How Abraaj makes the case for third-party valuations

The charges against Abraaj Group executives may drive LPs to mandate external valuations methods in LPAs.

Recent charges against liquidated emerging markets-focused private equity firm Abraaj Group may drive limited partners to push for external valuations to be included in limited partnership agreements, say experts.

The Southern District of New York released updated charges on June 13 for the Abraaj Group’s chief executive and founder, Arif Naqvi, as well as several figures in the group’s upper management. The charges not only allege the mismanagement of its healthcare fund that came to light last summer, but also claim the executives manipulated the valuation of its would-be $6 Billion Fund VI, for which $3 billion was raised, to attract investors.

The valuations were conducted internally, which is not unusual for private funds. According to a benchmarking survey conducted by Private Funds CFO in 2018, two-thirds of firms undertake all valuation activity in-house. This is gradually changing, say advisors.

“There has been a push in the last several years to make sure funds at least have their valuations reviewed on a periodic basis to make sure the internal valuations that the funds are doing are reasonable and can be supported,” Dan DiDomenico, a senior managing director at Murray Devine Valuation Advisors tells Private Funds CFO.

Although not currently a standard term within LPAs, the emphasis on third-party valuation advice may soon begin to change, says Thomas Angell, financial services practice leader at Withum in New York.

“I think over time that’ll change,” says Angell, “Similar to how originally private equity funds didn’t use outside administrators and now a lot of them will use outside administrators just because it’s a comfort level to the institutional investors that there’s someone else looking at the books besides the staff of the fund itself.”

David Larsen, managing director of Duff & Phelps in San Francisco, notes that third-party expertise in valuations should “augment and enhance” process so that they are “not just reliant upon management or the auditor, but you’ve effectively got a third leg to help demonstrate rigour, reliability, and a level of independence.”

While demand may begin to grow for larger funds, mid-market and small-cap funds may have to continue conducting valuations internally if costs demand it. “Just because there has been a push [for third-party valuation to be written into the LPA] doesn’t mean everyone has complied,” says DiDomenico.