Private iniquity? The Abraaj case

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Hello and welcome to the Intelligence on Economist Radio. I'm your host, Jason Palmer. Every weekday we provide a fresh perspective on the events shaping your world. Australians head to the polls tomorrow to elect their Parliament. The country is impatient with its political class and it's had five prime ministers in the past decade. One way to tackle that malaise is to keep a leader in place long enough to get some big ideas pushed through. In part because of Australia's compulsory voting, its elections are very much a community affair, bringing neighbours and families together at the ballot box. But perhaps the most unifying feature of voting day for many there is the democracy sausage. But first today, Arif Naqvi, a Pakistani businessman, is expected to appear in court in central London. He's hoping to walk out the front door, having been imprisoned since his arrest last month. To do so, he's got to put up a bail of £15 million, around $20 million. It's believed to be the largest such security ever ordered in the country. That record reflects the gravity of a case involving billions of dollars and that's causing major headaches for the wider industry of private equity.

In September 2017, Hamilton Lane, which is an investment manager based in Pennsylvania, received a fairly unusual email.

Matthew Favas covers finance for the Economist.

The email had the subject line ABRAJ Fund 6 warning. And it was accusing the ABRA is a private equity firm, so a firm that invests in unlisted companies of exaggerating the value of its investments so as to raise Fund 6. So one of its funds, the latest funds it was raising. The email was littered with typos and grammatical mistakes, so its appearance was not very serious. But actually its tone was fairly sinister. It contained phrases like, there is no smoke without fire. Some friendly advice, so some fairly stark language. Hamilton Lane got a bit startled, forwarded the email to senior people at Abraj asking for evidence to disprove the claims, they got some documents in return, then they did their research as well and in the end they were happy with what they got and they decided to invest more than $100 million in font 6.

And how significant was the Abraaj Group at this point?

So the Abraaj Group was, it's fair to say, the best known firm investing in price equity, based in emerging markets. So based out of Dubai, it was investing across Latin America, Asia, the Middle East, Africa, Turkey as well. Abraj understand local dynamics, Turkish economy and Turkish customer. It had about $14 billion of assets, which is quite a lot. And it was a darling of investors because of the returns it provided. Now, something that was also notable about the firm was its leader. So Mr. Nagvi Arif Nagvi, a Pakistani national, was a patron of the arts, a Davos regular. The last time he was at Davos, he was sitting on the same stage as Bill Gates.

Actually the conclusion I'm coming to is that healthcare is everybody's business, ok? It's not just the remit of governments, it's not just the remit of non governmental organizations.

And he was a very charismatic character. So everybody believed what he said and it was very followed by investors.

But there came a point where not everyone believed what he said. How did that all kind of unravel?

Yeah, exactly. It actually happened very rapidly. So the Abrad Group, one of the funds it managed, was a fairly high profile fund which had about $1 billion of money in the Kiti. It was a fund focused on healthc and it was also notable because it was labeled as an impact investment fund. And by that what people mean is that it was chasing financial returns, but also was aiming for positive impact, to make a positive impact where it invested. It's an impact in terms of environmental, social and governance benefits, of creating jobs.

Partnership is everything for a brush.

We invest in people, not in assets.

In Akurio we found an excellent management.

Now, by late 2017, four investors in that fund started wondering where the money that they had given the firm to make investments, where that money was, because some of the investment that they were expecting had not materialized. So they asked questions to Abraaj, but they were not apparently satisfied with the answer they got because they hired an investigator to try and trace the millions. Basically, a few months later, in February 2018, the news broke and that shattered confidence in the firm, including among banks and other lenders which closed the taps. At that point, the company sought protection, filed for provisional liquidation in the Cayman Islands where it is incorporated to try and have a bit more control over its restructuring. And, you know, this all happened in the space of four months and it's essentially the very fast collapse of an emerging market star.

And Mr. Naqvi is implicated in this somehow. What exactly is he charged with?

So last month the securities and Exchange Commission, which is America's main financial regulator, issued an indictment accusing Mr. Naqvi and the firm, but involving Mr. Nagvi of diverting money from the fund, 230 million, about that sum from the fund to the company's bank account to try and plug financial hold. So the company was allegedly making operating losses for many years it had been doing so. And so it appears from the accusation that the regulator issued that Mr. Nagvi used the money of its investors to prop up its own finances, the finances of the company. He was arrested in England, where he lives. Two more executives have been arrested and as we speak, Mr. Nagvi is in a British prison awaiting for a bail hearing. Today, it should be said that Mr. Nagvi denies all the charges and still expects to be cleared.

And the sort of sudden collapse of a firm of that size, such a high profile firm of that size, does that have sort of knock on effects, in particular in the emerging markets where it was such a star?

Yes, absolutely. Especially the home turf of Abraj, so Africa and the Middle East. This has taken quite a big knock. So from data I got from Private Equity International, which tracks this sector, I understand that about a billion dollars was raised in the four quarters that followed the menus coming out. And that's about a third of the annual average of what was raised in the five years before. So it's really a fract of what used to be collected by these funds.

So it seems to have just spooked investors off that entire region?

Absolutely. Especially investors from the Western world. So large pension funds in America, for example, seem to have retreated. And that is definitely having an impact. You can see that in the numbers. But we'll have to see whether in the future there is a broader impact.

And did we ever find out who wrote the error ridden letter?

No, actually we have no idea. So the sources I spoke to told me that it was sent through an encrypted router, so they don't know the identity of the person. We can formulate theories. It could be a disgruntled employee, it could be a rival for all we know. But for now it will remain a very anonymous whistleblower.

Matthew, thank you very much for your time.

You're very welcome.

Tomorrow Australians will vote to elect a new Parliament.

Tomorrow's election is high stakes, not just because it'll probably result in the first change of government in six years in Australia.

Edward MacBride is the Economist's Asia editor. Last year he wrote our special report.

On Australia, but because it probably will be a watershed in terms of policy making, most obviously on climate change, where Australia has had a very muddled response until now and looks like it might finally adopt a more pointed policy.

Prime Minister Scott Morrison and his right leaning Liberal Party are fighting to remain in power. We have a plan to make Australia.

Stronger and on the 18th of May, Australians will have the opportunity to back.

That plan as we're backing them.

Thank you very much.

But the centre left Labour Party, led by Bill shorten, is slightly ahead in the polls. After a decade of political instability, many voters are disillusioned. Australia has had five different prime ministers since 2010. Political infighting and a series of ousters meant that not one of them finished a full term.

We never voted for Scott Morrison. We never asked for him and Abbott and Turnbull to waste time fighting over each other's jobs.

And just 41% of voters say they're satisfied with the way democracy works in Australia.

The irony is that Australia has been doing phenomenally well economically. It's been growing for 28 years straight. That's a record for any rich country ever. And yet many Australian voters don't feel that they're really seeing the benefits of that growth anymore. But their disgruntlement isn't just with the economy. They're upset at the political class. Australia has churned through five prime ministers in 10 years. There's some sense that politicians are losing touch and not providing the policies, the answers that Australians are looking for.

So it's inherently dangerous to be an incumbent. The incumbent Liberals, how are they and their coalition parties polling?

Well, they've been behind in the polls for three years, only slightly behind, but consistently so. So they're likely to lose the election narrowly to the Labour Party. What they've been trying to do to claw back an advantage is to lab Labour as unreliable on the economy.

Labor can't manage money.

That's why they're coming after yours. Labour, it's the bill Australia can't afford. And they've also been trying to get people anxious about labor being too liberal, so being too welcoming to refugees, being too willing to take radical steps to counter climate change that might hurt the economy, that kind of thing.

The Liberals want to convince the electorate that labor is too Liberal.

Yes. In Australia, the Liberals are the right wing party. It's confusing. Like so much about Australia, it's down under, upside down.

So how does labor answer that charge? How is it sort of positioning itself?

Labour's pitch centers on the idea that the Liberals are only concerned about the rich. So although their economic policies aren't that different, Labour is raising some taxes, the burden of which it says will fall mainly on the rich in order to pay for more schools and hospitals. And so its ads keep talking about how the Liberals just care about the top end of town. You may think Liberal leader Scott Morrison hasn't done very much, but that's not true. He's done plenty. He spent every waking hour trying to give the banks a $17 billion tax.

Cut, cut $14 billion from.

And they would only oppose these changes because they're in the pockets of millionaires.

And so what about Labour's policy on climate change, which you mentioned is foremost in voters minds?

This has become a big deal. Up until now. The right wing of Australian politics has basically spent its time just shooting down that labor and other parties on the left, obviously the Greens proposed to do about climate change as too expensive, too disruptive to the economy, too much of a risk to ordinary people's incomes. And that line had worked very well. And indeed, the last time the Liberals won power from labor six years ago, they built their whole campaign around that very successfully. They've tried to do that again this time around and it doesn't seem to be playing nearly so well.

It sounds as if it's even more politicized than it is, for example, in America.

Well, the political dynamic is very similar, but I think the difference in Australia is that climate change is even more present and destructive than it is in America. Rainfall, which is already a fairly rare commodity in Australia, has been decreasing in a lot of farming areas, something that's very bad for farmers. Obviously there have been wildfires again, something they have every summer, but that are increasing in intensity. Droughts, cyclones. Perhaps the most notable thing in the last couple of years has been coral bleaching on the Great Barrier Reef. When the sea temperature rises, coral can't cope. And if the water stays too hot for too long, the coral dies. That's happened to about a third of the Great Barrier Reef since the last federal election in Australia. So I think even Australians, who might be inclined politically to side with the right are becoming alarmed about global warming.

And so that's why Labor's doing well in the polls.

Well, yes, but Labor's not doing that well. It's only ahead by 2 percentage points on average. I think Australian voters feel fed up with both the Liberals and with Labour. It doesn't show up so much in the results because of Australia's electoral system, which guides votes back to the main parties. But people are increasingly voting for smaller parties, protesting against what they see as a sort of stagnant politics of the Liberals and Labour.

So how to get past that stagnation and therefore that frustration?

Part of the problem has been this churn of prime ministers. So the two parties, basically, because they keep worrying when an election comes, as it happens every three years, they're going to lose out to the other party. So they keep ditching their prime minister in the hopes that that'll improve their pol, and that just means there's no consistent policy making. I think if things finally settle down and any Prime Minister from either party is given the chance to really pursue a policy platform for a full term or two, that might reassure Australians that actually the system is capable of working. And there might be a chance of that because both of the big parties have changed their rules to make it harder to switch prime ministers midterm. So maybe whoever wins this election, the result will be something a little bit more stable.

And so, Edward, last year you wrote a big, splashy cover piece about Australia and the lessons that the wider world can learn from it, arguing, you know, with this great long success in the economy and political system that keeps things relatively centrist. We all had something to learn. There's a bit of attention then. If everybody in Australia is disenchanted with.

It, there is a bit of a tension. One of the things that was striking after writing that special report, all the feedback I got from Australians was, how come you're being so nice about Australia? You know, you're saying it's wonderful. We don't think it's that wonderful. The thing is, the foundations of this incredible economic prosperity that Australia has experienced were laid 20, 30 years ago by politicians who adopted very big, ambitious reforms, exactly the sort of thing that Australians complain their politicians aren't doing these days. They completely overhauled the management of the economy. They made sure that the welfare state was affordable. Big steps that the rest of the world is still wrestling with in a lot of cases. So the world can definitely learn from what was done then, but Australians need to remember what was done then too, if you see what I mean. The contemporary Australian politicians need to take a leaf out of the book of their predecessors and try and be equally ambitious. And I guess what we've been discussing about climate change is a good example. Right. It's a clear, grave problem that a whole generation of Australian politicians have either ducked or adopted policies that didn't stick. So Australia needs those same kind of visionary politics that put it in such a good place.

Edward, thank you very much for coming in.

Thanks for having me.

If you're following the results of the Australian election online this weekend, you might notice a certain emoji appear a lot. It's the democracy sausage, the patriotic pork product that's become an unlikely electoral icon.

Oh, well, the most traditional democracy sausage will actually just be in a single.

Slice of Kimberly's seats.

Helps eager voters find their nearest ballot based barbecue. She's in charge of spreading the word about the website democracysausage.org and you usually.

Place the democracy sausage on an angle from each corner and then fold the bread up so it kind of looks like a triangle.

No onions.

You can have onions if you like.

And how central is this to the act of participatory democracy in Australia?

It's quite central these days. Australia has compulsory voting. Having a democracy sausage is not part of the compulsory nature, but it is a very popular way to spend your election day.

Well, I might have imagined it as a sort of an incentive to get more people to vote, but if they have to vote anyway, where did this tradition come from?

A lot of the polling places in Australian elections are your local primary school or your local church. So a lot of the parents associations at these schools will put on fundraising sausage sizzle to raise money.

And what does democracy sausage.org do?

So democracysausage.org maps where democracy sausages are available on election day to help people decide where they might like to vote and get their best election day snack.

Kimberly, it's been a pleasure to meet with you. Thanks very much.

No problem at all. Thank you.

Eleanor Whitehead is the Economist's Australia and New Zealand correspondent. She's been looking into just how pork products became a part of the voting ritual.

Because of Australia's compulsory voting system, elections have kind of been treated almost like fates, almost like a kind of public holiday. So they take place on Saturdays. Makes it easy for people to get to polling stations. And you've got your sausage sizzle. There's maybe like a bake sale. There might be live music and there's balloons and banners and that kind of thing. So it's all good fun. And I guess it's kind of a carrot to the stick of compulsory voting. And very Australian, obviously as well. Even at an election, there is a barbecue.

I mean, it sounds like loads of fun.

Without overstating the significance of the democracy sausage, there's an argument as well that it turns elections into a kind of family event. So, you know, kids get dragged along and it's there that they get an early political education, so they get a sense of voting as being a duty, but one that's not taken too seriously or that's not too kind of sombre.

How enthusiastic do you think Australians are to get to the polls? Or is this sort of family outing feel kind of the actual draw?

Yeah, you know, I think if you were to probably ask people how enthused they were about the democracy sausage, then you'd probably find that they were more positive on that than they are on their politicians and their political system. You know, obviously because of compulsory voting in Australia, you don't get a feel for political disillusionment by low voter turnouts, but the frustrations are still there like they are in other countries. And it doesn't help, obviously, that Australia has chewed through six prime ministers this decade, and all of the numbers show that faith in the system, faith in democracy, has fallen really sharply over a really short period of time. There was one survey that said it had halved in the last decade.

And for your part, have you partaken in a democracy sausage? Do you approve of this ritual?

Well, I can't vote because I'm not a citizen, but I'm sure I will find cause to be at some polling stations purely for reporting purposes, and I will make sure that they are ones where the sausage sizzle is fired up.

We will have to get you to report back on the quality of the democracy sausage that you consume. Will do for now. Eleanor, thank you very much for your time.

Thanks.

That's all for this episode of the Intelligence. If you like us, give us a rating on Apple podcasts and you can subscribe to the economist@exterator.com radio. Offer 12 issues for $12 or 12 pounds. See you back here on Monday.