Investors seek answers after Abraaj meltdown
by Arleen Jacobius, Pensions & Investments, April 29, 2019 (excerpts)
Abraaj Investment Management Ltd. is in liquidation and its founders have been indicted, while institutional investors in its funds and their consultant, Hamilton Lane Inc., are left to deal with the fallout.
On April 11, the Securities and Exchange Commission filed a civil lawsuit against the defunct private equity firm and Abraaj founder and CEO Arif Naqvi for fraud and the alleged misappropriation of more than $230 million from Abraaj's health-care fund. As a result of an audit by some investors in the Abraaj Growth Markets Health Fund, including the $50.7 billion Bill & Melinda Gates Foundation, Seattle, Abraaj was forced into liquidation in June. It managed about $14 billion at the time. On the same day, Mr. Naqvi and former managing partner Mustafa Abdel-Wadood were arrested on U.S. charges of defrauding investors.
A source with knowledge of the situation said: "These issues were destined to come out. The holding company was toxic. … Along the way there were signs and people should have paid attention to the red flags. … It was clear Abraaj was very lackadaisical in the back office, compliance and financial reporting ... but it's hard to blame people looking backwards."
Some consultants passed on recommending Abraaj funds.
"We met with Abraaj several times over the course of months and had concerns," said David Fann, New York-based president and CEO of private equity consulting firm TorreyCove Capital Partners LLC. "Their statements regarding foreign-exchange management of their investments did not comport with market practices. Also, we were fortunate to be able to speak with former employees who described problematic management practices."
Among asset owners that made commitments to Abraaj are the $145.4 billion Teacher Retirement System of Texas, Austin; the Olympia-based Washington State Investment Board, which oversees $128.1 billion in assets including $99.4 billion in defined benefit plan assets; $20.1 billion Louisiana Teachers' Retirement System, Baton Rouge; and the $16.6 billion Hawaii Employees' Retirement System, Honolulu.
The Texas, Louisiana and Hawaii plans also made commitments to Abraaj Private Equity Fund VI in 2017. In February 2018, Abraaj suspended the fund and released investors from their commitments.
Hawaii ERS officials rehired Hamilton Lane as its private equity consultant "prior to Hamilton Lane proactively pushing (for) release of our commitment to (Abraaj Private Equity) Fund VI," Hawaii ERS CIO Elizabeth T. Burton said in an email. Ms. Burton joined as CIO on Oct. 1.
Abraaj Private Equity Fund VI released the pension plan from its $50 million commitment in February 2018, Ms. Burton said. "Abraaj Global Growth remains an active investment and capital calls are necessary to preserve and protect existing investments," she added.
As of Sept. 30, Hawaii has paid $36.4 million to Abraaj Global Growth Markets Fund; the investment was valued at $37.3 million.
However, at the time the board rehired Hamilton Lane, pension fund officials were "fully apprised of the then-existing allegations concerning Abraaj in advance of their selection and rehire," said Thomas "Thom" Williams, Hawaii Employees executive director, in a separate email.
"Certainly, questions and concerns were raised by both staff and the members of our board," he said. "We were provided answers, to the extent available, and concluded our long-standing and rewarding relationship offset any immediate concerns."
Since then, Hawaii officials have monitored developments "very closely," and he said they "are confident that our interests are being well represented."
"Absent such confidence, and as a matter of principle, we would step away," Mr. Williams said.
Hawaii's relationship with Hamilton Lane goes back to 1997; the firm provides discretionary private equity consulting services, Ms. Burton said in her email.
Hamilton Lane oversaw a $1.4 billion private equity portfolio for Hawaii ERS as of Dec. 31, which earned 18.73% for one year, 16.37% for three years, 14.9% for five years and 9.35% since the portfolio's Nov. 1, 1997 inception, topping benchmarks in all periods but since inception, which was at 11.63%.
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SEC Charges Dubai-Based Advisory Firm and Its Founder
Securities and Exchange Commission v. Arif M. Naqvi and Abraaj Investment Management Limited, No. 1:19-cv-03244 (S.D.N.Y. filed April 11, 2019)
SEC Litigation Release No. 24449 / April 11, 2019
The Securities and Exchange Commission today charged Arif M. Naqvi and Abraaj Investment Management Limited, a Dubai-based investment advisory firm, with misappropriating funds from a private equity fund client.
The SEC alleges that Naqvi and his firm raised money for the Abraaj Growth Markets Health Fund ("Health Fund"), collecting more than $100 million over three years from U.S.-based charitable organizations and other U.S. investors. According to the SEC's complaint, Naqvi misappropriated money from the Health Fund and commingled the assets with corporate funds of Abraaj Investment Management Limited and its parent company, and used it for purposes unrelated to the Health Fund. The SEC alleges that Naqvi and his firm made misrepresentations to investors and issued false and misleading financial statements to hide that they were spending investor money in unrelated ways.
The SEC's complaint, filed in federal district court in Manhattan, charges Naqvi and Abraaj Investment Management with violating the antifraud provisions of Sections 206(1), 206(2) and 204 of the Investment Advisers Act of 1940 and Rule 206(4)-8 thereunder. The SEC seeks permanent injunctions, disgorgement plus interest, and penalties.
The SEC's investigation is being conducted by David A. Neuman and David A. Becker of the SEC's Asset Management Unit, and Deborah Russell located in Washington, DC. The litigation will be handled by Matthew Scarlato and Jan M. Folena.
PDF: SEC Complaint
Feb, 2018: ERS Fires Investment Officer After Losses on VIX Puts