The many questions swirling around the collapse of Abraaj Group will take time to answer. Its collapse and the arrests of three current or former executives have undoubtedly put a shadow on emerging markets private equity investing, almost bringing it to a halt as the details of the firm's collapse began to emerge, as reported by Bloomberg.
The demise of the Abraaj Group raises important questions, the main one being why it took from September 2017 to April 2019 for legal action to be taken against top officers.
Another question is why the alarm about the governance at the private equity firm was not raised sooner when reports of wrongdoing were surfacing in February 2018, and some consultants reportedly received anonymous tips in September 2017. Should they not have quickly reported to their investors, if not the Securities and Exchange Commission, that questions had been raised while they began their own investigations? Since the SEC won't comment, we don't know what was reported to them when or by whom, but questions abound.
Yet another question is why an apparently successful private equity firm that managed $14 billion and was an influential emerging market investor went wrong. Was it a fraud from the beginning or a case of poor management leading to errors of judgment that top management sought to cover up while they tried to repair the damage unseen?
Private equity investing has been successful for many institutions over the past 30-plus years, though not without bumps along the way. It is time for a close review of current practices and an examination of transparency in private equity firm operations. Limited partners must demand it.
Further, clients should ask their consultants what's been done to step up their screening and monitoring processes, especially where governance systems are not as well developed as in the U.S.
Investors should also get behind the efforts of the Institutional Limited Partnership Association to persuade the SEC to force managers to improve governance in their fund documents by clearly identifying conflicts.
The Abraaj collapse also should increase pressure from clients for independent directors on the boards of private equity firms as a check on their operations, and those directors should be changed frequently so they do not become too connected to the firm and lose the independent mindset.
Now is the time to tighten any processes in the researching, hiring and monitoring of private equity firms and their investments.
