LSBM302 - Corporate Risk: The Abraaj Group Case Study Evaluation

This case study examines the Abraaj Group, a Dubai-based private equity firm, and its dramatic collapse. The analysis begins with an introduction to the company, founded by Arif Naqvi, and its initial success, including a peak of $14 billion in assets under management. The study then delves into the key risks that led to the company's downfall, including financial risk, hiding losses, and investment risks. It classifies these risks and evaluates Abraaj’s responses, highlighting significant gaps and shortfalls in their approach, such as over-leverage and a lack of transparency. The study also discusses relevant aspects of risk governance and regulatory risk, particularly the role of the Dubai Financial Services Authority (DFSA) in investigating the collapse. The conclusion summarizes the failures and recommends improvements in private equity valuation transparency and regulatory oversight. The case study provides insights into the importance of corporate risk management, financial transparency, and the consequences of misconduct in the financial sector.

Case study

Table of Contents
INTRODUCTION...........................................................................................................................1
Assessment of Risk:.........................................................................................................................1
Key risks.....................................................................................................................................1
Classification of the risks............................................................................................................2
Risk responses..................................................................................................................................3
Evaluation of Abraaj’s response to its risk exposure..................................................................3
Gaps and shortfalls in Abraaj’s approach...................................................................................3
Relevant aspects of risk governance and regulatory risk............................................................4
CONCLUSION ...............................................................................................................................6
Recommendation.............................................................................................................................6
REFERENCES................................................................................................................................7
Online reference..........................................................................................................................7

INTRODUCTION
The Abraaj Group is a Dubai located private equity organisation, the firm was founded
by Pakistani businessman Arif Naqvi. Group was founded in 2002 by Arif, company is growing
and well maintained organisation(Beerel, 2019). But its success turned into biggest failure of the
company. Organisation become most powerful emerging market increase the firms after 16 years
of years of success and gain $14 billion AUM. But in 2018 its reputation destroyed and in 4
months company collapsed. In 2019 Naqvi and then executive Mustafa Abdel- Wadood were
arrested on US with the charges of defrauding investors. It was the biggest fall in the success of
the Abraaj group, it become an sheltered for the company. The management of US claimed that
company was lying its growth from the 2014 and also about its performance in the market.
Abraaj group was also accused for misappropriation of million of dollars of investor's funds in
Madoff esque fashion. There is also on going investigation about the company about the
dynamic duo bribed Pakistani politician.
Abraaj group was fonded in 2002 by Arif Naqvi who is an Pakistani business man, also
he remind chief executive of the firm till the last years. The supporting partaner is Mustafa Abdel
Wadood. He jonied the company in 2006 and become managing partner. After the establishment
company dazzled with effective growth by 17% annual return. In the years 2014 to 2015
company generate profit of $450 million on 13 exits. Organisation was listed in London stock
exchange in 2015.
Assessment of Risk:
Key risks.
Despite of establishment and continuous growth company began to struggle as year after
year in its profit and loss balance show multi million dollar operating losses. The revenue that
made up performance and management fees were measure by bloated cost to plug the gap, the
group was borrowed by 2018(Bianchi, 2019). the financing cost was came out $41 million, after
the tow years Abraaj attempted to divest its assets including the stake in a Pakistani utility firm
of $1.8 billion. It was the biggest failure of the company, Abraaj defaulted on its loans and it was
the huge impact on its performance in the market. Kuwait's public institution for social security
alongside a fund linked to Sharjah based cerscent group's Hamid Jafar moved to force company
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to give court supervision restructuring. Various risk faced by the company make it more difficult
for the investor to believe on the investment companies.
Classification of the risks.
Abraaj group face various risks that impact the reputation and growth of the company.
Organisation face huge losses and decrease in the revenue by 2018. below is the classification of
various risk that company faced.
Financial risk: Abraaj group face huge loss in its profit & loss accounts, in Dubai
financial services Authority fined out that company is combined $315 million for deceiving
investors and misappropriation of funds(Bishop, 2012). This make a huge impact on the
company and its reputation in the market. The Authority of financial services said that
misconduct and deceit were pervasive and persistent and the management of rode roughshod
over its compliance function. Financial risk face by the company was the down fall that affect its
market and growth in the market.
Hiding losses: The Abraaj group lied about the losses to the investors in order to
maintain the position in the market and gain profit. Lying about the growth and performance
becomes huge risk for the managing partner of Abraaj group. The members of Abraaj group was
arrested for the lie about the losses and profitability rate of the company. The New York
prosecutors investigate about the members of Abraaj group and finds out that there was security
fraud of the company. It become huge challenge fro Abraaj group to face those allegations by the
investigators.
Investment Risk: Abraaj group face huge investment risk in their firm after the shelterer
of the company. Investors of the company also get huge losses by the fraud Abraaj group
done(McMahon, 2016). Allegations on the investment and capital of the company affect the
profit rate and growth of the company. After the defaulted on loans, company was forced to
came in the court supervision. Abraaj's downfall eroded investors' confidence in private equity
companies emerging in the market. This make an huge impact on the purchase of the company's
shares and its growth. Huge frauds of the company make its reopening more difficult. For many
investors this collapse is estimated assets of $1.1 billion unlikely to cover the debt of Abraaj
group.
Thus, from the above information it can be understand that company face various losses
and risk by lying about its performance in the market. It was the huge loss for its investors also to
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invest in the company with huge debts. Abraaj group could survive this scandal but there are
huge number of the reasons that explain why company fall. Due to lack of transparency in the
business company face huge risk and challenges.
Risk responses
Evaluation of Abraaj’s response to its risk exposure.
The company was spending beyond its limits by using money of other people, Abraaj's
holdings become largest investment fund that manages private asset worth more than $14 billion.
But due to huge loss in the company or lack of transparency it Abraaj group collapse with
estimated assets $1.1 billion(Stephens, Michael, and Moonesar, eds., 2013). Company start to
cover its debts, Abu Dubai's financial market have disclosed association with Abraaj capital
group. The managing partners of Abraaj group corrupt the funds of their investors in order to
overcome from the losses company was facing from long period of time. They ensure that firm
has continuous to perform at the highest levels. These development of the company has adverts
effect on the investors and their funds. Company was lied about its growth and performance in
the market in order to prevent from the various risk that they are facing. Abraaj group lied to its
investors in order to promote the business and hide internal losses. Mr Naqvi also face two
criminal cases over bounced cheques in the past, he tried to control all the financial risk in the
firm. The case was filed by his personal creditors, and one of the creditor was founding
shareholder of Abraaj. This was the criminal offence by the Abraaj group to issue cheque
without funds.
Gaps and shortfalls in Abraaj’s approach.
Over leverage is the one of the main reason why company fail, both Abraaj spokespeople
and Mr Naqvi largest shareholder always deny any wrongdoing(Watkins, 2020). Abraaj's
approach to its risk management was wrong, company blame the founder and fellow board
members for PwC, the gap between long running liquidity shortfall between the investment
management fee and operating expenses was the down fall of the company. Abraaj group's the
gap between the investment management fee and operating expenses was $30 million and $60
million per year. Company was short spending beyond its limits, they use other investors money
for higher expenses and it become huge risk for its future market. In March company hosted 500
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guests for a week of discussion, with the dinner at Dubai's Burj Kalifa. The lavish dinner was the
symbol of how high Abraaj had risen, but behind scene it was trouble for the company to show
its fake growth and performance(Windsor, 2009). This over leverage expenses of the company
become the reason to its fall in the market. Thus, there was many downfall in the management of
the company, and its management of risk in the firm. This downfall could me minimise by the
managing partners of the organisation but with over expenses and use of invalid funds could
become threat for their future.
Relevant aspects of risk governance and regulatory risk
Whatever happened in Abraaj group can be seen as an wake up call for the government
and the investors. Private equity valuation always seen lack of transparency in the business
increase the challenges and barriers. all the information of investment and shares. These issues
includes sourcing of suitable comparable companies and calibrating relevant liquidity and market
discounts. The Dubai Financial Services Authority, investigate the collapse of the company, the
firm influence thinking on the corporate governance. DFSA said that it was the responsibility of
higher management of the company to provide insight about its financial loss and position of the
company in the market. DFSA said that reviewing risk based approach to supervision in order to
ensure that all the feature of the particular case. On August Dubai Financial Services Authority
stopped Abraaj capital Limited from taking new business or moving to the Abraaj Investment
Limited. It was the step that government of the Dubai take in order to prevent the country form
the fraud and other scam. Dubai Financial Services Authority, said that government ensure that
taken regulatory action had assisted liquidators but that it did not regulate Abraaj Holdings.
Below are some provisional liquidation that Dubai Financial Services Authority investigate:
 Company carried out some unauthorised financial services, such as fund management,
within and from the Dubai Financial Services Authority(Zafar, and Perepu, 2020).
 Abraaj actively misled and deceived investors in the funds of the company over the
expended period of time.
 Misuse of funds and investment of the investors in order to meet company's expenses.
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CONCLUSION
From the above information it can be conclude that Abraaj group was failed to maintain
its capital resources, as a result of misconduct company face many challenges and risk. Dubai
Financial Services Authority also taken action because of the concern about firm carrying out the
unauthorised financial services. Company borrow money to show in the bank balance which was
not expected by the investors. Abraaj group face various allegation and criticisms due to the
fraud in the private capital market.
Recommendation
From the above information it can the recommended that in private equity valuation it is
very important to make transparency in business that can help to reduce future barriers.
Government of financial security can investigate earlier about the funds and loans of the
company. Several investor should question about the investment market so that it can prevent
them from fraud. To prevent market form the frauds government of financial security should
focus on proper investigation about the various private equity capital.
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REFERENCES
Books and Journals
Beerel, A., 2019. Ethical Leadership and Global Capitalism: A Guide to Good Practice.
Routledge.
Bianchi, R.R., 2019. China and the Islamic world: How the new Silk Road is transforming
global politics. Oxford University Press.
Bishop, M., 2012. The Future of Private Equity: Beyond the Mega Buyout. Springer.
McMahon, S.F., 2016. Crisis and Class War in Egypt: social reproduction, factional
realignments and the global political economy. Zed Books Ltd..
Stephens, M., Michael, I. and Moonesar, I.A. eds., 2013. East Meets West. Emerald Group
Publishing.
Watkins, J.S., 2020. Islamic Finance and Global Capitalism. Springer International Publishing.
Windsor, D., 2009, July. Private Equity Investments: Assessment Of Responsibilities And
Remedies. In Proceedings of the International Association for Business and Society (Vol.
20, pp. 278-289).
Online reference.
The Abraaj Group Scandal, 2020. available through: <https://bspeclub.com/2019/11/19/the-
abraaj-group-scandal/>
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