Investing In Africa: The Abraaj Story

In late January 2014, at the most recent World Economic Forum (WEF) annual meeting high in the snow-capped mountains of Davos, Switzerland, Tom Speechley, Sev Vettivetpillai, Mustafa Abdel-Wadood – three of The Abraaj Group’s partners – and Group CEO, Arif Naqvi, were out in full force. Abraaj – as the firm is more commonly called – is one of the WEF’s 100 Strategic Partners (members who support the organization through fees of CHF500, 000). There were panels to attend, meetings with other business leaders, and numerous hallway run-ins that many attendees consider the most exhilarating and productive part of the WEF experience. While the 99-percent regard Davos as a playground for the tiniest fraction of the world’s entitled elite, many business and political leaders view the gathering as an important forum for taking the global economic and political pulse, which in turn impacts how they make big decisions over the course of the year. The Abraaj team sees it somewhat differently. For Naqvi and the other partners, Davos is not just a place to do business and make connections, it is a captive population of the world’s most important influencers upon whom they can press what the firm calls its “corporate foreign policy” – bringing greater attention to, and recognition for, the power of what they call the “growth markets” of the global south in which it invests.

With $7.5 billion in assets under management and a 20-year track record of successful returns investing in some of the world’s more difficult places, Abraaj is both an industry stalwart and a trend setter. This is especially true in the politically tumultuous countries of the Maghreb and the high growth and complex economies of Sub-Saharan Africa. Abraaj has put just over $2.2 billion into its Africa investments since its inception, and in the coming years is set to invest even more, primarily because it sees the continent as the next realm for unprecedented growth driven largely by consumer spending. “Our faith and belief in the African consumer story is dramatic because the African consumer today, in my opinion, is well neglected,” said Naqvi. “Everybody looks at Sub-Saharan Africa and calls it a resources story. I’ve always called it a consumer story.”

Arif Naqvi has made a name and a fortune for himself by embracing the unconventional. With his silver hair and soft but commanding voice, Naqvi is more professorial than one would expect a global dealmaker to be. He is a student of current events and political theory. When we met for breakfast in the Wheatbaker hotel in Lagos he was visibly excited when discussing how China’s aggressive posturing in the waters of the far east is the best thing to happen to the current Japanese Prime Minister, or how direct person-to-person development aid in Kenya might be better than the traditional packages offered by international development organisations.

Abraaj is perhaps the most visible manifestation of a contrarian attitude supported by hard data and an emotional tie to the world’s financially underserved geographies. Naqvi, who was born in Karachi, studied at the London School of Economics before setting his sights on Saudi Arabia, where he built a career working for Sulaiman Olayan, a man he calls one of the great entrepreneurs of Saudi Arabia. In 1994, Naqvi left his position at Olayan Group, with the $50,000 he had in his bank account, a new Range Rover he had won in a raffle, and the conviction that the world outside the West was full of undiscovered potential. “I felt that this region was being treated a bit like a vacuum cleaner,” he said. “People were coming into these markets, soaking up cash from individuals and institutions and investing it in the West. I said we had so much low-hanging fruit. There were so many opportunities that could be beneficially altered by applying governance and transparency, and following a very stakeholder-driven process of engagement towards investment activity. If you did it properly, then you could positively change the futures of not just companies but frankly, countries. That’s what got me started.”

His first venture, the Cupola Fund, grew steadily from inception and eventually led the largest, leveraged buyout transaction in the Middle East. In 2002, Naqvi hired McKinsey & Company to help him review his business operations. The eventual realisation was that Naqvi had been pioneering private equity (PE) in a region where it didn’t exist, and so Abraaj Capital was born.

Abraaj, which means “towers” in Arabic, was an on-the-fly choice that Naqvi stumbled upon while a colleague was absentmindedly sketching pictures of the Emirates Towers, Naqvi told The New York Times DealBook in an earlier interview. In 2002, Abraaj was capitalised with $60 million and began making acquisitions across the Middle East, including the logistics company Aramex, which it bought for $65 million and later exited through a $190-million initial public offering (IPO). In 2013, Abraaj completed 15 exits from its various funds and returned $700 million to investors. From 30 people in Dubai in 2002, the firm has no grown to over 300 people in 25 countries, organised in a hub and spoke model. The firm has six regional offices, or hubs, in Istanbul, Mexico City, Mumbai, Nairobi, Singapore, and Dubai. Its other country offices focus on fundraising or sourcing and executing deals in-country.

Abraaj’s Dubai office, which serves as the Middle East and North Africa (MENA) hub, sits in a corner of the sprawling and exquisitely manicured Dubai International Finance Centre (DIFC), a state-of-the art complex of office buildings that is the centre of financial activity in the Middle East. Inside the building, locks are controlled by fingerprint scanners and the modern design is juxtaposed with large masterworks of Middle Eastern art that are part of the firm’s corporate collection. The partners’ offices form a U-shape around a buzzing open floor populated by analysts in sharp suits. It is here that I met Mustafa Abdel Wadood, the 44-year-old Egyptian who, as a partner and chairman of Abraaj’s Management Executive Committee, or Mexcom as it is called internally, leads the seven senior partners tasked with ensuring the smooth coordination of Abraaj activities in its offices across the globe. Something of a wunderkind on the Egyptian corporate scene, Abdel-Wadood served on the board of Orascom Telecom, founded his own boutique investment bank, and ran the investment banking operations of the Egyptian financial giant, EFG Hermes, all before the age of 36. He and Naqvi had met each other professionally and through the WEF, where Abdel-Wadood was a Global Leader for Tomorrow. He joined Abraaj in 2006.

“For a firm of our size, managing close to $8 billion, we’ve actually invested in substantial infrastructure beyond what any firm our size would be doing, and that’s because of the nature of the markets we invest in. They’re spread geographically but also, more importantly, they’re market where a high level of engagement is important,” said Abdel-Wadood when describing Abraaj’s operating model. “You have to be close to your investments if you want to see the best deals and create the best deals. And you want to stay close to them to manage the right outcome. So as a result we have a substantial infrastructure and teams on the ground and we operate on the basis of geographic regions.”

Abraaj staffs its offices with people who have direct ties to the region or country in which they work. In fact, there is hardly a conversation with an Abraaj employee that doesn’t involve the phrase “we’re local” to indicate how they are able to operate effectively in complicated economic and regulatory environments. “You can’t have a big team sitting primarily in London or New York for that matter and say ‘I am going to do the growth markets of Africa, Latin America and Asia’,” Abdel-Wadood explained. “What you’ll see is the stuff that’s being shopped around instead of the deals you want to do. By being on the ground you have a very different perspective. You don’t waste your time dealing with the wrong counter parties, you don’t waste your time dealing with deals that you know won’t work. You have a reference point because you know the local landscape. I need to have seen 50 deals in Turkey to know what makes a good deal in Turkey versus what makes an average deal.”

Operating in what its leadership calls an entrepreneurial fashion, Abraaj country teams use their knowledge of the deal landscape to source local investment opportunities. The deals are then reviewed at a regional level and again by the group investment and risk management committees. Once a decision is made to acquire an asset, members from the Abraaj Performance Acceleration Group (APAG), deployed to analyse the asset’s existing infrastructure and operations, develop a short-term 100-day strategy, and a longterm roadmap for maximizing the new partner company’s (as assets are called once acquired) productive capacity.

The APAG team also addresses rigorous environmental, social and governance (ESG) considerations as part of Abraaj’s push to conduct ethical and sustainable business across its operational geographies. Abraaj has developed a proprietary index, the Abraaj Sustainability Index (ASI), which allows the group and its partner companies to measure sustainability progress and performance against each other and other similar organizations in their region. The 70 metrics fall into six broad categories, namely Financial Performance, Economic Linkages, Socio-economic Impact, Private Sector Development, Management and Governance and finally, Health, Safety, Environmental and Social.

The combination of local knowledge and the firm’s international superstructure allows teams to share knowledge accumulated over the lifecycles of numerous deals. “It’s very important, having done over 200 investments as a firm, that collective knowledge is available to everybody,” said Abdel-Wadood. “So if you’re sitting in Africa you should be able to learn from that collective experience from the deals that’s been done before.” He also emphasised how the collaborative process and local knowledge allows the firm to de-risk its investments in difficult places.

In December 2010, Mohamed Bouazizi, a young Tunisian street vendor, set himself on fire to protest a lack of economic opportunity and unfair harassment by local authorities. His dramatic death sent the Arab world into a fervour, setting off a string of revolutions that have reshaped the MENA’s political landscape. While there has been some positive political change, the social upheaval dealt a severe blow to the region’s economic stability. Research by the Bank of International Settlements reported capital flight of about $8.6 billion from Egypt, Libya and Tunisia during the height of the upheaval in those countries. According to a controversial 2013 research report released by HSBC, the Arab Spring will have cost the MENA over $800 billion by the end of 2014.

While many foreign investors were pulling out of the region because of the unrest, in 2011 Abraaj announced its acquisition of the SGAM Al Kantara Fund, a EUR 115 million PE platform jointly owned by the French banks Société General and Crédit Agricole. The deal was indicative of Abraaj’s confidence in the region. Ahmed Badreldin, the animated engineer and investment banker turned fund manager who leads Abraaj’s operations across the MENA region, affirmed Abraaj’s commitment. Outlining just how the firm was able to continue investing in North Africa during the Arab Spring, he said: “I think the key thing about managing risk around that region, the key enemy, is really foreign exchange risk, because whether it’s political or not, everything translates into foreign exchange in the end. So we try and focus on defensive businesses, or businesses with export revenue – so dollar-linked revenue – or businesses which have strong market share and strong potential to adjust pricing in the event that there is devaluation.”

In North Africa, Abraaj avoids sectors heavily dependent on government for approvals and revenue. It also limits its exposure to businesses with large concentrations of workers at a single site to avoid losses caused by industrial action and protest.

Abraaj has done well in North Africa despite the regional turmoil. It has invested $1.7 billion here since 2006. Last year the group exited from a 2009 investment in the Tunisian Opalia Pharma SA by selling a 90-percent stake to the Italian pharmaceutical maker, Recordati. Opalia recorded a 250-percent increase in sales over the course of Abraaj’s ownership. “The sectors that we’ve invested in North Africa range from financial services, basic materials, FMCG [Fast Moving Consumer Goods], healthcare – including on the service side and on the manufacturing side in pharmaceuticals. We’ve also invested in education. We’ve invested in utility services, business services and IT [Information Technology] outsourcing,” said Badreldin.

In North Africa, Abraaj tries to find sectors that are fragmented and then consolidate businesses to create a market leader. Perhaps the best example of this is their investment in diagnostic health services in Egypt, where they were able to combine two smaller diagnostic service providers into Integrated Diagnostics Holdings, a firm that is now one of the largest lab and imaging providers in the MENA region.

While Abraaj is sector agnostic across North Africa, Badreldin indicates that different countries are attractive investment destinations for different reasons. Egypt’s large population makes healthcare and FMCG an attractive play, while Morocco shows lots of opportunity in the financial services sector, despite the high cost of investing in the country. Tunisia is attractive because of its advanced manufacturing sector and ties to the European markets. “In North Africa, I think Tunisia appears to be, at least for 2014, probably the most promising in terms of deal flow because entrepreneurs in mid-market companies are keen to professionalise their companies and are seeking private capital to do so,” Badreldin said. “The fear of political risk, which was the case pre-revolution, did not allow these entrepreneurs to grow their companies for fear of reprisal. However, with a new regime and greater private sector participation, the opportunities to invest in strong, local businesses are high.”

He also expects a shake up in the private equity sector across the MENA region in the near future, suggesting that growing sophistication will lead to more secondary transactions where PE firms buy assets from each other. Ultimately, while Abraaj expects North Africa to remain a politically volatile place it considers the overall economic outlook for the region favourable. Said Badreldin: “I think the region moves in a zigzag, not in a straight line, but the direction is positive.”

If Arif Naqvi is a spokesperson for global growth markets, then he is an evangelist for Sub-Saharan Africa. When we met in Lagos, together with two members of Abraaj’s Nigeria team, Ravi Sharma and Ijeoma Agboti, the three smartly dressed for a day full of meetings with potential business interests, Naqvi spoke excitedly about the reason why he believes Sub-Saharan Africa is the next global frontier for PE. It is a theme that permeates almost all of his official statements about investing – Africa’s extremely young and fast-growing population which, if economically empowered, will drive an unprecedented consumer-fuelled increase in economic growth. “There are less credit cards in Sub-Saharan Africa than there are in Italy,” Naqvi said. “And if you transfer all of those Italian credit cards to Africa, you’ll have a growth in spending and you’ll solve the problem of Italian debt.” Abraaj takes Sub-Saharan Africa so seriously that 53 of the 200-plus investments the group has made are spread across 12 countries in the region. The firm believes that Africa is underserved when it comes to investment flows and that many deals exist if you have an on-the-ground understanding of the investment climate.

Abraaj’s strong presence in Sub-Saharan Africa is in large part a result of its 2011 merger with Aureos Capital, though the Abraaj Group’s partners are keen to stress a seamless integration and complementarities across the continent (Abraaj having been active in North Africa). Aureos Capital, the $1.3-billion dollar fund run by Sev Vettivetpillai, was initially established in 2001 as a joint venture between the Norwegian government’s PE arm, Norfund, and the Commonwealth Development Corporation (CDC). In 2008, Vettivetpillai and the principals of Aureos led a management buyout of the firm from its parent entities to form an independent PE fund with a strong Sub-Saharan Africa practice. Four years later, in 2012, Abraaj Capital and Aureos Capital completed a merger to become The Abraaj Group. Vettivetpillai said the two entities shared a similar belief in the future prominence of south-south trade flows, complementary talent pools of employees with deep local knowledge, and with the combined assets of the two organizations, the ability to invest for the long term in markets where the realisation of returns happens over longer time horizons. The combination has clearly paid off as Abraaj has logged 10 new deals in the region alone since the merger, including the 2013 acquisition of the West African FMCG company, Fan Milk, reportedly the largest PE transaction in Sub-Saharan Africa outside of South Africa.

Davinder Sikand is the Partner who heads Abraaj’s Nairobi hub, which coordinates operations across Sub-Saharan Africa. When I met with him and Sandeep Khanna, an Abraaj managing director based in South Africa, Sikand said: “We’ve known Fan Milk for many, many years. If you’re West African, you’ve grown up on Fan Milk. If you’ve grown up on the ground, this is a name that’s close to your heart. You know it very well. And our teams on the ground are local, so our investment professionals have known the business well for many years.” According to the Abraaj Partner in charge of West Africa, Jacob Kholi, Aureos had been interested in Fan Milk since 2003. Despite a strong interest in investing in one or more of Fan Milk’s country subsidiaries, the opportunity for outright acquisition eluded the fund because of the size of the deal. After the merger with Abraaj Capital and the fortuitous decision by Fan Milk’s Danish founders to sell their interests in the 50-year-old business, Abraaj was invited to bid on the larger holding company. Kholi believes Abraaj was successful in its bid, beating large, international dairy conglomerates, because of its on-the-ground knowledge. “We believe that our proximity to the operating companies, our relationship with some of the key actors, and more importantly, our understanding of the local dynamics, put us in a better state to put in a competitive bid which won the day for us,” he said. Abraaj later brought Danone into the deal as a co-investor because of Danone’s vast experience with large-scale dairy businesses.

The plans for Fan Milk are illustrative of Abraaj’s general approach to maximizing the value of all businesses it acquires in Sub-Saharan Africa, regardless of sector,. First, the intention is to improve upon the company’s core product offerings in the markets where it already operates. Next is the push to create new products that can be distributed through existing channels. Finally, there is the intent to expand the company’s footprint into new regional geographies, thus growing the scale of the business. In the case of Fan Milk, this means expanding operations across key cities in West Africa, investing in a new cold chain infrastructure and new products for the West African market. Other Abraaj portfolio companies in Africa have fared well with the same strategy. In 2009, during the height of the financial crisis and the resulting severe downturn in the global shipping industry, Abraaj acquired Southey, originally a ship repair and maintenance company in South Africa. The company was repositioned as a refurbisher of oil rigs (in addition to its core business of ship repair) and now serves a global clientele. For Sikand, these two investments, along with Abraaj’s other portfolio companies, indicate a mission beyond simply offering returns to Abraaj’s investors. Abraaj has the opportunity to prove that Africa and other growth markets are capable of producing world-class goods and services at competitive prices, and in the process, improve the region’s economic outlook.

As a company, Abraaj has built the idea of a mission beyond making money into its core operating structure. Its consideration of ESG issues in each investment is the first way to add value locally by ensuring that each company brings higher standards of sustainable business practice to its community. But Abraaj also has a more innovative means of stakeholder engagement to maintain a focus on building strong communities and not just cash returns. Its Abraaj Strategic Stakeholder Engagement Track (ASSET) seeks to grow entrepreneurial activity in geographies where Abraaj operates.

Frederic Sicre, the managing director in charge of stakeholder engagement and who joined Abraaj from the WEF in 2005, spoke animatedly about ASSET: “What really compelled me to join Abraaj was that the firm wanted to have someone drive an inclusive stakeholder approach internally and with our external partners.” The vision was to move beyond spot responses to humanitarian issues and build a mechanism for comprehensive engagement that will ultimately allow for economically empowered communities that are stronger and more resilient in an often volatile world. “It starts at the top – and Arif fundamentally believes in this approach. It’s part of his DNA. That’s why he created his own foundation, the Aman Foundation. He lives this philosophy by example. He spends time mentoring entrepreneurs. He is always ready to engage and give advice,” he said.

The Aman Foundation, established by Naqvi, is the largest private social sector enterprise in Pakistan. It supports health nutrition and education. “As you know, from the very first day we started we had this philosophy of five, five, five, which is we give five percent of our top line to stakeholder engagement and sustainable causes in the regions in which we operate,” Naqvi told me. “This is very important because when you give away five percent of your top line, basically what that’s saying is that you start with a negative five percent in your P and L [profit and loss] in the first day of the year. The reason I did that is that I wanted people to work just a little bit harder but not for themselves. So that built a dream, a culture of inclusiveness from day one.”

Abraaj asks its staff to volunteer five days a year and donate five percent of their yearly bonus to support ASSET initiatives. The result is over 8,000 hours of volunteering time logged in the past three years and over $60 million channeled into projects that support entrepreneurial initiatives. Abraaj also benefits from ASSET activities. According to Sicre, the idea was for stakeholder engagement to not only be a source of good corporate citizenship but also to allow Abraaj to embed itself into the markets and the societies in which they invest. “Because of these programmes we are so much better informed, so much better involved, and integrated into Kenya, into Karachi, into other markets where we are present. This is more than being a good corporate citizen: it is about being a long term value creator, because the businesses that we grow will only continue to grow if the societies around them grow,” he said. Abraaj seeks to further its mission by “infecting” companies it invests in with what Sicre calls, “the ASSET virus.” This, he said, is part of the Abraaj corporate foreign policy on engaging with growth markets.

Abraaj’s success ultimately depends in large part on its corporate foreign policy, doing the work both to invest successfully and responsibly in financially underserved geographies and to educate the wider world about the opportunities provided by growth markets. For Naqvi and his team, there is no question that the right strategy is increasing the amount of capital flowing to investments in Africa and other geographies of the global south. “Dominance of these markets taken collectively is what I see, and that is because two thirds of global GDP expansion between now and 2025 will take place in growth markets,” he said when asked to give his outlook on growth markets over the next 10 years. “When we look at the macro trends, we look at urbanisation, the fact that mankind, for the first time in its history, is becoming so rapidly urbanised. More than half of us live in cities. The second is that most of the cities driving global growth are in our markets. And the third is therefore, we have a rising middle class which is one and a half billion people. And the last element is the average age is 26, which is an age that people consume. They spend either on capital products or consumption items.”

Abraaj is particularly bullish about Africa, though Naqvi cites the impact of politics on macroeconomic stability as one major cause for concern. “There are some countries that are ahead of the curve and by that I mean Nigeria, South Africa and Kenya, for example. And then there are some countries that have enormous potential but are still held up by political gridlock,” he said. “I mean the kind of things that just governments can do at the most basic levels to enhance the trade flows in Africa are phenomenal, and that in itself will add points to GDP.” Otherwise he thinks the potential for growth is boundless: “When you look at economics, it’s in my book a clear story upwards because Africans need to learn to live with Africans and next to Africans. And if they start trading amongst each other, I think the continent is actually not going to need anybody from the outside for a long time to come.” (VENTURES AFRICA)