LONDON: Professor Brian Brivati has said that Arif Naqvi’s case is completely different because of Naqvi’s race and nationality.
Professor Brian Brivati, who is currently a visiting professor at the Kingston University and taught Human Rights and Life Writing full time at the university till 2019, has written “The Life and Death of the Abraaj Group”, published by the London-based Biteback Publishing.
In an exclusive interview with The Pakistan Daily Editor Hamza Azhar Salam, Professor Brivati said that Arif Naqvi is a Pakistani patriot.
Hamza Azhar Salam: What role do you think Arif Naqvi’s nationality and race played in Abraaj downfall?
Professor Brivati: I think what we have seen over many different cases is the way in which UK-US based companies get away with fines and civil action against them when they were accused of this kind of regularly issues what we see in this case is completely different and why that happens is I believe in part because of Arif Naqvi’s identity and Abraaj identity.
Mr Naqvi a Pakistani national was running his Abraaj private equity company based in Dubai, registered in Cayman island. He was a technician for making money for Arab investors in that company. He passed as an Arab in Dubai. The company was based in Dubai but it was not in Dubai. Similarly, he was on wall street and he was on the London stock exchange and other less well know stock exchanges around the world doing deals.
In all of these places, he passed as a private equity guy but actually, the private equity world is a white world I am not saying there are no people of colour in a senior position in private equity companies but those companies are UK companies, US companies.
They are not Arab companies based in Dubai run by Pakistanis. He was on the world stage he was on the Davos of the World Economic Forum and he was talking with passion and commitment the talk of impact investment and making a different thing that he profoundly in my view believed in this is not a fairy tale impact investment works on the ground in creating jobs and in providing health and education in difficult market complicated places.
As soon as this went wrong, as soon as thee media coverage began to destroy the reputation of the company, suddenly he was a Pakistani in Dubai, he was Pakistani in London, New York he was Pakistani on the world stage of Davos and all his friends and partners melted away.
Now would they have melted away if he had been a part of the western establishment. If he had been a white guy in Goldman sacks I don’t believe they would have melted away in the same way and I don’t beloved the action against him would not be done but it’s not an identity it’s also about geopolitics.
Hamza Azhar Salam: There is an issue about the valuations of Abraaj’s investments. Do you think Arif Naqvi was honest to his investors about the financial health of his investment just like Turkish your son group or the said restaurant chain Kudu?
Professor Brivati: I think we need to think about the way these kinds of companies are structured so there was a holding company a branch holdings limited which had one set of investors and one set of creditors and none of whom were from the united states and then there were each of the different funds which invested in the different geographies or thematic areas.
The Turkish fund the health fund the clean energy fund and so on so if there were problem companies then they were dealt with that fund level and there were certainly some issues over the lifetime of the company invested in about 200 different companies and there were problem companies at fund level within all of those investments you invest with private equity it’s over 10 years generally and the company will invest in one of what called portfolio companies and there may be bad years there may be bad times in which things are not going as well as they should over the lifetime of the firm and over the lifetime of the investment the performance was generally pretty good.
The second thing to think about is this issue in detail of evaluation and the branch actually followed global standards in its valuation process and it and it involved a large number of external experts in developing its methodology for valuing companies there was a huge process of due diligence before they invested in a company also every single investor in a branch would have done a huge process of due diligence before it decided to invest in those individual funds and if i’m an investor and i’ve got a hundred dollars to invest i might put five or ten dollars into the private equity bit as a non-standard asset class as a a higher risk part of my portfolio because i understand that sometimes these things will fail but sometimes they will also be spectacularly successful.
Abraaj’s particular talent was at deal level at company level and making a difference to the way in which companies operated and the way in which they ran in these emerging markets and you know these companies were sometimes run differently than companies in other geographies and so a branch compensated for that in the way they approached the due diligence process in 2016.
Naqvi was trying to take his company to the next level and looked at the way they valued companies and suggested that they change to a a different standard If the way in which those valuations took place so that if they believed that when they exited a company would be worth a certain amount then why put the value up and down on the road to that exit have faith in that and present that in your quarterly reports and your annual reports to your investors so the bottom line in all this I think is that there’s nothing unusual in a portfolio of companies that are invested in by private equity firms for there to be some problem companies or some problems awesome companies that over a period of time are going through a problematic period it’s very normal for the sector.
Hamza Azhar Salam: We’ve also seen some leaked emails between Naqvi and his teammates and those emails have also been published by some news outlets and they talk about the valuation of those companies or you know valuing them at a certain amount so that they can get credit from other sources so do you think such practices do they imply any financial criminality at all or like you said it’s just common practice?
Professor Brivati: I think what we’ve got to see here is that there’s there’s a difference between a hedge fund and the way a hedge fund is rewarded in a private equity company so a lot has been made of this valuation question but if you’re in a hedge fund what you want is you are paid you make your money at the high water market value of your investments over a given year so in a way it’s in your interest to push those valuations up because that’s how you get paid right if you’re in private equity.
Most people in the private equity teams only get paid when the investment is exited so in a way all of this talk evaluation is a bit of a red herring what matters is at the moment of sale cash in you put cash into the company how much do you take out there’s an exception and that is the the people in the team who are raising money for a fund and in this case the fund which was the global fund and they’re trying to attract investors so they may well want to have a more positive kind of valuation methodology but everything all the underlying data is given to the investors so it doesn’t really matter in a way what spin you might think somebody in this field has put on it you hand over your report with all its footnotes and all the raw data then me as an investor i’m a sophisticated investor presumably i’ve got hundreds of millions of dollars to invest.
I then look at the underlying numbers right and if I believe in those numbers and those raw that raw data I invest and if I don’t invest right. So there is no I don’t believe that there is any case to answer in terms of misrepresentation or misvaluation and I think the emails that have been released are there’s some colourful language there are some colourful exchanges between people as there would be if any of our email or conversation exchanges you and I hamza were released we wouldn’t want every single conversation we ever had to be put out into the public domain for scrutiny analysis you’ve got to look at the underlying facts the hard data if I’m a sophisticated investor from anywhere in the world I look at the raw data if I buy the case the private equity company is making I put my slice of investment into it if I don’t buy that case I don’t yes fair enough fair enough
Hamza Azhar Salam: Many people claim that if K Electric’s sale had gone through by Abraaj then they might not have been in so much trouble but why do you think the sale didn’t go through and do you think there were some bigger players or bigger forces at play?
Professor Brivati: K-Electric is the key in many ways that unlocks this story when a branch made the original investment in 2008. Wikileaks documents show the u.s embassy welcoming that involvement welcoming abraraj’s investment because they saw it as a way of enhancing the energy sector in Pakistan which would improve the security the political stability as you know better than Karachi electric is crucially important in the politics of that city is the engine of the Pakistani economy so whoever runs Karachi electric has a big influence on the economy has a big influence on the politics of Pakistan.
America wanted a western-oriented western friendly company in there and they thought that’s what they were getting with Mr Naqvi abraaj but actually what they were really getting in nappy was a Pakistani patriot right in the end he was going to do the things in his business dealings that were in the best interests of Pakistan when they involved Pakistan and in this instance he believed as a Pakistani patriot that selling Karachi electric to shanghai electric was the best deal for Pakistan because shanghai electric was offering nine billion dollars of investment between 2008 and 2016 Karachi electric made some progress reduced outages became more efficient shanghai electric promised to continue that process but the deal was done in October 2016.
If the americans welcomed that sale to abraaj in 2008 they were dismayed by the announcement of the sale to shanghai electric in october and in november donald trump is elected president record donations to donald trump from the US private equity industry at the same time and the u.s private equity industry and others were quite jealous of a branch’s network in emerging markets there’s one estimate that it would cost them 500 million dollars to get that kind of a network so there were economic interests at play.
There were political interests as Donald Trump had said all the way through his campaign that he was going to fight a trade war with china. Arif Naqvi was on the record as supporting chinese investment in pakistan in his new global fund which he was trying to raise money for there was a significant amount of chinese investment which would open more emerging markets to more chinese investment and he’d even in one report says he’d considered selling a chunk of abraaj to the chinese so he was supporting chinese and pakistani economic partnership and
My argument is that there’s no way the americans wanted that sale to take place and they let it be known to their friends within the pakistani establishment who are friendly to the united states there’s a good relationship over many decades between pakistan and america a complicated one but a good one and pakistan is in a way caught between these two superpowers china and the us those elements within pakistan who support the US dimension helped block the deal and it still hasn’t taken place right that meant that there was a cash flow crisis within a branch because 550 million of the 1.7 billion sale of karachi electric would have flowed in to that holding company that I mentioned and that caused vulnerability but and this is what I think is fascinating to me and crucially important but even though the company was vulnerable it took a series of what i’ve described as precision strikes to destroy it and I just don’t believe that this happened by accident.
Hamza Azhar Salam: What do you think the US is so eager to get him extradited and why did the US-led media play such a negative role in Arif Naqvi’s coverage?
Professor Brivati: I think the vulnerability is created by the blocking of the sale of Karachi electric and then that creates a cash flow problem in the company but the only investors who raise any questions about the way the company is being run are a small number of investors in one fund the health fund and they question whether what’s called the limited partner agreements which manage the relationship between the investor and the private equity company allowed abraaj to move funds around.
Now a barrage went to their law firm fresh fields and said are we allowed to do what we’re doing do we have to show bank statements to these investors do we have to do what do we have to do under the terms of the agreement and their lawyers said absolutely fine nothing you’re doing breaks these agreements their own auditors said exactly the same thing the competent authority in all this the dubai regulator had deloitte’s do an audit they said the same thing yes there have been movements of funds but there were no funds missing so in the normal run of events there was some discontent on some investors so the money that had been drawn down there was delay in investing it in some hospitals that money was returned to the investors with interest but actually was still locked in to be investing subsequently in future projects and many hospitals and many diagnostic centers had been invested in by the health fund but because of events in nigeria and kenya there were delays in making those investments
If you then write a newspaper article saying that the bill gates foundation for example is asking questions about the way in which this private equity fund is run that is the most destructive thing you can do to a private equity fund because it’s all based on trust and due diligence.
You’re handing over a proportion of your investment fund to this company to invest on your behalf reputation is there for everything in this and magney was definitely trying to raise money for his six fund which was going to be a six billion dollar fund for emerging markets so reputation was even more crucial than normal because they were in a fundraising and investing period now I don’t know what happened either someone in a branch leaked material to the press as a whistleblower very carefully crafted email was sent to investors saying they should ask questions about the health fund that was then leaked to the Wall Street Journal and the New York Times who wrote a piece that might explain one article but then we see a series of articles at crucial moments and it could be that this is still someone leaking this material or it could be that the web server the email server of a branch was hacked and a carefully curated set of emails was leaked to the media at selective moments to ensure that the company slowly fell apart.
Now it may be just a coincidence but it does seem as though each time Naqvi had managed to pull the company back together again at the end of 2017 the very few investors who wanted the drawdown money returned had it returned with interest everyone else was perfectly happy the fundraising was continued for the fund then in February a new set of articles comes out that means that fundraising is stopped then puts together a restructuring package new articles emerge which scupper the restructuring package there’s a botched liquidation process and you know you can see all the detail in my book but I cannot say that I have got the WikiLeaks memo right that says an economic hitman operation has been ordered this company is to be stopped because of its sale of Karachi electric to shanghai electric and because there’s a whole bunch of US private equity companies who’d very much like to pick up the funds at fund level cheaply.
I don’t have that document but circumstantial evidence seems to me to be overwhelming that this is not what it looks like that the dominant narrative is not correct and that there’s much more at work here and and here’s the thing so a number of these reports talk about over 700 million dollars missing right there are different numbers banded around at different times and other reports say that 390 million dollars has been returned okay what no one seems to have discussed is is the remuneration package for someone like Arif running a company like this and actually most founders of private equity companies the huge american ones take 80 to 90 percent of the carried interest of the money that the company makes year on year.
Naqvi was entitled to the money that he was paid all the money that he was paid is documented in his remuneration package and in the minutes of the board and actually he took less than most founders of private equity companies and to my knowledge there is no civil action anywhere in any court or against the liquidators for the recovery of any money so what has actually been stolen here if million or 700.
If these large amounts of money are supposedly missing why isn’t anyone anywhere trying to recover that money from Arif Naqvi or anyone else to do with a branch or indeed the liquidators i think it’s because there is no money missing that in fact if the restructuring plan which was co-authored um by a very a globally respected restructuring company called hooligan loki if that plan in august 2018 had been implemented then all the creditors of the holding company would have been repaid.
The only investors who had complained had already had their money back with interest so i think what’s happened here is you know you have that saying where generals like to fight the last war.
Journalists in this instance have been carefully fed in my view carefully fed material and they’ve seen this as another billion dollar whale another big story like the big malaysian um fraud case um the one mbd scandal or another bernie madoff story the u.s investor who had a ponzi scheme paying old investors off with new money i’ve seen no evidence that it’s any of those things and in the normal run of events the dubai regulator who imposed a fine on a branch would have dealt with this they would have challenged the fine but instead as Ibesay for geopolitical reasons the department of justice and the trump administration got involved so the company had to be brought down.
The Abraaj Group was just shy of $14 billion under management by 2017; they were on the threshold of closing a new fund that would invest $6 billion into these emerging markets.
Abraaj, which was founded in 2002, was the Middle East’s biggest private equity fund and one of the world’s most influential emerging-market investors, with stakes in health care, clean energy, lending and real estate across Africa, Asia, Latin America and Turkey.
Abraaj managed more than 40 private equity funds and assets of more than $14 billion until it crumbled in the biggest failure for a private equity firm.
Problems began in February 2018 with allegations that money in Abraaj’s health fund had been misused. Naqvi and Abraaj denied wrongdoing and blamed unforeseen political and regulatory hurdles for a delay in deploying the money.
After Abraaj defaulted on loans, Kuwait’s Public Institution for Social Security and a fund linked to Sharjah-based Crescent Group’s Hamid Jafar moved to force the company into a court-supervised restructuring.
Abraaj Investment Management Ltd., which managed the private equity funds, and its parent, Abraaj Holdings Ltd, filed for provisional liquidation in the Cayman Islands, where they are registered.
In the liquidation process several irregularities including mismanagement and misappropriation of funds were discovered.
Dubai’s financial regulator fined Abraaj $315 million for deceiving investors and misappropriating their funds.