Beats | July 25, 2018

TPG Growth’s Rise Fund touts ‘impact’ in bid for Abraaj health fund

David Bank
ImpactAlpha Editor

David Bank

Bono and Bill Gates have been longtime partners in philanthropic efforts to fight poverty, hunger and disease. They may become impact investment partners as well in a private-equity fund aimed at transforming health care delivery in the developing world.

Round-robin negotiations over the fate of the troubled Abraaj Group has left TPG Growth’s Rise Fund as one of the remaining bidders for Abraaj’s $1 billion Growth Markets Health Fund. Bono, the rock-star-turned-activist, co-founded the $2 billion Rise Fund with billionaire Jeff Skoll and TPG Growth’s Bill McGlashan.

The fate of the health fund has been intertwined with the disposition of other Abraaj assets, but has unique considerations because of particular impact commitments Abraaj has made to limited partners, including the Bill & Melinda Gates Foundation. Whether and how a new fund manager will carry through on those impact commitments is a key factor in the ongoing discussions, according to a person close to the situation. A spokeswoman for the Gates Foundation declined to comment.

With Abraaj’s Arif Naqvi, Gates helped develop the health fund’s audacious plan to build comprehensive healthcare networks in the megacities of the 21st century like Lagos, Karachi and Mumbai. The notion was that such networks could deliver high-quality health care and attractive financial returns through high levels of market penetration and economies of scale across geographies.

“Bill was instrumental in that vision,” Naqvi said on a panel at the World Economic Forum in Davos in January. “It all started with a discussion with him.”

The Gates Foundation made an early $100 million program-related investment in the fund and helped bring in other investors. But the foundation was also part of a group of investors that pressed Abraaj on accounting irregularities, an inquiry that ultimately led the parent firm to file for liquidation in the Cayman Islands. 

The Wall Street Journal reported this month that PwC, which is supervising the liquidation, had found that Abraaj “borrowed” money from the health-care fund “without giving notice to investors.” When investors objected, Abraaj repaid the capital. In addition to the Gates Foundation, other investors that questioned Abraaj’s accounting included the International Finance Corp., the U.K.’s CDC Group and France’s Proparco.

What we know about Abraaj’s $1B health fund — and the mystery of the firm’s finances

The Rise Fund is among several private-equity firms still in the running to manage the health fund. A deal struck by Colony Capital to acquire Abraaj Group funds collapsed earlier this month. More recently, Cerberus Capital walked away from negotiations after its $25 billion bid to manage the Abraaj platform was rejected by limited partners. Other investment firms said to still be in contention for parts of Abraaj’s platform are York Capital Management and a unit of Abu Dhabi Financial Group.

Will ambitious global health strategy survive the Abraaj scandal?

Maya Chorengel, a senior partner with the Rise Fund, referred questions to a spokesman, who didn’t repond. It’s not clear whether units of TPG or TPG Growth are vying for other parts of Abraaj beyond the health fund. The Rise Fund appears to be one of the only self-described impact investors among the bidders. That may prove to be a key factor in winning over limited partners.

Under U.S. tax rules, program-related investments like the one made by the Gates Foundation must have “charitable purpose,” rather than financial returns, as their primary intent.

In an on-stage interview with me earlier this year, the Rise Fund’s McGlashan said he looks for opportunities in which financial success and social impact are “colinear,” that is, in which business growth drives growing impact as well.

Each Rise Fund investment, McGlashan said, is underwritten not only for financial targets, but for a specific impact target, in dollars. That “impact multiple of money,” or IMM, can be delivered in many forms, such as increased income for smallholder farmers, reduced greenhouse gas emissions, lower costs through diabetes prevention, or other quantifiable social goods.

Rise Fund’s Impact Multiple of Money: A conversation with TPG’s Bill McGlashan

The impact commitments made by Abraaj include the creation of an impact committee, which was chaired by Sir David Nicholson, former head of the U.K.’s national health service. The committee screened potential investments before they were sent to the fund’s investment committee. It also was to collect data and report across five impact metrics, including access, affordability, quality, training and prevention. A representative of the Gates Foundation served on the committee. 

“We are judged by financial returns and a deep set of impact metrics,” Khawar Mann, managing director of the health fund, told ImpactAlpha in an interview last year, before the accounting irregularities came to light.

The health fund was a hands-on operator of urban health networks it was both acquiring and building, including new hospitals in Lagos and Karachi and the provision of cardiology care in Nairobi. The fund had deployed just under half of the $1 billion commitment when investment halted late last year amid the audits of the firms accounting.

In the earlier interview, Mann suggested that some elements of the fund’s strategy, such as primary care through health clinics, only make financial sense as part of the comprehensive plan. “By pulling those assets together in hub-and-spoke systems, you can make good returns,” Mann said. “I have not seen primary care as standalone be profitable, but it can be as part of integrated model.”

Whether the operating strategy and integrated model can survive the transfer to a new fund manager is critical not just to the disposition of the fund’s assets, but to broader efforts to boost investments in global health systems sufficiently to meet  U.N. Sustainable Development Goal No. 3, “ensure healthy lives and promote wellbeing for all at all ages.” The additional investment needed in health infrastructure needed to fulfill that goal is estimated to be $140 billion every year through 2030.

In the interview, Mann said the $1 billion fund was just the beginning of even bigger plans to roll out in additional cities with follow-on funds. He said an established health care platform would allow Abraaj to more efficiently build health networks in additional cities. “There’s a lot of capacity to do much more in health care,” he said. “There will be a need for more capital.”

How to keep Abraaj Group’s meltdown from dragging down ‘SDG investing’ as well

Disclosure: ImpactAlpha worked with the Gates Foundation to produce a 2016 special report, Making Markets Work for the Poor, that profiled a number of the foundation’s program-related investments.