The Gulf’s Buyout King

Arif Naqvi founded Abraaj Capital in 2002 and built it into the Middle East’s biggest private equity firm. Its $5 billion in total capital is more than one fifth of the $23.9 billion in capital wielded by the region’s 59 PE funds at the end of 2007.


Arif Naqvi had built a modest collection of businesses, including a Dubai call center and Gulf franchises of Western restaurant chains, when he spotted his first big opportunity a decade ago. Inchcape, a trading conglomerate that traces its origins to the glory days of the British Empire, was looking to shed the bulk of its international businesses to focus on motor vehicle distribution. Naqvi set his sights on Inchcape Marketing Services, which comprised 15 companies involved in everything from travel services to supermarkets in 13 Middle Eastern countries. The trouble was, he had only $9 million in cash and nonbinding letters of intent from five prominent Middle Eastern investors promising up to $50 million in equity. That left him well short of Inchcape’s $150 million asking price.

Undeterred, Naqvi took his entire 11-man management team to London, where, living dormitory-style in three small apartments, they spent two months poring over a complex web of 134 agreements that Inchcape Marketing had with local partners. The team discovered that most of those agreements had contractual clauses that could reduce profits in the event of a change in ownership. Naqvi used that information to bargain the takeover price down to $102 million, or five times earnings, with payments stretched out in three installments over a year from the deal’s March 1999 closing date. He even got Inchcape to chip in $10 million in cash to cover any delays Naqvi might face in getting control of cash flows. Then, over the next three years, Naqvi succeeded in selling off most of Inchcape Marketing’s businesses and earning $70 million in profit — a more than 16-fold return on his equity investment of just $4.3 million.

“My god, I would never take such a big risk again!” exclaims the 48-year-old Naqvi, who chain-smokes Marlboro Lights as he relates his story at his offices on the seventh floor of Dubai’s needle-shaped Emirates Offices Tower, where the directory is a virtual who’s who of the emirate’s rich and powerful, including its ruler, Sheikh Mohammed bin Rashid al-Maktoum. “But when you’re young and not yet established, sometimes you need to put a lot on the line to get recognition.”

Today the Pakistan-born entrepreneur has all the recognition he needs. Following on the success of the Inchcape Marketing deal, the first leveraged buyout of a Middle East business, Naqvi founded Abraaj Capital in 2002 and built it into the region’s biggest private equity outfit at a time when the business appears poised to explode. Abraaj, which means “towering” in Arabic, boasts seven funds specializing in everything from real estate to infrastructure, with total capital of some $5 billion. That’s more than one fifth of the $23.9 billion in capital wielded by the Middle East’s 59 private equity funds at the end of 2007, according to Dubai-based Zawya Private Equity Monitor, an online trade journal and data provider, and well ahead of the $2.8 billion managed by Kuwait’s Global Investment House, the No. 2 regional player. “We are clearly in the pole position at an exciting time for private equity in our region,” says Naqvi.

Naqvi is looking to broaden his empire by developing a hedge fund business. In June he poached Ahmed Nashaat, the Middle East director of Legg Mason’s $35 billion fund-of-hedge-funds operation, Permal Group, to develop the activity at Abraaj, and the company is in the midst of fundraising for what it hopes will be a $700 million fund by the end of the year.

Abraaj, which employs 142 people at its Dubai headquarters and at offices opened this year in Cairo, Istanbul, Karachi and London, claims a 35 percent average annual return over the past nine years after exiting 17 major investments. The firm burnished its reputation with two recent blockbuster deals. In November 2007 it sold a 25 percent stake in Cairo-based investment bank EFG-Hermes to an arm of Dubai Group, an investment vehicle of Sheikh Mohammed, for $1.1 billion, or $595 million more than it had paid 16 months earlier. And in February, Abraaj sold Egyptian Fertilizer Co. to Cairo-based contractor Orascom Construction Industries for $2.69 billion, some 39 percent more than it had paid for the company just eight months earlier. After transferring debt the firm made a profit of $835 million on its $750 million equity investment and retained an 8 percent stake in OCI.

Such results have helped Naqvi line up an impressive list of backers. Abraaj’s limited partners include members of the royal families of Dubai, Bahrain, Qatar, Saudi Arabia and the United Arab Emirates state of Sharjah as well as Deutsche Bank and Citigroup. Other investors include the General Retirement and Pension Authority of Qatar, Kuwait’s Public Institution for Social Security and DIFC Investments, the investment arm of the Dubai International Financial Centre and owner of Bourse Dubai.

“Naqvi has gotten recognition for translating big risks into consistently handsome returns,” says Iyad Duwaji, CEO of Dubai-based investment bank Shuaa Capital, which is in the process of raising its own $733 million private equity fund. “He has penetrated the GCC community with undeniable flair,” he adds, referring to the six-nation Gulf Cooperation Council, made up of Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the UAE.

Success inspires imitation, though, and the burgeoning ranks of private equity players looking to tap into the Gulf’s riches are creating plenty of competition for Abraaj and pushing up valuations. U.S. giant Carlyle Group and Investcorp, a Bahrain-based fund that until now has focused mostly on Western markets, are both raising $1 billion-plus funds for the region. Others gearing up to enter the Middle East include London-based private equity firms 3i and CVC Capital Partners, New York–based Ripplewood Holdings and Fort Worth, Texas–based TPG. More are likely to follow, attracted not just by the region’s breakneck growth but also by the fact that the Middle East is largely unscathed by the global credit crisis, with cheap credit for leveraged buyouts readily available.

“Although it was always seen as a source of capital, until Abraaj, no one looked at the region as a destination for investment,” says an executive at one leading Western firm, who spoke on condition of anonymity. He acknowledges that Naqvi has a big lead on his rivals but believes Western firms with deep pockets, experienced managers and global contacts can catch up quickly. “Companies that want international exposure, global industry expertise and a private equity team that has the clout to recruit the best managers worldwide will inevitably turn to firms like ours over even the biggest local players like Abraaj,” he contends.

Naqvi is confident that his team is up to the challenge. The influx of foreign funds may well have a “bubble effect” on prices, he concedes, while insisting that Abraaj has the expertise and market knowledge to maintain its regional dominance. The company has 81 investment professionals, including a five-man investor relations team and four 17-person investment management teams that are responsible for identifying, purchasing, managing and exiting companies in the Middle East, North Africa and South Asia. By comparison, Carlyle opened its regional office in Dubai earlier this year with a staff of ten professionals.

“Sixty-five percent of our deal sourcing comes from our in-house research or our connections,” Naqvi tells Institutional Investor in a recent interview. “We have a size and reach that allows us to stay ahead of the competition.”

With its extensive resources and early start, Abraaj has racked up an impressive array of firsts. It launched the Middle East’s first Western-style private equity vehicle, the $116 million Abraaj Buyout Fund, in 2002, then upped the ante in 2005 with a second buyout fund worth a then-record $500 million. Last December the firm set a new record by closing a $2 billion Infrastructure and Growth Capital Fund, which seeks to invest in everything from roads and energy to schools and health care. Abraaj’s recent sales of its stakes in EFG-Hermes and Egyptian Fertilizer were the biggest exits to date by a private equity investor in the Middle East.

“The one unifying theme amongst all our investments is the belief that the region’s fragmented industries will consolidate,” says Naqvi. “Merging Egyptian Fertilizer into OCI gives us a fantastic platform for consolidation in both construction and fertilizers.”

Notwithstanding the growing competition among private equity houses, industry executives say the region can support a big increase in deal flow. With local economies booming and oil prices likely to remain high for some time, there is plenty of liquidity available. Privatizations and a rapidly growing private sector should keep the industry supplied with targets. The steady deepening of local capital markets, moreover, is making it easier for private equity investors to cash out. Abraaj sold off Jordan-based logistics and courier group Aramex International through a $186 million initial public offering in June 2005 on the Dubai Financial Market, the emirate’s local exchange, in the region’s first such exit. Abraaj had paid $65 million, of which $25 million was equity, to take Nasdaq-listed Aramex private in 2002. A half dozen similar exits have been engineered on stock markets in the Gulf and North Africa. Strategic sales are also on the increase. Altogether, regional private equity firms managed to make 19 exits worth $1.5 billion last year, up from six worth less than $500 million in 2005.

The son of a Karachi plastics factory owner, Naqvi is a chartered accountant who received a BA with honors from the London School of Economics in 1982; his thesis, ironic considering his career, was on Soviet economic systems and national planning. He subsequently spent four years as an accountant serving oil and gas clients at the London office of the former Arthur Andersen & Co. before returning to Karachi with American Express Co. As chief operating officer of a new investment bank Amex was setting up, Naqvi spent much of his time petitioning Pakistan’s central bank to set up clear contractual regulations regarding everything from foreign exchange transactions to tenders for publicly listed companies.

Tiring of the bureaucracy and eager to become a deal maker, Naqvi in 1990 joined the business development department of Saudi Arabia’s largest trading company, Olayan Group, founded by celebrated entrepreneur and investor Sulaiman Olayan. Arranging regional franchising agreements with the likes of Coca-Cola Co. and Hertz Corp., Naqvi quickly made a name for himself as a masterful deal engineer, rising to head of Middle East business development by 1993. “When it came to presenting a convincing case when we were trying to get new partners, or structuring deals with a minimum investment from us, there was no one better than Arif,” says Zahi Khouri, the former New York–based president of Olayan’s development unit who hired Naqvi and today is chairman of Palestinian National Beverage Co., the Coca-Cola franchisee for the West Bank and the Gaza Strip.

After failing to get a big raise he sought, Naqvi left the company. Through a friend at Kidder, Peabody & Co. in London, he began placing the investment bank’s European private equity investments with Middle Eastern investors, earning $1.5 million in fees in just 12 months. “After that I thought I was a genius, and I decided to go into operating businesses myself,” says Naqvi.

He invested all of his money in Cupola, an off-the-shelf shell company, and raised additional capital by selling 75 percent to a few Saudi and Bahraini investors he knew from his days at Olayan. He bought franchise rights for several restaurant chains in the UAE and Pakistan, among them TGI Fridays and Pizza Express. He also invested in a factory making magnetic-strip and chip-embedded cards for the banking industry, a call center and a document warehousing business, all located in Dubai’s Jebel Ali free-trade zone, before striking the Inchcape Marketing deal in 1998. “With Inchcape we discovered we had a knack for alternative-investment structures that involve leverage, and we are pursuing it single-mindedly,” says Naqvi.

Abraaj’s purchase of a 25 percent stake in EFG-Hermes in July 2006 demonstrated Naqvi’s patience and ability to find value in turbulent times. He had flown to Cairo in the spring of 2005 to discuss purchasing a significant stake, only to be rebuffed by EFG chief executive Hassan Heikal, who was eager to preserve the firm’s independence. At the time, EFG was enjoying an unprecedented surge that saw its stock rise more than 15-fold, to a high of 94.90 Egyptian pounds ($17.62) a share, by late January 2006. When Middle Eastern stock markets subsequently collapsed, the stock was among the hardest hit, falling to 22.75 pounds that June. The following month Israel invaded Lebanon, and EFG, which had just bought a 20 percent stake in Lebanon’s Bank Audi, decided that the only way to keep the shares from falling further would be to seek major new institutional investors. But with no other investors willing to commit, Heikal was forced to turn to Naqvi, who paid $505 million for the stake. “Abraaj was ready to invest without hesitating, despite the difficult circumstances in the market, while we were eager to sell,” says one senior EFG manager who spoke on condition of anonymity. “It was a marriage of convenience, but, as far as we were concerned, no more.”

Naqvi wanted to integrate EFG’s investment banking business with Abraaj’s private equity operations and create a regional financial powerhouse capable of making acquisitions in everything from insurance to commercial banking to asset management. But clashes with EFG executives stymied those plans. “Integrating businesses always looks good on paper, but it is usually much more complex in practice,” says Mustafa Abdel-Wadood, a former CEO of EFG’s Gulf operations who has served as Abraaj’s managing director and head of its portfolio investment teams since May 2006. “We clearly caught hints of that difficulty with EFG, realizing that we faced really tough questions when it came to how to create a clear chain of command between the two entities and drive synergies.” The senior EFG manager is blunter: “Abraaj had two people on a nine-person board, and Heikal and his other shareholders simply refused to give up control or sell them a further stake, putting paid to their integration plans.”

Naqvi ultimately sold his EFG stake to Dubai Group last November for $1.1 billion, an 8 percent premium to EFG’s share price the day before sale rumors surfaced.

“In addition to Dubai Group, we had two sovereign wealth funds interested in buying the stake and one global investment bank, with a marginally higher offer from one of them,” says Naqvi. “We chose to sell to Dubai Group because it’s a fund focused exclusively on financial services investments and would therefore add the greatest value to EFG going forward.” He denies that selling to Dubai Group, an investment vehicle owned by Sheikh Mohammed, was simply the most politically expedient option. People close to Heikal say that while he had no say in the matter, Dubai Group was also his preferred bidder.

The difficulty he encountered in trying to integrate EFG combined with the lucrative nature of his exit persuaded Naqvi that his group should stick to its focus on private equity and avoid any attempt to build a financial services empire. “As a result of the EFG experience, we have a clearer understanding of ourselves,” he says. “What we are good at, what people rely on us to do and what we are very comfortable doing is being an alternative-asset manager with a focus on private equity.”

Egyptian Fertilizer is another example of the kind of opportunities that exist in the region’s nascent private equity market. As with EFG there was no real need for Abraaj to roll up its shirtsleeves and restructure the fertilizer producer and distributor, based in Sokhna on Egypt’s Red Sea coast. With the arid Middle East and North Africa eager to boost food production, Egyptian Fertilizer’s profits and revenues are projected to grow at a double-digit pace for years to come. The company had been privatized for roughly $750 million by Egypt’s government in 2005 and sold to a consortium made up of a half dozen Saudi and UAE investors, who owned a 90.6 percent stake, and Cairo-based private equity firm Citadel Capital, which owned the remainder. When the Saudis decided they wanted to sell in the spring of 2007, Naqvi quickly heard of it, since most of the Saudis were also investors in Abraaj. After a brief tussle between the two equity firms, Naqvi’s side offered slightly more-advantageous initial terms than Citadel, according to investors in both funds, winning the right to negotiate exclusively with the consortium. By June, Naqvi had struck a deal to buy Egyptian Fertilizer that saw the consortium take home $680 million in cash, while the company’s existing $600 million debt was refinanced with a new $1.25 billion debt package supplied by Deutsche Bank. This gave the company capital to expand, in particular into Algeria and Nigeria, two markets that were also priorities for OCI.

At the time Naqvi was concluding the Egyptian Fertilizer deal, OCI’s controlling shareholder, Nassef Sawiris, also an investor in Abraaj’s funds, was buying and consolidating a string of North African and Middle Eastern cement operations, which he sold last December to French building materials conglomerate Lafarge for €8 billion ($11.8 billion). Flush with cash and eager to grow his own small fertilizer operation, Sawiris agreed to buy Egyptian Fertilizer from Naqvi for $2.69 billion in February, half in cash and half in OCI shares, leaving Abraaj with an 8 percent interest in the company.

As a limited partner in Abraaj funds since 2006, Sawiris speaks with Naqvi regularly about investment opportunities in the region, making it no surprise that they had been thinking along the same lines for some time. Naqvi now sits on OCI’s board. That’s an added benefit of the Egyptian Fertilizer deal for Sawiris, who, like Naqvi, believes that the greatest investment opportunities going forward will be in broad regional infrastructure projects ranging from roads to natural gas. “With his nose for opportunity, I’m sure Arif will provide us with lots of ideas for profitable investments that we can make alongside Abraaj,” says Sawiris.

In what remains his core regional private equity business, Naqvi forecasts that the most activity in the short term will be in energy, logistics and transportation. “Before the end of this year, you will see new record-breaking transactions of $3 billion to $4 billion in those sectors,” he says. “I am not being prophetic — we are working on a few of them.”

Elsewhere, Naqvi is looking to build up a hedge fund business, a dream he has nurtured since launching the $32 million Abraaj Special Opportunities Fund in 2003. That fund was liquidated in 2005 with a 61 percent return over 20 months. Its $128 million successor, Abraaj Special Opportunities Fund II, launched in 2005 and closed in December 2007 with a 56 percent return after 29 months. The two vehicles invested primarily in pre-IPO share placements and in listed companies where short-term corporate activity was likely to lead to rapid price gains.

Naqvi is currently raising funds for Abraaj Special Opportunities III, which people close to him say could attract as much as $700 million before the end of the year. Although there are no reliable figures, that would probably rank as the largest of the region’s roughly two dozen hedge funds, according to industry executives. Nashaat, whom Naqvi recruited to run the business, had established a fund of funds at Permal aimed at Western equity investors interested in the Middle East. He is expected to boost Abraaj’s in-house expertise with roughly a dozen hires.

Naqvi makes it no secret that his ultimate ambition is to build a diversified investment business like Blackstone Group, the New York–based private equity and alternative-asset manager. With his swagger and the Gulf’s riches behind him, he may well succeed.