Abraaj, a private-equity firm, files for provisional liquidation

UNTIL recently the Abraaj Group, a private-equity firm based in Dubai, was riding high. It was one of just a few such firms focused on emerging markets, and a darling of “impact investors”, who seek social or environmental returns, not just financial ones. Assets under management of $ 13.6bn made it the largest private-equity firm in the Middle East, and the 42nd-largest globally in 2017. Its Pakistani founder and boss, Arif Naqvi, a regular at Davos and a patron of the arts, had won awards for philanthropy. It is all the more surprising, then, that basic corporate-governance missteps led his firm to file for provisional liquidation on June 14th.

The problems began in late 2017 when four investors in its $ 1bn health-care fund, including the Bill & Melinda Gates Foundation and the private-sector arm of the World Bank, grew worried. Nearly $ 280m of $ 545m they had been asked for was not promptly spent on acquisitions, as is standard in the industry. Abraaj blamed delays in the construction of hospitals in Pakistan and Nigeria. The investors asked for proof that the funds had not been misspent; unsatisfied, they hired a forensic auditor to comb through Abraaj’s accounts.

News of the investigation broke in February. Later that month Abraaj ceased investing and Mr Naqvi stepped down from the fund-management unit. The firm stopped raising money for its newest fund and released investors from $ 3bn already committed. A review by Deloitte, an auditor, concluded that it had covered its own expenses with investors’ money from the health-care fund and another. The money was replaced in the health-care fund, but the other fund was left short of $ 95m.

Even before the review was finished, Abraaj had started looking for buyers for its fund-management arm, hoping to use the proceeds to pay off its creditors. But some grew impatient. On May 22nd Kuwait’s social-security fund filed a petition in a court in the Cayman Islands, where Abraaj is incorporated, seeking to force it into bankruptcy proceedings. In response Abraaj filed for provisional liquidation, akin to America’s Chapter 11 proceedings, to give it greater control over its restructuring.

Abraaj’s downfall is highly unusual. Debt is generally taken on by the individual funds run by private-equity firms, or the companies that those funds own, rather than by the firms themselves. Ludovic Phalippou of the Saïd Business School at Oxford University says he cannot recall any other private-equity firm declaring bankruptcy.

A charismatic boss can sometimes lull investors in a private-equity fund into complacency. Although they will carefully scrutinise any new fund-management company, when it comes to established ones they typically focus their due diligence on the individual funds it runs. And they may gloss over the fine print in agreements that govern relations between investors and funds, says Sunaina Sinha of Cebile Capital, a placement agent that helps private-equity firms find investors. Abraaj’s actions seem not to have broken its agreements with investors. Its collapse highlights the need for vigilance, especially when it comes to fashionable asset classes and fast-growing firms.

Clarification (June 21st 2018): In our original headline we said that Abraaj had filed for bankruptcy. It has in fact filed for provisional liquidation.

This article appeared in the Finance and economics section of the print edition under the headline “After pride, the fall”