Economia, Akrebia & Abraaj Capital's downfall

Can we help poor people in Third World Countries by turning a few brown people with degrees from places like Harvard or the LSE into billionaires?

Of course! First there was Dr. Akula who was not a Vampire and did not suck the blood of millions of poor Telugu women through his for-profit Microfinance initiative. Akula, btw, wasn't a banker, or even an Economist.  His PhD was in Political Science. Somehow, he didn't predict that poor Indian women would use democratic political processes to put an end to his blood-sucking.

Akula explains how he wowed Bill Gates-

The Gates Foundation was considering launching a microfinance funding program and Bill and Melinda Gates had set out to learn everything they could about microfinance. Melinda Gates had already come to India to see microfinance at work in villages. Their next step was to invite eight MFI practitioners to a roundtable in Seattle. We met in a conference room in a nondescript (but, as I was later told, bulletproof) building. Bill Gates Sr. would be joining Bill and Melinda, along with another “friend” of theirs. When they walked into the room, we saw that the friend was Warren Buffett. We had a wide-ranging discussion on the basics of microfinance and how it was practiced in various parts of the world. Then Bill suddenly asked, “Hold on. What are people possibly doing where they can pay 28% interest on a loan and still make money?” I took a deep breath and started explaining what I call “goat economics.” I described how a landless agricultural worker might use a 2,000 rupee loan (about $40) to buy a goat. She continues with her daily work and takes the goat along with her to the fields. The goat eats grass and virtually anything else, so there is no investment from her end. A goat gives birth to one or two kids a year and the value of the offspring is about 50% of the mother, or about 1,000 rupees. Even if a borrower took a 28% loan, she makes a return of about 70% on invested capital. An interest rate of 28% might seem high, but demand for SKS loans was exploding. We had almost no defaults among borrowers, and re-payment rates were about 99.4%, higher than re-payment rates in the west. Clearly, the system worked for the poor. There are four other reasons why microenterprises yield very high returns. First, borrowers tend to draw on family to help with microenterprises, which is far more productive than hiring wage laborers. Think of your classic immigrant-owned grocery story in the US where sons and daughters help out. Second, in the informal economy, the poor make too little to pay taxes (they typically make less than $2 a day when they join SKS.) Third, poor entrepreneurs have little infrastructure and overhead costs. A village grocery is a homefront shop, not a separate rental property. And fourth, for the first three reasons, capital is only a small percentage of a new micro-venture’s input. What’s far more important for a micro-entrepreneur is timely access to capital. As I finished my explanation of “goat economics” I watched Bill Gates scribble on his note pad. A thought popped into my head: “I’m explaining to the richest man in the world how poor people make money on goats.” It was an amazing and affirming moment

It was also a crock of shit. Livestock loans for the very poor tend to either have negative returns or else, in the case of goats, are ecologically very damaging.

So much for Dr. Akula- though it appears he is seeking a comeback- which however is likely to be on a very modest scale. Let us now turn to the case of Arif Naqvi- an Accountant- who, it transpires, is either a crook or doesn't understand Accountancy at all. He too was beloved of Davos Man, indeed he rose higher than Akula, and appeared for a while to be a major Prophet, if not the Messiah, of a new Secular Religion devoted to Saving the Global South from itself.

This wonderful creed already has its own theology thanks to Professors like Sen and Nussbaum. Let us now consider its theory of 'economia'.

Wikipedia tells us-

 economia is discretionary deviation from the letter of the law in order to adhere to the spirit of the law and charity. This is in contrast to legalism, or akribia (Greek: ακριβεια)—strict adherence to the letter of the law of the church

Abraaj Capital- founded by Arif Naqvi- had emerged as the poster child for a new 'moral economy' in which super-star Private Equity moguls would earn high returns for Pension funds and Sovereign Wealth or Development funds, as well as private investors, through ethical 'impact investing' in developing countries so as to meet the UN's Sustainable Development Goals.

Naqvi was a darling of the U.N and the Davos set. However, his highly publicised partnering with Bill Gates led to his downfall. Why? Well, the Gates Foundation had developed a strategy of using strict forensic accounting to force their partners to cut costs and improve corporate governance. Thus Gates's 'tough love' for Root Capital improved outcomes for smallholders. However Root Capital was a small non-profit. Abraaj was a 14 billion dollar behemoth promising high returns and paying vast salaries. The Gates Foundation may have only intended to reform 'impact investing' but, it appears, they have killed the thing off completely. Henceforth, any Private Equity guy who starts gassing on about effective altruism or UN Sustainable Development Goals will be seen as a budding Madoff or Naqvi. 

Earlier this year, the Medium reported-

Abraaj’s Arif Naqvi’s strategy for building integrated health systems across megacities like Mumbai, Karachi and Lagos was developed with Bill Gates himself.

What was this strategy? Buying and selling health care companies for a big profit so as to pay high salaries and vast bonuses to a bunch of jumped up accountants while simultaneously generating steady 15 to 20 per cent returns for Sovereign 'Development' Funds and 'Ethical Investors' like Teacher's Pension funds.

Stupid people might think 'building integrated health systems' would involve enriching Doctors and nurses and medical researchers- not a bunch of shady accountants. Gates, of course, isn't stupid at all. 'Populist' Government regulation, in countries like India and Pakistan, will limit entry and cause a shake out in any industry whose pricing policy impacts upon ordinary voters.  This means monopoly profits for those with political clout and insolvency for all the rest. Thus, the only money to be made arises by being part of the problem, not part of the solution.

Bill Gates has flagged the rise in the developing world of chronic diseases such as heart disease, diabetes and cancer as a huge challenge. The Bill & Melinda Gates Foundation seeded the health fund with a $100 million program-related investment and helped recruit other investors, including International Finance Corp., the U.K.’s CDC Group and the Overseas Private Investment Corp. By targeting lower-middle and middle-class customers rather than the poorest of the poor, the health fund aimed to crack the code for providing 21st-century health care to the rising billions in emerging megacities like Lagos, Kolkata and Karachi.

In other words, Gates and Naqvi planned to take stakes in, often family run, Medical chains in developing countries, generate some worthless hype about economies of scope or 'vertical or lateral integration' and then flog the thing off for a profit. Obviously, these great philanthropists would claim to have saved the life of every lower middle class patient who paid through the nose for treatment at one of these clinics or hospitals.

“Bill was instrumental in that vision,” Naqvi said on a panel in Davos early this year. “It all started with a discussion with him, that you can tackle the base of the pyramid, but there are so many measures that have to be dealt with. ‘Let’s come up with an innovative solution.’”

The innovative solution was to get a brown dude with delusions of grandeur to deal with the dirty end of the business- lying and cheating and fudging the books- before pulling the rug from under this stupid Chartered Accountant by hiring a slightly less stupid bunch of forensic accountants to show the man was a crook.

The Gates Foundation, along with several other foundations, also helped trigger the spate of investigations into Abraaj’s finances, calling in auditors to resolve questions about Abraaj’s use of funds in the Growth Markets Health Fund.

Did Gates make a mistake? Was this a case where 'economia'- i.e. sympathetic hand holding- was the way to go- not forensic accounting based 'akrebia'? After all, Abraaj had sold its Karachi Electricity business quite profitably and was waiting for clearance to get the money- though that might not now happen because of...wait for it...'populist' Government regulation.

 No doubt, there had been 'commingling of funds', but it did look as though some genuine profits were in the pipeline. Abraaj might have muddled through a little longer. I suppose, the founder and his brother in law and so forth would have to be eased out and their profligacy curtailed. However, Naqvi was charismatic and the international face of Dubai's Private Equity Industry. Sympathetic locals were prepared to do their bit to bail him out and some regional institutions might have taken a haircut in return for something juicy down the road.

Did the Gates Foundation shoot themselves in the foot because of lack of local knowledge? Or was Abraaj always doomed to fail because of the hubris of its founder?

The answer, sadly, is that the Americans got it right. They saw through Naqvi's claims  

to have sound local knowledge- evaluating business opportunities by 'kicking the tyres' as he put it- because he was an outsider to the Middle East and had no core competency specific to the region- or, indeed, the Developing World. 

The truth is he was an LSE graduate trained by Arthur Anderson who then worked for American Express in Karachi. While this might have opened doors for him, those doors were political and just as likely to suddenly spring shut trapping him into illiquidity.  

Naqvi arrived in the region in the early Nineties. Initially, he was the protege of an older Pakistani Chartered Accountant, Imtiaz Hydari, who was a longstanding employee of the Olayan Group. Hydari left Olayan in 1995 and returned to London where he became involved with Inchcape- a legendary 'Managing Agency' with roots in the sub-continent- regarding divestment of its Middle East business.

Hydari partnered with Arif Naqvi to launch an audacious and successful bid which remains to this day a matter of rumor and speculation with a spokesman for Naqvi dismissing Hydari's recent book- 'Leverage in the Desert' as an 'act of fiction'. An article sympathetic to Hydari  gives the following account of what happened-

Raising $150 million was no small task but the Imtiaz and Arif team was excited by the challenge. How the landmark acquisition was completed with a mere $3 million in equity has been the subject of much discussion and often rumour mongering in business circles. “We had pipe dreams of building up the business and then IPO’ing it on the local stock exchange, but those dreams went up in smoke pretty much immediately after we purchased the business,” he recalls. “Having never done anything like this before, we did not anticipate that the biggest challenge was not raising the money, it would be managing our local partners. I think in hindsight the local regional partners were in shock when they were told that Inchcape, a FTSE 250 company which was founded in 1847 was no longer involved in the business and ‘a company called Cupola owned by Pakistanis’ were their new partners,” he says with a chuckle. “They reacted to this perhaps with some moral justification and did not let us manage the business as per our legal rights. We were literally up against giants, some of the most powerful local businessmen in the region. A melee of discussions, legal proceedings and intense negotiations ensued and in the end I think we made even more money than our original plan allotted for.”  

It took Imtiaz and Arif four years to settle the disagreements with their local partners but in the end a series of concessions were made and various pieces of the business were sold off to various individuals which netted Cupola more profits than it would have if they sold it all together; a true blessing in disguise.

This is the crucial point. The Inchcape deal was so profitable precisely because of unexpected delays against a rising market. Hydari and Naqvi's next big success was with Aramex which, once again, was based more on luck than cunning. Naqvi, however, took a different view. In an article sympathetic to him, he is depicted as the prime mover-

 More deals followed after Naqvi founded Abraaj in 2002. He and his team moved quickly to acquire Aramex International Courier in the wake of the September 11 terrorist attacks, shortly after the Mideast company lost more than 15% of its value. Abraaj paid for the company with $25mn in equity and $40mn in debt and made 6.6 times its investment when it took the business public in 2005. The company chalked up more than half a billion dollars in profit in 2007 when it sold a 25% stake in Egyptian investment bank EFG-Hermes to Dubai Financial Group.
“I led those deals, I did those deals,” Naqvi says. “The reason I stopped being a dealmaker is because the business grew so I couldn’t oversee everything.”

Hydari's account is somewhat different- he stresses the importance of building relationships with highly experienced indigenous entrepreneurs- thus, after resolving things with the local stakeholders in Inchape's operations

 the next leg of the journey sees Imtiaz and Arif team up with Ali al Shihabi, founder and then CEO of Rasmala Private Equity, but soon after, there was an amicable separation and the split from Rasmala led to the founding of Abraaj Capital. “We conceived the idea and plans for private equity in Al Moosa Tower 1 on Sheik Zayed road and later moved to Emirates Towers when we joined hands with Ali Shihabi and Rasmala. It was 2002 and Dubai was nothing what it is today and no one could have predicted what a wild ride we were in for,” he narrates. “After completing the Inchcape transaction we were introduced to Fadi Ghandour, the founder of Aramex which was the first Arab company to list on the NASDAQ in New York. In reality though, it did not make sense to be listed in the USA and so we went on to help him de-list the company, add value and then re-list it on the local stock exchange. I must say getting the chance to work briefly with a visionary like Fadi was exciting.'

Hydari, parted amicably with Naqvi in 2004. He bought ex-Inchcape retailer Spinneys Jordan and restored it to profitability by increasing, not reducing, inventories of Fast Moving Consumer Groups. This was by no means a glamorous business but it had high visibility and thus enhanced Hydari's reputation as a genuine businessman- not a fancy-shmancy Accountant from London.

Since then, Hydari has gone in the direction of family based, Shariah Compliant, 'special situations' strategic leveraging often involving long standing relationships with local stakeholders while working within the religious and business ethos of the region.

A sympathetic article in 'The Accountant' gives this conclusion to his story-

 By 2004 Imtiaz was ready for a new challenge and seeing as his son had just completed his MBA it seemed like a great opportunity to start his own firm and mentor him in the art of private equity. Imtiaz founded HBG Holdings and in an odd twist of fate, HBG took a major position in European Islamic Investment Bank, which in 2012 acquired Rasmala Investment Bank; bringing Imtiaz almost full circle to where he is now the Chairman of Rasmala.

It seems this Pakistani Chartered Accountant who came to the region more than 40 years ago and who survived a near miss from a Scud attack during the first Gulf War has made a home for himself in the region. His son will carry on the tradition. What will happen to the far more high profile Naqvi? It appears he bounced a cheque to the Jafar's of the Crescent Group and may face a prison sentence if he returns. Comfortably ensconced in Britain, it is unlikely that he will face any very serious consequences.

However, as with 'for profit' Micro-finance, so too has Leveraged Buyout based 'impact investing' bit the dust as a way of reconciling God with Mammon. It is doubtful whether Government backed Development Funds- like the UK's CDC or Norfund- will learn their lesson. It is even more doubtful that International Auditing franchises will mend their ways. However, it is likely that the Gates Foundation will change its approach and get rid off dodgy middle-men whose inflated rhetoric might upstage the Great Bill (& Melinda).

Is there a lesson to all this? Yes. Economia is linked to oikos- families operating in an akrebic manner and relating to other families according to the rules of a common eusebia or conventional piety. This gives some leeway for 'economia'- some sympathy and forgiveness and reciprocal acts of gratitude and generosity- which Accountancy can't capture. In order for this 'economia' to survive from generation to generation, there have to be acts of pure philanthropy- moral potlatches- such that residuary control rights are surrendered and reputational benefits get diffused because of inter-marriage or shared ideology.

The problem with the Gates Foundation is that its interventions are not in keeping with the eusebia prevalent in the countries where it can get 'the biggest bang for its buck'. It now appears that Davos type eusebia was pure horse-shit. Thus, going forward, either the Gates Foundation becomes truly autonomous and goes the way of the Ford Foundation, or else it either exits the market or just shuts the fuck up.