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Abu Dhabi, UAEThursday 20 September 2018

Fall of Abraaj highlights imperatives of transparency and governance

The short-term fall-out to private equity and venture capital firms is that it will make their jobs more difficult

The string of regulatory filings disclosing companies’ exposure to Abraaj this week highlighted two things: one, that the broader financial damage from the group’s unravelling has so far has been limited and contained, and two, how quickly corporate reputations can dismantle when there are allegations of wrongdoing.

Most of the companies that reported links to the private equity group through regulatory filings to the Abu Dhabi Exchange and Dubai Financial Market on Tuesday and Wednesday had only limited and indirect exposure to Abraaj via independently managed funds.

The emirate’s biggest lender, First Abu Dhabi Bank (FAB), said it had direct exposure via a $21.4m loan to Abraaj, but even after the disclosure there was little impact on its stock or the markets overall. FAB shares gained 1.64 per cent by close of trade on Tuesday and 1.21 per cent higher on Wednesday, while the Abu Dhabi Securities Exchange closed up on both days.

Two local insurance companies – Al Buhaira and Emirates Insurance – said they had small exposure to Abraaj, of Dh8.4m and $2.45m, respectively, while companies including Al Qudra Holding, Shuaa Capital, and others, had indirect exposure through funds and investment stakes. Many other prominent UAE-based companies, including Aramex and Abu Dhabi Commercial Bank, said they had no exposure at all.

The short-term fall-out to private equity and venture capital firms is that it will make their jobs more difficult as investors become more cautious about where their funds are being deployed, potentially requiring greater due diligence and a longer period of reflection before deals are struck.

In the medium to longer term, private equity will remain just as viable an asset class across the markets Abraaj was investing in and new asset managers will emerge. However, the question of governance and transparency becomes even more pertinent as the industry grows.

The Abraaj situation highlights some of the broader challenges regarding governance and transparency. Whatever the outcome, it will undoubtedly prompt investors to demand more tangible assurances of governance and remind them just how fragile company reputations are.

Abraaj was once the Middle East’s biggest buyout firm, managing more than $13.6bn of assets at its peak and building up a solid profile over many years. But all it achieved came crashing down earlier this year when it faced allegations of misusing investors’ money in a $1bn healthcare fund, and the company has been unravelling ever since.

If there is some good to come out of the Abraaj scandal, it is that companies tighten their procedures and offer greater transparency to their valued investors.

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