أزمة أبراج كابيتال وتبعاتها على قطاع الأسهم الخاصة في دول مجلس التعاون الخليجي

Globally, private-equity (PE) firms manage about USD 3 trillion of capital for various investors such as pension funds, sovereign wealth funds, endowments and High Net worth Individuals (HNWI). However, less than USD 18bn of that (approximately, 0.6%) is managed by PE firms based in the Middle East region. The minuscule proportion of the Assets under Management (AuM) of the regional PE industry sets clear perspective on the size of PE industry in the region compared with the global level. Recently, the success stories of Souq (acquired by Amazon), Careem and Talabat hogged the limelight and reinvigorated the fortunes of the industry. Big bang announcements in KSA including partnering with Softbank to set up a USD 100bn technology fund and setting up of USD 1bn fund by Saudi Public Investment Fund (PIF) was welcomed by the industry. However, the encouraging development signs witnessed by the nascent industry has been facing headwinds ever since the Abraaj crisis unfolded.

Abraaj, the Middle East’s biggest private equity firm, was founded in 2002. It rose over the years attracting global investors by offering easy access in hard-to-invest, but fast-growing economies with lucrative investment opportunities such as the Middle East, Asia & Africa. The fund currently manages almost USD 14 billion, which accounts for more than 75% of the regional PE industry managed funds, for various marquee regional and global institutional investors such as the Bill & Melinda Gates Foundation, the World Bank’s International Finance Corporation, Britain’s CDC Group and Proparco Group of France.

The group is under scrutiny for allegedly mismanaging money in a USD 1 billion healthcare fund (read more, Abraaj: Stunning Past, Stunted Future). Between October 2016 and April 2017, Abraaj drawdown USD 545 million in three tranches from health care fund’s investors. By the end of September 2017, only USD 266 million of that money, less than half the amount was deployed. The way the fund was handled had led investors to question the internal policies, highlights the deficiency of adequate governance measures and weakness in the control framework, which emphasizes the long persisting regional issue with transparency. Though the need for enhanced disclosures, better governance measures, and robust risk frameworks have been echoed for long in the GCC region, the recent episode involving Abraaj fund has renewed concerns among investors to improve the corporate governance standards in the region.

Bad corporate governance has been a chronic problem
The PE industry in the region has been stunted by significant gaps in the region’s legal and regulatory frameworks, particularly in areas of investor protection and corporate governance. Moreover, the still evolving bankruptcy laws make it extremely challenging to deal with positions where the investee companies fail to deliver the expected results. The business landscape in the Middle East region is primarily relationships driven, which does not emphasize the transparency expectations of the global investors.

The regional corporate governance standards remain weak. While regulations do exist for timely disclosures and establishing internal controls, enforcement of the same falls short. Large family groups often dominate non-listed companies and their organizational structures vary widely. They often have family councils in lieu of Board of Directors, comprising of senior family members, to provide direction and strategy for the businesses. Influential Directors often sit across the boards of many companies, leading to interlocked directorships. Families tend to keep their affairs private and are often reluctant to induct independent directors for board positions. Evaluation of board performance is a sensitive issue that could potentially disrupt family ties. Power is concentrated in the hands of select few. Company ownership is closely controlled and senior members of the family often influence decision-making. Centralized decisions are the norm and financial controls could be weak.

Impact on Fundraising and Deals
As a fall out of this episode, the founder and CEO of Abraaj, Arif Naqvi stepped down as head of its fund management business and the fund halted further deployment activities. Further, Abraaj suspended fundraising for its latest fund, which already had closed on USD 3 billion of its USD 6 billion target. Since the allegations surfaced in February 2018, private equity deals and fundraising in the region have come to a halt.

Faced with a crisis of confidence among investors, other industry players in the region who intended to raise capital are already feeling the heat as their fund raising plans have either been impacted or abandoned completely. For instance, Waha Capital has abandoned plans to raise a USD 300 million private equity fund. Fundraising activity has come to a grinning halt in the region, with no funds closing in the first four months of the 2018 compared to USD 144 mn raised by six funds during 2017 (Bloomberg). Taking into consideration, the small fragment of fund allocation for the region, the crisis augments the scale of the impact.

Additionally, most of the regional funds that raised capital earlier are yet to fully deploy the same. Presence of high dry powder (funds sought from investor but yet to be invested) could further complicate the deal space, as investors will now be closely watching and paying more attention on how their funds are being handled. According to Preqin, Middle East-based private equity have not been involved in any PE backed buyout deal so far in 2018. The PE transactions had been continuously declining for the last three years as the region’s economy grappled with the impact of low oil prices.

Way Forward
The PE firms may now be subject to greater investors’ scrutiny and may have no choice but to oblige with such investors demand. On the other hand, this incident could shake up the industry and could bring in positive changes including better governance, internal control measures, enhanced transparency of operations and better disclosures and reporting standards. Going ahead, we envision greater emphasis on independent boards and corporate oversight to become the norm.

To reassure investors, roles and responsibilities of the board and management should be clearly demarcated. Conflict of interest should be minimized, independence of the board should be exerted and accountability should be firmly established. Emphasis on establishing clear lines of internal control and risk management measures would be welcomed.