July 17, 2012
Interviewed by: David Snow
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Building Abraaj

Since its inception in 2002, Abraaj Capital has moved from an upstart, Dubai-based investor to among one of the largest private equity firms in the world and a dominant player across the emerging markets. Its acquisition this year of Aureos Capital give the firm a presence in 30 countries. And according to Abraaj CEO Mustafa Abdel-Wadood, the growth of Abraaj has only just begun.

In an exclusive interview with Privcap, Abdel-Wadood discusses how his firm has built upon its initial success in the Middle East by expanding to contiguous geographies, the importance of the Aureos Capital acquisition, how Abraaj can be competitive in newer markets like Latin America, the business connections that are growing between emerging markets, the “pent up demand” for goods and services among emerging middle-class consumers around the world, how the MENA region moved away from being “a source of capital as opposed to a target for capital,” and why the firm recently launched a fund targeting investment in Palestine.

Since its inception in 2002, Abraaj Capital has moved from an upstart, Dubai-based investor to among one of the largest private equity firms in the world and a dominant player across the emerging markets. Its acquisition this year of Aureos Capital give the firm a presence in 30 countries. And according to Abraaj CEO Mustafa Abdel-Wadood, the growth of Abraaj has only just begun.

In an exclusive interview with Privcap, Abdel-Wadood discusses how his firm has built upon its initial success in the Middle East by expanding to contiguous geographies, the importance of the Aureos Capital acquisition, how Abraaj can be competitive in newer markets like Latin America, the business connections that are growing between emerging markets, the “pent up demand” for goods and services among emerging middle-class consumers around the world, how the MENA region moved away from being “a source of capital as opposed to a target for capital,” and why the firm recently launched a fund targeting investment in Palestine.

David Snow, Privcap: We are joined today by Mustafa Abdel-Wadood, the CEO of Abraaj Capital. Mustafa, thank you for joining Privcap today.

Let’s talk a bit about the broader ambitions of Abraaj. I think many people in the finance world are very aware of Abraaj being a powerhouse in the MENA, the Middle East region. And yet recent expansions, and all along, have indicated that you have broader ambitions in the emerging markets broadly defined. Can you talk a bit about what your strategy is with regard to the world, essentially?

Mustafa Abdel-Wadood, Abraaj Capital: Sure. I think at the core of our so-called ambition is our investor base and the opportunity set that exists in the markets that we’ve been operating in and the markets that we have gradually expanded to.

In terms of the history of Abraaj, it’s been a 10 year history. So we’ve been at it for a while. We’re largely associated with MENA, that being our route in how we’ve built our success. But we were able to leverage that region and the opportunity in that region that very few people saw initially. And on the back of that success, we have gradually sort of spread the region, looking at contiguous geographies where there– we saw a contiguous geographies, trade investment flows, and markets where our model would translate well to. So, although historically been associated with MENA, from the outset our defined geography was Middle East, North Africa, and South Asia.

About five, six years ago, organically, we built a very strong presence in Turkey with a significant portfolio there. And more recently, about a year and a half ago, we set up operations in Singapore to look at Southeast Asia and some of those economies there, considering the similar sort of characteristics of these emerging markets.

And most recently, the opportunity came about where we accelerated our growth plans, which were– eventually, our intention was to cover Asia more thoroughly and sub-Saharan Africa eventually, through basically the acquisition of Aureos. We acquired 100% of Aureos Capital, which is a great firm focusing on small and mid-cap opportunities across all emerging markets.

So I guess there’s a few distinct footprints, Asia, sub-Saharan Africa, Latin America, and India. Very complimentary. We already had our own sort of small and mid-cap focus strategy separate from our large-cap funds that was focused on MENA. So it was complimentary and helped us accelerate a plan we already had.

Snow: Do you intend to gradually fully integrate the Aureos infrastructure into Abraaj or will they remain distinct entities?

Abdel-Wadood: It’s an interesting question. I think it’s very important that the investment strategies remain separate. However, there’s a lot of, for lack of better word, synergies that exist in the businesses. I think the knowledge around the sectors and investments and geographies we invest in, that’s shared. I think to a very large extent, you look at the back-office operations in its entirety, our ability to better service LPs through having a strong team on the coverage side, our ability to manage the back office, all of that allows the investment teams to do what they do best, which is invest investor’s money and achieve the returns that we seek to achieve.

I think today if you look at Abraaj Capital, you essentially have two strategies. You have the Aureos group of funds, which focuses on high-growth growth capital type opportunities across the entire geographies of all emerging markets, practically. You have the Abraaj Private Equity Fund 4, which is the fourth generation of our funds, which is investing fairly large deals, typically platform deals, deals that are able to roll out, grow by acquisition and across geographies, which historically has been focused on the MENASA region but extended now to Turkey and South Asia. And I think what we can leverage also is the existing office infrastructure and presence that Aureos has in place to look at opportunities that otherwise would not fit with the Aureos mandate.

And we have– just on that question I think ’cause it does tie into it– we have an experience with that recently about a year and a half or two years ago. We acquired a GP that was focused on the North African countries. So although part of our stated geography, it was doing small and mid-cap deals in the North African geography. But since then, our ability to see deals on the large side is enhanced substantially by virtue of the fact that we have an infrastructure there.

Snow: You mentioned earlier contiguous geographies and how you’ve typically expanded that way where it made sense. Now with the acquisition of Aureos, you have essentially a network in Latin America, as well in South America. Can you talk about how what you’ve learned from, again, your history of starting in the MENA region? How is that going to inform the way that you understand and source opportunities in a different and far away location?

Abdel-Wadood: Sure. I think, obviously, Latin America does not have the same geographic proximity of some of the other markets. But as an emerging market, it does share a lot of the same characteristics. And if I sort of roll back a bit, if you look at emerging markets, these are markets where you’re seeing 2/3 of the world’s growth come out. And most people think of emerging markets in terms of BRICs. So if you look at the world outside of BRICs, there’s a lot of growth happening there, too.

But capturing the opportunity, very few people have the infrastructure, the local presence, the on-the-ground presence, in order to capitalize on that opportunity. I think the combined Abraaj-Aureos platform has the scale to have that right infrastructure. But at the same time, you look at the individual opportunities.

Now what is the commonalities? These are all under-penetrated markets. They’re all about the rising middle class and consumer stories, largely. If you look across most emerging markets, it’s ultimately about how that rising middle class is– and its appetite to consume. So, whether you’re talking about retail, whether you’re talking about financial services, white goods, what have you, that’s a very interesting play.

Obviously, there are other themes in emerging markets around natural resources, be it Latin America or Middle East or otherwise. But the underlying theme across both investment strategies is this is growth investing. This is active investing where you take active operational involvement in some of these businesses, helping accelerate their growth in the case of the small and mid-cap strategy. In the case of the platform strategy, again, it’s around heavy operational involvement. It’s about active involvement on the portfolio management side to a very large extent. And it’s largely about not buyouts, but partnering in deals and helping accelerate the growth plans they already have.

Snow: Given that you’re active in so many different geographies and given that there are recurring themes, for example, you mentioned the rise of the middle class– and that exists in Latin America just as well as it doesn’t in the Middle East– is there an Abraaj approach to the sorting out the opportunities that you’d like to pursue from the opportunities that you’d rather let someone else try?

Abdel-Wadood: Very much so. You practically said it. We like to do the deals we want to do, not the deals that are out there being sold. It’s very relationship based. It’s very local. It’s being based on the ground, looking for those deals, building that rapport. And it may be that you develop a relationship, and it’s not ready for a deal, and it comes back a few years later. But by then, you know the assets and the counter parties have been conditioned as to what you do.

I think one of things we do offer a lot of these businesses as a partner of choice, so to speak, is that we’ve done it before in a lot of different markets. We have that network effect. A lot of these businesses are looking for growth, are looking for the shared experience we have. So it’s not about presenting them with a PowerPoint of what we can do. It’s about telling them, here’s our experience in different sectors and different geographies. Here’s our network in different sectors and different geographies. We’re here to help you accelerate what you’re already doing. So there’s a natural filtration process where the deals we want to do to a certain extent gravitate towards us and vice versa.

So we like businesses that are growth-oriented. We like businesses that are ready to understand what it means to take on a partner. What it means in terms of governance and changing a little bit of the way you work, but at the same time realizing the benefits of what that partnership brings.

Snow: Can you talk about some of the synergies or the advantages that you would offer, your firm, because you are established in so many different geographies? The one difference, of course, is that many of the big emerging markets, kind of pan-emerging markets investors, have their roots in the West. You have your roots in Dubai. And therefore, is there a rising desire to plug into a network that doesn’t just offer access to maybe Western markets, but actually plugs into other emerging markets?

Abdel-Wadood: Very much so. We historically start out based in Dubai. But very early on, we started establishing a presence in different markets in order to be even more local. I think with the Aureos acquisition, even more so across a broader geography. So we’re very much from emerging markets to emerging markets. And from the outset, even when we were operating out of one location, I think we had close to 30 nationalities and mostly from EM.

So I think it has been very much in our DNA. If you look at the different offices, they’re staffed largely by teams that come from the region that have operated both in the region abroad in terms of the experiences they’ve achieved.

So what does that really mean? If you look increasingly as well, given the rising share of growth of emerging markets, then automatically what translates from that there’s more EM to EM flows. So the reliance on developed markets is less. And increasingly you’re seeing that a lot of the platform players when they look to grow, they look at other emerging markets.

We have a recent example of how that pans out in our case. So we have a 50% stake in one of the largest health groups in Turkey. We recently did a partial exit to a health care group that was backed by the Khazana Sovereign Wealth Fund out of Malaysia. And that is a function of having a presence in Asia, having a presence in Turkey, making that connectivity, but recognizing that increasingly EM players are looking for growth in other emerging markets. And I think we are uniquely positioned to help those flows.

Snow: One of the big investment theses that your firm has, and many other firms have, is that there is pent up demand, again, in this rising middle class. Can you think of any examples of an investment that worked out very well for Abraaj in any geography where you found a huge demand for a service that just didn’t exist to the extent that the consumers needed?

Abdel-Wadood: I’ll take the last example. If you look at health care in Turkey, Turkey is one of the relatively more advanced growth markets– we call them growth markets as opposed to emerging markets– but if you look at the health care business we invested in, there is– health care in general across emerging markets is extremely under-invested. If you look in terms on any metric– hospitals per 1,000 population, doctors, et cetera– on any metrics, it’s under-invested. If you look at the demographics, these are young and growing populations. So there’s a massive need there.

We invested in late 2007, probably early 2008, in that business, so you could argue at a time where the world suddenly fell off a cliff. Yet in the ensuing four, five years, we basically, if you look at, again, on terms of bed capacity, number of hospitals, and actual performance of the business, we tripled the EBITDA levels at a time where the world economy came to a screeching halt. So the growth is there in sectors such as health care and other related services in most emerging markets.

Snow: I’m really interested in your network around the world, not just by way of your offices and your portfolio companies, but your investors. And without necessarily naming any names, can you kind of give us a sense of where the capital’s coming from and how you expect that to change over the next five to 10 years?

Abdel-Wadood: Sure. I think there’s really two sort of converging stories here. Because there’s the history of Abraaj and its investor base, and then there’s a history of Aureos Capital and its investor base, and the result of investor bases going from there. And if I tackle it as a Abraaj Capital, we started out in a region where private equity was an unknown asset class. So it was early believers in the regional opportunity, a region that historically had been a source of capital as opposed to a target for capital. And so people with conviction around the opportunity in our part of the world were the initial investors, mostly family offices. Over a period of time, come–

Snow: From the region?

Abdel-Wadood: From the region, primarily. Over a period of time as we validated the thesis and we built a track record and as more people started seeing the opportunity, that investor base gradually became a bit more institutional in it’s structure where you retain the family offices, you attract more of those, but increasingly pension funds, sovereign wealth funds from the region initially. And increasingly over the past few years, we’ve seen that the investor base has become more diversified, includes international investors. And here we’re not just talking investors out of the West, but also out of Asia and other markets. So, it is still primarily skewed a little bit towards our region. It’s a function of the legacy and history of how we’ve grown.

Recently we’ve added an interesting constituency in terms of the DFIs when we developed an SME strategy at Abraaj Capitals. So we attracted a whole new group of investors that historically hadn’t been part of our investor base. And that investor base overlaps to a certain degree with the Aureos investor base. And the Aureos investor base has even given the legacy as CDC and the resultant offshoot of Actis and Aureos was primarily a DFI base. And increasingly, they’ve been tapping private pockets as well. So it’s a very diverse investor base. 

Snow: Take us back to when you were originally putting Abraaj together. And not withstanding the fact that your original backers were from the MENA region and believed in its future, was it a difficult sell to get them to think that private equity would work locally as opposed to being exported to Western countries and put to work?

Abdel-Wadood: If you look at the original history of Abraaj Capital, I mean, Arif Naqvi is the founder and group CEO of the business. Arif has been active in the region for 20 years. And there’s a number of investors who have successfully invested with him, and even at the outset of Abraaj Capital, had a substantial history. The precursor to Abraaj Capital was an investment company called Cupola, which was an investment vehicle that Arif had built with a financial backing of some investors on a deal-by-deal basis. And the track record was substantially good. On the back of his personal track record and the management team that he brought together, people were willing to invest. And then it just evolved from there.

Snow: So, it started with a faith in the Abraaj team. And it’s sort of evolved into the proof of concept that private equity can work in the Middle East and beyond.

Abdel-Wadood: Largely. And I think private equity, especially for first-time managers, is very dependent on the founders and their own track record and their own credibility. And I think Arif’s track record was essentially what people were backing at the time.

Snow: Has there been any resistance or a drop in enthusiasm from any of your investors, whether in the Middle East or beyond, as a result of the turbulence in some parts of the Middle East right now? Have you found certain investors pulling back because they’re less certain about what’s going to happen in the region?

Abdel-Wadood: I think the real challenges in terms of investor appetite happened more with the global financial crisis then really with Arab Spring. Obviously, volatility is sometimes a concern for investors. But long-term investors tend to look at the opportunity from a long-term perspective and see it across cycles and think in terms of how it looks. But there is definitely an impact.

In today’s world, there is a bit of a premium for liquidity, or for the past few years there’s been a premium for equity. So fund raising, in general, is more challenging than it historically has been. That’s one side of the equation.

But the flip side as well is there’s been a natural culling process of GPs as a result of the global financial crisis and other events. So by definition, what remains is the more established, better performing managers, those that have some differentiating factor. So you obviously have to work a lot harder to raise that money, but there’s less noise in the system, so to speak.

Snow: I’d like to step away from pure investing and maybe talk a bit about the fact that Abraaj is a big backer of responsible investment programs and even is a sponsor of some kind of cultural programs such as art. Why are you spending time and energy on those kinds of initiatives when you’re real job is driving returns, right?

Abdel-Wadood: Sure. And the two can very much reconcile. I think what we do in terms of community engagement– and there’s two angles to that. I think whether us or Aureos, responsible investing has very much been part of our culture. And we had our own way of doing it. We had a lot to learn, also, from how Aureos has been doing it given their track record and their history in investing responsibly, as well. So that remains very core to our business and is very embedded in our investment process throughout.

In terms of community engagement, that is something that we do as a firm. This is through our own resources, not investor money. And we do that because we recognize that we operate in markets where there are challenges. We do recognize, also, that these markets, there’s some misperceptions. So we highlight the talent that exists in the region.

There are causes that we do support. We support entrepreneurship. It’s something we’re very close to. And we’re not saying just supporting with money. We support it with the time of the partners and the team members within Abraaj Capital. A lot of our colleagues spend their time and effort in supporting these causes. But also, it’s a function of being engaged in these communities. And we feel it pays off and is something that we have to do.

Snow: Very briefly, I’m interested in the recent bit of news to come out of Abraaj. And again, not withstanding the fact that you are active globally, you have backed a fund specifically targeting Palestine. Can you talk a bit about why you find promises of private equity investor in that region and why there aren’t more Palestinian funds?

Abdel-Wadood: There are a few actually. There are a few small initiatives there that support investing in Palestinian businesses. For us, it’s part of a broader MENA SME strategy. So there’s a regional SME fund for the MENA region. But there’s also some dedicated country funds of which Palestine is one of those funds.

There is again, as with most markets, there’s a big gap between the perception and reality in terms of what the opportunity set is. And I think you find in those markets, there’s a very strong sense of entrepreneurial activity in a market like that, and operating sometimes in some very challenging circumstances. So we found that backing the right entrepreneurs and the right businesses is a very viable and interesting investment strategy.

Snow: What would you predict Abraaj will look like, let’s say, 10 years from now? Again, we’re not gonna hold you to this, but clearly you’re growing. You’ve grown well beyond your MENA roots. And so, how do you see the organization looking and functioning in, let’s say, 10 years?

Abdel-Wadood: Our core values have always remained consistent. So we have a very strong work ethic as a firm, yet we maintain a very collegial sort of work culture. We have a very communicative work culture. I think it’s very important to have that balance of both process but entrepreneurial conviction around investment opportunities. And that’s something we’d like to see remain. Our core investment thesis, even from the beginnings of investing in MENA, were around let’s invest in growth businesses and let’s help them grow quicker, better, and support them in doing that.

So in a way, not much has changed. We’ve grown a little bit in size. The geography has grown. But we’ve always made sure that you had the operational infrastructure as a firm to service the opportunity the way it should be serviced. As a matter of fact, if anything, we’ve invested ahead of time in terms of head count, staff, operational infrastructure to make sure that we are servicing the opportunity the best way possible.

So, that geography that we look at today, the broader emerging markets geography, is something that we feel will continue to provide a tremendous opportunity over the next 10 years. So, hopefully doing a lot of the same, but consistently and better.

Snow: Well, Mustafa, thank you so much for joining Privcap today. Much appreciated.

Abdel-Wadood: Thank you.

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