission, European Parliament, and Council of Ministers).