Clouds over Dubai

The results of an LP-led audit into the Abraaj Growth Markets Health Fund could have wide ramifications.

Conjecture has been swirling around Abraaj this week.

The firm, which has become one of the most significant investors in emerging markets since it was established in 2002, has been caught up in a dispute with four investors in its $1 billion 2015-vintage Abraaj Growth Markets Health Fund. The dispute centres on the treatment of capital that had been drawn down but not invested. You can read more about it and Abraaj’s response in full here.

One of the investors involved, who asked not to be identified, noted what is alleged of Abraaj – that it drew down capital and held it uninvested for longer than its limited partnership agreement permits – is not uncommon among its managers, which mostly focus on emerging markets. What was unusual in this instance was the length of the delay and a dissatisfaction around the explanations on offer.

(As a side note: this whole situation can be seen as a fine case for the use of subscription credit facilities, which allow firms to invest first and draw capital later, although these are significantly less common in emerging markets.)

On Wednesday night the firm issued a follow-up statement announcing the fund’s own investigation into the matter – it had hired KPMG in early January – had been concluded. The report from the Big Four accounting firm revealed “all such payments and receipts have been verified, in line with agreed upon procedures performed, and that unused capital was returned to investors.”

The latest statement was brief – fewer than 100 words – and left some questions unanswered. The firm maintains that the contents of the KPMG report are confidential. It is not clear, therefore, whether this satisfies investors’ concerns. We will only have a better idea once the LP-led audit reports its findings. The investor said this would likely be complete in a matter of weeks.

So what is at stake?

The firm’s ambitious fundraising plans, for one. It is currently trying to raise a $6 billion global fund and has already attracted sizeable commitments from the likes of  Washington State Investment BoardTeacher Retirement System of Texas and Teachers’ Retirement System of Louisiana. Progress on the fundraise is difficult to ascertain, though recent reports say the firm has attracted $3 billion in commitments. The firm declined to comment on fundraising.

The outcome of the audit may also have an effect on the development of the rapidly growing impact investment space. Impact investing – where a fund assumes a positive mission alongside its goal to generate financial returns – is a strategy that is gaining traction among institutional investors. Abraaj’s Growth Markets Health Fund is an impact fund and in the words of the Overseas Private Investment Corporation, an investor in it, will “play a vital role in financing healthcare services and provide significant knowledge transfer.”

There has always been a natural skepticism about returns-seeking private capital purporting to deliver social gains. Any nefarious activity – of which, to be clear, none has been proven – could reinforce this skepticism and stunt the growth of the impact sector.