Abraaj ‘boosted valuations’ to entice secondaries buyers – prosecutors

Senior executives at the former emerging markets private equity firm overvalued positions and delayed markdowns to attract LP stakes purchases, a US indictment alleges.

Abraaj Group senior executives deliberately inflated valuations of its existing funds to attract secondaries buyers, US prosecutors have alleged.

In an updated indictment filed by the US attorney’s office for the southern district of New York on Thursday, authorities allege six executives, including founder Arif Naqvi, intentionally overvalued certain Abraaj investments over time.

In or around 2016 and 2017, the executives “increased the frequency and magnitude” of their overvaluations to induce new investor commitments in APEF VI and to “induce the purchase of certain limited partnership interests in existing Abraaj-branded funds to new investors in secondary transactions”, the deposition alleges.

Abraaj had been misappropriating limited partner capital to cover payroll, borrowing, and operating expenses, prosecutors claim.

The executives sought an “uplift” of valuations of positions in Abraaj private equity funds despite “strong resistance” from lower-level Abraaj employees familiar with the companies being valued, according to the document.

In an August 2017 email to three executives regarding the uplifted numbers, Naqvi allegedly wrote: “Is this sufficient? What more do we need to get into the safe zone,” the prosecutors claim.

Ashish Dave, Abraaj’s chief financial officer at the time, directed his financial controller to “plug in” the enhanced valuation numbers into the marks provided to existing and prospective investors, the document alleges.

In one email exchange with senior Abraaj executives, Naqvi critisises members of the firm’s deal teams who had suggested write-downs and directed that “no such markdowns should be taken”, according to the indictment.

“I need a minimum of 20-25 mm profit at [Abraaj Holdings] in order to keep this effing business afloat and show strength to the banks,” Naqvi is alleged to have written.

Abraaj’s marketing materials and periodic investor reports state that the firm valued its funds according to the International Private Equity and Venture Capital Valuation guidelines, the prosecutors noted.

“In truth and in fact, the Abraaj Leadership valued its positions however necessary to support its claims of success,” the indictment claims.

Secondaries Investor reported in June last year that Abraaj attempted at least two secondaries sales to offload stakes in its own funds held by Abraaj Holdings, the entity which was split from the fund management unit last year. These included a potential stapled deal process at the end of 2017 and another offering in April last year.

The first process, which did not proceed past early stages, involved around $200 million of secondaries exposure to Abraaj vehicles and a $100 million commitment to the flagship fund, two sources told Secondaries Investor. The stakes are understood to have been Abraaj Holdings’ GP commitments.

In the April process, one buyer told Secondaries Investor an Abraaj partner had offered them interests in the firm’s 2014-vintage The Abraaj Turkey Fund, 2013-vintage Abraaj North Africa Fund II and 2013-vintage Abraaj Africa Fund III. These stakes represented combined exposure of around $100 million and Abraaj Holdings wanted to sell the interests to shore up its balance sheet capital, the source said.

Thursday’s updated indictment brings charges against three additional Abraaj executives: Dave, Rafique Lakhani – a former vice-president responsible for day-to-day cashflow – and Waqar Siddique – a former managing partner who oversaw operations. Naqvi along with former managing partners Mustafa Abdel-Wadood and Sev Vettivetpillai had previously been charged.

The charges, which have been widened to include money laundering, also allege that Abraaj executives embezzled money from employee welfare and pension benefit funds, including a pension fund for professional musicians; used LP capital to cover payroll; borrowed capital from an unnamed airline to cover missing funds and bribed Pakistani officials.

Abraaj was thrust into the spotlight in February last year after four limited partners in its 2013-vintage Global Healthcare fund hired an auditor to examine the alleged misuse of funds from the vehicle. The firm underwent provisional liquidation by a Cayman Islands court last summer.

– Additional reporting by Rod James and Alex Lynn.

Read more on the US prosecutors’ updated indictment here.