By Simeon Kerr From Financial Times

Private equity group lacked governance but did not embezzle funds, Deloitte finds

Abraaj dipped into investor funds because of cash shortages at the group, but there is no evidence of embezzlement, a forensic review of two funds at the struggling private equity firm by Deloitte has found.

The emerging-markets specialist suffered from a “lack of adequate governance, including segregation of duties, and the overall weakness in the control framework,” according to briefing notes prepared last week for creditors and seen by the Financial Times.

The notes shed light on confidential communications with its creditors as Abraaj and its advisers try to effect an orderly debt restructuring despite an attempt by a Kuwaiti pension fund to put the firm into liquidation later this month.

Abraaj, the Middle East’s largest private equity firm, has been in crisis since it emerged that four investors, including the Bill & Melinda Gates Foundation, had complained that it had mishandled funds held in a $1bn emerging markets healthcare fund.

Deloitte makes reference to delays in Abraaj’s 2016 transaction to sell its stake in Karachi’s electricity company to a Chinese utility. The auditor said there had been commingling of fund money with Abraaj’s own money in the healthcare fund and Abraaj’s fourth buyout fund.

“Liquidity problems in the group appear to have had led to the commingling,” according to the notes. Deloitte declined to comment. Abraaj said the content of adviser presentations to creditors remained confidential.

Abraaj, which hired Deloitte to carry out a forensic review of these two funds, has already disclosed to its regulator, investors and potential buyers that monies were taken out of, and later returned, to the healthcare fund, confirming investors’ initial fears that Abraaj had mishandled their funds.

Deloitte, which has also carried out a corporate governance review at the group, confirmed there is $95m of commingled money that Abraaj has to pay back to its fourth buyout fund.

The audit found that this money had been accounted for as a receivable from Abraaj’s asset management arm.

“Deloitte confirmed that all money has been accounted for and no money is missing,” the notes said. “They further confirmed that they have not seen evidence of embezzlement and/or misappropriation in the course of review.”

Abraaj last week called lenders to a meeting in Dubai, where it presented a plan, known as Project Compass, to restructure its $1bn debt.

Cerberus Capital Management, which also presented at the creditor meeting, has made a $125m bid for Abraaj’s funds-management business, including $50m for working capital at the cash-strapped firm.

After the meeting, the secured creditors agreed to refrain from taking any action over default, helping the company to start repaying debts via asset sales, including Abraaj’s stakes in the funds it manages.

The Dubai Financial Services Authority, the regulator, is supportive of the plan, “as long as the investors’ interests in the funds . . . are protected.”

The restructuring plan, however, could be upended by a Kuwaiti pension fund, which plans to appoint FTI Consulting as a liquidator in the Cayman Islands on June 29 to wind down Abraaj for non-payment of a $100m loan.

Abraaj and Cerberus have so far been unsuccessful in attempts to persuade the Kuwaiti fund that, as an unsecured creditor, joining a consensual process would maximise its recovery.

The Dubai-based company could be forced to apply for provisional liquidation in the Cayman Islands in a bid to retain control over its own destiny.

The Deloitte notes did not assign individual responsibility for the breakdown in governance.

“It is however a collective responsibility and accountability of entire senior management of the group for lapses in governance and control framework,” the notes said.

Copyright The Financial Times Limited 2018. All rights reserved.

IMAGE: The Dubai International Financial Centre where Abraaj is based

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