Deloitte Dubai may have understated Abraaj’s misuse of $300m of funds

The unauthorised use of money relates to the $1.6 billion Abraaj Private Equity Fund IV

Arif M. Naqvi, Founder and Group Chief Executive, Abraaj Capital, of the United Arab Emirates, attends a session at the World Economic Forum (WEF) in Davos, January 26, 2012.              REUTERS/Arnd Wiegmann (SWITZERLAND  - Tags: POLITICS BUSINESS)
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Abraaj allegedly misused as much as $300 million (Dh1.1 billion) in one of its funds and Deloitte’s Dubai office may have understated the scale of unauthorised practice by the private equity company in a review it conducted, according to a memo from a Cayman Islands law firm.

"An estimate provided by Deloitte Dubai and subsequently adopted by the AIML JPLs [Abraaj Investment Management Limited's joint provisional liquidators who are Deloitte UK]…may well understate the true extent of the unauthorised use of APEF IV's funds," the Grand Cayman office of the law firm Ogier said in a March 1 memorandum sent to Abraaj and its directors that was seen by The National.

“It appears from initial investigations that the unauthorised use of APEF IV’s [Abraaj Private Equity Fund IV] funds occurred in the latter half of 2017 or early 2018,” Ogier, which was appointed by the investors in APEF IV, also known as Abraaj’s Fund 4 or Fund IV, said.

The National has also reviewed an August 13, 2018 letter addressed to the counsel of Deloitte UK from New York-based Debevoise Plimpton, the law firm appointed by Fund IV investors. "Fund IV has multiple claims for damages … The [Investment] Council's conservative estimate is that Fund IV is owed $300m at the very least [although the total amount owed will likely increase once additional matters are taken into account]," Debevoise Plimpton's letter said. A partner at Debevoise Plimpton, whose name appeared on the letter, did not respond to an email from The National seeking comment.

Abraaj, which claims to have managed almost $14bn in funds, was forced into liquidation last June after a group of investors, including the Bill & Melinda Gates Foundation, the World Bank’s International Finance Corporation and The Overseas Private Investment Corporation, a US government development financing agency, commissioned an audit to investigate the alleged mismanagement of money in its healthcare fund.

Fund IV was a $1.6bn buyout fund that consisted of two parallel Cayman Island entities, one of which was Sharia compliant, according to an April 2017 Abraaj presentation on the company's track record and other documents seen by The National. The fund was set up to invest in greenfield projects, privatisations, growth capital opportunities and buy-outs in the Middle East, North Africa, South Asia and the Levant region. AIML, a 100 per cent owned subsidiary of Abraaj Holding (AH), was the investment manager of the fund.

Bhavin Shah, of Deloitte Dubai's forensic team, conducted an analysis of how money was used in Abraaj funds in two confidential reports seen by The National. The reports, known as Cheetah 1 and Cheetah 2, were commissioned after investors were unhappy with the findings of an initial audit by KPMG. Mr Shah declined to comment when reached by The National and directed all queries to his company. Mr Shah has now left Deloitte and joined another company. Ralph Stobwasser, who worked with Mr Shah on Abraaj, did not responded to an email seeking comment, nor has Deloitte's regional head office in Beirut.

We understand that carry payment may have been made to AIML on the basis of inflated and outdated valuations which did not properly or at all take into account write downs in various asset valuations which likely should have been taken into account.

Deloitte's Cheetah 1 report focused on the healthcare fund, which became the centre of attention after investors, raised questions about the alleged misuse of their money. Concerns over the health fund widened the scope of scrutiny on Abraaj, which led to the collapse of the company. Deloitte's Cheetah 2 report focused on Fund IV. A Cheetah 3 report, which was not completed, intended to look at corporate governance in addition to the splitting up of Abraaj.

Ogier's head of global dispute resolution team in the Cayman Islands and whose name appeared on correspondence related to the memo declined to comment when reached by The National.

“We understand that a letter before action dated August, 13, 2018 sent on behalf of Fund IV to the AIML JPLs has already been shared with insurers. This letter sets out the understanding of APEF IV’s advisors of claims as at that stage up to the value of $300m,” Ogier’s memo said.

The memo goes on to say that the adviser team to Fund IV investors hired to help recover funds “does not have access to full information and documentation and analysis is still continuing”.

Neil Hayward the managing director and co-head of Alvarez & Marsal's Middle East office, which is an advisor to Fund IV investors, declined to comment when contacted by The National.

David Soden of Deloitte UK, appointed joint provisional liquidator, also did not respond to an email seeking comment.

Investors in Fund IV included members of royal families in the Arab world, high-net-worth people, pension funds, US banks, Hamilton Lane and Falcon Flight among others.

The claims, estimated to be up to $300m, that arise from the management of Fund IV by AIML and GP8 (Abraaj General Partner VIII Limited) relate to various investments, according to Ogier’s memo.

Those investments include a $33.6m investment in a now defunct Saudi healthcare company that “appears to have been a ‘bail out’ payment not made in the best interests of APEF IV", Ogier said. “This investment was entered into with a related party and was conflicted. No permission was sought in advance from an Investor’s Council, which should have been formed to consider such conflicts.”

Unlike the health fund, which had an investor’s council and detected the alleged misuse of more than $200m in the third quarter of 2017 that belonged to investors, Fund IV did not have such a council, even though investors had a provision to set one up at the fund’s closing, according to people familiar with the matter. Fund IV set up the investor’s council in early 2018, when issues related to Abraaj’s misuse of money in the health fund surfaced, the people said.

Ogier’s memo goes on to say the value of Fund IV’s investment in the Saudi healthcare company was written off as of December 2018, after all Abraaj Group interests in the company were sold.

The other investment in question relates to Fund IV Limited Partner’s indirect investment in Middlesex University Dubai branch. Those “involved in setting up the transaction had conflicts of interest and did not obtain the consent required from an Abraaj Private Equity Fund IV Limited Partner’s Investors’ Council in advance of the transaction being executed,” Ogier’s memo said.

Other claims relate to unfunded Abraaj Holding Limited Partner stakes and other unfunded LP stakes, according to Ogier’s memo. Claims also arise from interest income related to a $100m loan extended by Fund IV to Kuwait Energy Plc, the memo said. There are also claims related to a $12m cash payment that was “redirected by AIML to AIML’s bank account from October 2015 to March 2018” and was not used to fund any investments for Fund IV, Ogier’s memo said.

Due diligence policies and procedures are top of mind for many industry professionals following the demise of the Abraaj Group.

There is also claim in respect to $33m in carried interest payments and other fees, which may not have been earned, if valuations were accurate.

“We understand that carry payment may have been made to AIML on the basis of inflated and outdated valuations which did not properly or at all take into account write downs in various asset valuations which likely should have been taken into account,” Ogier’s memo said.

There are also claims that arise from window dressing and the unauthorised payment of $72.99m. The amount in question “appears to have been transferred from APEF IV to AIML on or around January 2018, which appears to have been applied by AIML for general liquidity of the Abraaj Group,” Ogier’s memo said.

Window dressing is a tactic used to improve the appearance of a fund’s performance around the end of the year or a quarter, prior to a pitch to clients and investors.

Ogier also cites in its memo claims arising from overpaid and inaccurate fee payments. There are also claims that arise from Project Dido, which was an investment in a telecom operator in North Africa. In closing Ogier’s memo stressed, the investigations are ongoing and further claims may arise.

It remains to be seen what actions liquidators have taken to recover missing funds especially in light of the US indictment against Abraaj founder Arif Naqvi who is in jail in the UK and has yet to post a $20m bail, as well as former Abraaj managing partner Mustafa Abdel-Wadood out on $10m bail in New York and other executives.

In its letter, Debevoise & Plimpton said, the joint provisional liquidators who were appointed in June 2018 “have failed to secure a deal for the sale of AIML and or its assets to a third party or to put in place any form of replacement investment manager for Fund IV.”

The demise last year of Abraaj, once the Middle East and North Africa’s largest private equity firm, has had reverberations across the private equity and finance industry.

“Due diligence policies and procedures are top of mind for many industry professionals following the demise of the Abraaj Group,” according to the findings of Washington-based Empea’s Global Limited Partners Survey, which represents the views of 104 limited partners on the current conditions and outlook for emerging private equity.

The Abraaj fallout “has prompted many LPs to expand the scope of their due diligence processes to include a closer look at the internal operations and governance arrangements of fund managers,” it said.