Features | February 7, 2018

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

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With Dennis Price

Editor’s note: ImpactAlpha is continuing to track the fallout from the dispute over the Abraaj Group’s finances. Among the developments since this story on the health fund and the original dispute:

  • KPMG, the auditor Abraaj brought in to inspect its books, said it has verified all payments and receipts. Ankura Consulting, another auditor enlisted by the Gates Foundation, the International Finance Corp., Proparco and CDC Group, has not released a statement.
  • Abraaj’s founder, Arif Naqvi, stepped aside from the firm’s fund-management business, which will be governed by an independent board of directors and management team, Abraaj said in a statement. Ashish Dave, Abraaj’s chief financial officer, has left the firm. Mustafa Abdel-Wadood, the global head of private equity at Abraaj, and Sev Vettivetpillai, Abraaj’s global head of impact investing, are also leaving.
  • Abraaj paused investments and halted fundraising on its new $6 billion SDG fund, Private Equity Fund VI. Abraaj closed on the fund’s first $3 billion last year. Washington State Investment Board and the Teachers’ Retirement System of Louisiana withdrew a combined $300 million that had been committed to the new fund.
  • Abraaj is considering selling part of its fund management business to raise cash.
  • The firm is now plans to cut 15% of its 350 person workforce.
  • Abraaj is ready to resign management duties on its $1 billion healthcare fund. A new plan would put the fund in control of an interim manager until a permanent home for the fund is found, allowing the the fund to manage existing investments and deploy the remaining $500 million.
  • Private equity firm TPG is in talks with investors in Abraaj’s Growth Markets Health Fund about TPG’s The Rise Fund taking over management of the $1 billion fund, the Wall Street Journal reports. Both funds claim to provide investment capital to help deliver the U.N.’s Sustainable Development Goals. Abraaj reportedly isn’t involved in the talks. Separately, Abraaj is engaged in an ongoing sale process for Abraaj Investment Management Ltd.

ImpactAlpha, Feb. 7, 2018 – If Davos was the party, then the simmering dispute between the private equity investor Abraaj Group and some of its limited partners, including the Bill & Melinda Gates Foundation, is the hangover.

Less than two weeks ago, Bill Gates and Abraaj CEO Arif Naqvi shared the stage at the annual meeting of the World Economic Forum to talk about “a new era of global health.” In that seemingly shared vision, private capital would be harnessed for the growing health needs of emerging middle-class consumers in cities like Karachi, Lagos and Mumbai. The Gates Foundation had made the first $100 million commitment to Abraaj’s $1 billion Growth Markets Health Fund, and helped to bring in other investors after an earlier meeting between Naqvi and Gates in 2012.

Behind the scenes, representatives of the Gates Foundation and other investors in the health fund had been pressuring Abraaj for months for a fuller accounting of the fund’s finances. This week, The New York Times and The Wall Street Journal reported that four limited partners — out of a total of 24 — have enlisted an outside auditor to examine the health fund’s books and verify all receipts and payments. At the end of December, Abraaj returned a reported $140 million to investors that had been called but not disbursed.

The surprisingly public rift signals a rare reversal for the Pakistan-born Naqvi and Dubai-based Abraaj, which manages a total of more than $13 billion. Abraaj has rocketed ahead of more established private-equity firms to become one of the world’s largest investors focused on what Naqvi calls “growth markets,” more commonly referred to as “the developing world.” With more than 20 offices and 300 employees spread across its five regional hubs of Dubai, Istanbul, Mexico City, Nairobi and Singapore, Abraaj touts its local presence as a core strength.

In recent months, Naqvi has taken a high-profile role as a leading spokesman for “SDG investing,” insisting in keynotes and interviews that the global Sustainable Development Goals represent the premier global growth opportunity. Driving social and environment impact with the investment of private capital represents not a tradeoff, Naqvi says, but “a trade-on.” The Wall Street Journal reported that Abraaj has raised about half of a separate $6 billion fund focused on such SDG investing.

In Davos last month, Naqvi laid out the health fund’s ambitious strategy. “We said, ‘How do you galvanize the private sector? How do you get private money to come in and make a difference?” His answer: “Let’s make systemic change to start with. Let’s talk about prevention rather than intervention. Let’s create a platform across markets.” In about 18 months, the health fund says, it has served nearly two million people through two dozen hospitals, 30 diagnostic centers and 17 clinics. Naqvi said the fund’s operations are profitable.

Hints about the current dispute snuck into the discussion around the edges of the prepared talking points. “It’s never easy,” Gates said at one point. “The delivery piece in a lot of these countries has been tough to execute on.”


In response to a question from the audience, Naqvi said, “Try walking into a government office in Nigeria or in Pakistan. They may not have that many rules and regulations, but they have one thing called bureaucracies…You still need an enormous amount of effort to get things done.” He acknowledged, “It’s still early. I wouldn’t claim success. I wouldn’t claim victory.”

A spokeswoman for the Gates Foundation, Gabriella Stern, declined to comment for this article, which includes interviews and reporting conducted before the current dispute became public. The Wall Street Journal reported that the other investors who have brought in their own auditor, Ankura Consulting, are the International Finance Corp., a part of the World Bank, and CDC Group and Proparco Group, development finance institutions in the UK and France, respectively.

Abraaj issued a public statement this week, calling the recent media reports “inaccurate and misleading” and said its fund management practices were consistent with the limited partnership agreement. Abraaj has enlisted KPMG to review its accounting and said it is confident the auditor “will confirm that all the funds were accounted for and used appropriately.”

Another investor, the Dutch health technology company Royal Philips, said in a statement it is “long-term partners with Abraaj and is committed to the Fund. Philips remains aligned with the Fund’s efforts and objectives to build hospital capacity and access to healthcare in emerging markets.”

“Bill was instrumental in that vision,” Naqvi said at Davos last month. “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.’”

Gates himself said the rise of non-communicable diseases, as well as higher incomes around the world means “the model is unlikely to be the hospital that has government employees and is government run.” Developing countries can’t afford to spend the same sums on health care as the US, but insurance can give patients access to private sector services, and innovative models can fund preventive measures and create competition. “That’s where the action will be,” he said. “We’re interested in getting a view of that.”

21st-century platform

The Abraaj Growth Markets Health Fund is aiming to build hub-and-spoke, geographically clustered health systems in 10 high-growth, high-need cities in Africa and South Asia. By 2050, the global population is expected to be nearly 10 billion people. The world’s biggest cities are expected to be Mumbai, Delhi, Dhaka, Kinshasa, Kolkata and Lagos, all with populations well above 30 million.

If the Abraaj Growth Markets Health Fund executes, its hospitals could be treating 14 million patients a year by 2020 and employing more than 50,000. The system could include 275 diagnostic centers for pathology and imaging services. The idea is to link networks of health services in urban clusters, driving both better health and lower costs through large-scale investments. A global health platform for the megacities of Africa and South Asia would provision whole health systems for cities, sometimes from scratch, but more likely by integrating existing assets.

By cross-fertilizing management talent and expertise, and sometimes even health services themselves, like remote diagnostics, Abraaj hopes to assemble entire health ecosystems, from tertiary hospitals to secondary clinics to pharmacies and primary clinics.

Abraaj has brought on teams of operators to manage the platform. The fund boasts a chief operating officer, a head of real estate, a head of learning and development, a head of HR, a head of digital, a head of IT and a head of procurement. By leveraging data, talent and purchasing power across a network of hospitals serving hundreds of millions, Abraaj could drive down costs, expand services, and improve quality.

“You’ve got quality at the core of the system. And that requires a middle-income, low-middle income strategy to make sure the hospital is self-sufficient,” says Khawar Mann, the managing director of Abraaj’s health care team. “From that core of quality, that core of doctors can transfer skills to junior doctors and you can build the hub and spoke systems that these markets need.”

The Growth Markets Health Fund isn’t primarily focused on the income targets of its beneficiaries. Instead, the fund has introduced and will track metrics that are indicators of healthcare accessibility, affordability and quality. The fund will monitor indicators of system transformation, like doctors and nurses trained and health innovations introduced. To ensure affordable prices, for example, each portfolio company will have to benchmark its pricing against its competitors.

A five-member impact committee, led by Sir David Nicholson, former head of the UK’s National Health Service, will evaluate each investment and guide the impact intent of the fund. Though it doesn’t hold a veto, the committee must approve at least 30% of the fund’s investments.

Project delays

Abraaj’s health fund has completed the acquisition of Avenue Group, a Kenyan hospital chain with a foothold in East Africa’s largest economy. A year ago, Abraaj snatched up the Islamabad Diagnostics Centre, a network of low-cost diagnostic centers that Abraaj plans to grow from 20 to 50 in the next five years. Early last year, as one of fund’s anchor investments, Abraaj bought Care Hospitals, India’s fifth-largest private healthcare provider with 2,600 beds across 16 hospitals in Hyderabad and eight other cities in central India. Abraaj is building new hospitals in Lahore and Lagos. In Karachi it has acquired a large plot of land to build.

Perhaps not surprisingly, some of those projects have run into delays. In Karachi, for example, a sudden ban on high-rises set back the construction of Abraaj’s planned 17-floor hospital. Two elections in Kenya caused delays. In India, the government’s “demonetization” strategy disrupted revenues for many businesses, including Care. “Some capital was not used as quickly as anticipated due to unforeseen political and regulatory developments in several of the fund’s operating markets,” Abraaj said in its statement. Abraaj said its partnership agreements allowed it to retain capital during such delays, as long as a project is not canceled.

It remains unclear why the accounting dispute has spilled into public view at this time. In the past, the same Gates Foundation program-related investment team that invested in Abraaj has used technical violations of its agreements as a way to force investees to improve their internal controls and systems and position themselves for more sustainable growth. In 2012, for example, after agricultural lender Root Capital briefly exceeded its lending limits, the Gates Foundation team insisted on extensive internal changes. Root officials chafed at some of the mandates but in the end said the Gates Foundation’s “tough love” helped make Root a stronger and more sophisticated financial manager (see, “Tough Love: How a dose of banking discipline strengthened financing for smallholder farmers”).

Less predictable is what impact the dispute will have on the broader landscape of private investments to advance the Sustainable Development Goals. For the health goals laid out in SDG №3, the investment needed is not just $1 billion, but $140 billion in additional investment in health infrastructure every year through 2030. That means tripling current investment levels of about $70 billion each year.

Abraaj is an early mover in that landscape and a leading example of a new player in the investment landscape: Multi-billion-dollar private equity funds at least officially committing themselves to shared global goals and measurable impact. Because they can take and deploy checks in the billions, such big private-equity funds may be able to unlock the trillions needed to meet all of the Global Goals. Meeting the 2030 goals will require the overhauling of systems and sectors to eradicate poverty and provide universal access to water, energy and education as well as health care.

TPG Growth’s The Rise Fund has raised $2 billion and made investments, ranging from a $120 million edtech investment in EverFi in the U.S. to a $50 million investment in Dodla Dairy in India. Bain Capital closed on a $390 million “Double Impact” fund focused on health, sustainability and community-building in the U.S.

The Abraaj Growth Markets Health Fund is expected to generate internal rates of return in the mid- to high 20s, according to Bloomberg. With more than 300 limited partners in a range of regional and country-focused funds, the firm has generated a 17 percent annual return since its inception, according to Forbes.

Some critics have taken issue with the arrival in the development world of such profit-seeking private investors, just as some private investors have scoffed at the notion that social-impact investing can deliver attractive returns. Naqvi has been vocal about pushing back against both sides.

>>MORE: Arif Naqvi takes global financiers to task

Great businesses are fundamentally about addressing societal challenges, Naqvi likes to say. The Sustainable Development Goals for cities, food and agriculture, health and education, and energy lay out “phenomenal” investment opportunities. “We’re at beginning of a rare inflection point,” Naqvi said during one of his several keynotes during UN Week in New York last September. “Not to grasp it would be a criminal waste.”

Disclosure: ImpactAlpha collaborated with the Bill & Melinda Gates Foundation on “Making Markets Work for the Poor” to share the foundation’s experiences in making program-related investments. The project was published in the Stanford Social Innovation Review and is available here.