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Abraaj Group Sees Buying Opportunity in Emerging Markets

Undaunted by recent market turmoil in emerging economies, Abraaj founder Arif Naqvi is raising new funds covering much of the developing world.

The recent setback in emerging markets has dealt a harsh blow to many money managers who had looked to the sector to provide growth and high returns. Capital outflows from emerging-markets stocks accelerated in the first two months of this year, hitting $29.4 billion, according to fund tracker EPFR Global, and the iShares MSCI Emerging Markets exchange-traded fund stood 10.6 percent below its May 2013 high on March 10.

The market turmoil hasn’t dimmed Arif Naqvi’s enthusiasm. Naqvi’s Abraaj Group has expanded globally from its Middle Eastern base over the past decade, and the founder sees the latest weakness as another buying opportunity.

Fragile Five? That name, used to describe a handful of problem-plagued emerging-markets economies, is irrelevant, Naqvi says. Abraaj focuses on 30-odd markets — markets, he emphasizes, not countries. The $7.5 billion firm targets consumer-oriented plays mainly in urban areas of the developing world, where so-called growth economies are experiencing the most dynamic expansion.

The population of greater Jakarta grew at an annual rate of 3.6 percent between 2000 and 2010, more than double the Indonesian average of 1.49 percent, to reach a total of 27.9 million in 2010, according to the country’s latest census. Similar trends can be seen in Istanbul; Lagos, Nigeria; and other metropolises in the developing world. More than 50 percent of the population in emerging-markets countries now live in urban areas, and their numbers are climbing by roughly 1 million people a week, Naqvi notes. “That’s eight New York Cities a year,” he says. “All of that’s in our markets.”

Consumer companies offer a much more attractive way to tap that growth than resource plays, says Tom Speechley, a senior partner and CEO of Abraaj North America, who recently opened the firm’s first U.S. office, in New York. Stocks of food companies, telecom operators, hospitals and the like provide direct exposure to emerging-markets demographics and a growing middle class, and they’re far less prone to government regulation, interference or even expropriation, Speechley asserts. Consumers “are much more predictable than governments or the corporate sector,” he says.

Typical of Abraaj’s approach was its June 2013 purchase of Fan Milk International. The company is the leading supplier of frozen dairy products and juices in West Africa, selling more than 1.8 million products a day across seven countries, including Ghana and Nigeria. Abraaj acquired 51 percent of Fan Milk for an undisclosed amount, and France’s Groupe Danone purchased the remainder.

Pakistani-born Naqvi, 53, has been adept at staying ahead of the curve. He established his reputation with the $102 million purchase of Inchcape Marketing Services, the Middle Eastern arm of British conglomerate Inchcape, in the late 1990s; he sold off most of the subsidiary’s 15 businesses and earned a 16-fold return on his investment. On the back of that success, Naqvi founded Abraaj in Dubai in 2002 and struck some landmark private equity deals in the Gulf, including buying stakes in investment bank EFG Hermes and Egyptian Fertilizer Co., both of which he deftly exited before Gulf markets tanked.

Over the past five years, Naqvi has transformed Abraaj into a truly global emerging-markets investor. The firm manages funds in six regions — the Middle East and North Africa, Latin America, sub-Saharan Africa, Turkey and Central Asia, South Asia and Southeast Asia — and owns positions in 140-odd companies. Lately, Abraaj has been as much a seller as a buyer. It has exited 30 investments in the past two years, raising a total of $1.7 billion. In February it sold its 20 percent holding in Pancake House International, a Philippines fast-food restaurant chain that Abraaj helped expand into Southeast Asia and the Middle East after making an initial investment in 2005.

Yet Abraaj’s appetite remains robust. The firm is seeking to raise new funds covering all of its regions except South and Southeast Asia. Sources say the funds are expected to total between $500 million and $800 million each. That’s a strong statement for an industry that hasn’t been immune to deteriorating market sentiment. Fundraising for emerging-markets-oriented private equity funds declined 19 percent last year, to a total of $36 billion, according to the Washington-based Emerging Markets Private Equity Association.

Abraaj is comfortable taking a contrarian stand, though. “Capital flows are obviously relevant when you’re investing in public markets,” partner Speechley says. “They’re much less relevant when you’re investing in the private space.” • •

Follow Tom Buerkle on Twitter at @tombuerkle.

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