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The Gulf's buyout king goes where others fear to tread

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Saturday, October 28, 2017 – Page B1

LONDON -- In 2008, when Hezbollah fighters seized control of much of western Beirut, the employees of Spinneys supermarket feared street fighting would wreck their outlets.

Phone calls were placed to the owner of the supermarkets, the AbrAj Group of Dubai. "The employees asked, 'What should we do?' " says Arif Masood Naqvi, AbrAj's founder and chief executive.

"Three of our supermarkets were in the middle of a war zone. We thought about it and said, 'Open the doors, guys, and give away all the consumable products to the community, anything with an expiry date.' " The instant act of charity proved to be a brilliant move. "We gave away everything to everyone. In the remaining 15 days of the war, all the local militia patrolled our supermarkets to ensure no looting happened and that customers were safe," he says.

The open-door strategy was classic AbrAj. The private equity (PE) firm, the biggest of its kind solely devoted to emerging markets, relies on a boots-on-the-ground network of managers and operating teams who have intimate knowledge of local politics and business. While other big-name PE firms might have put the supermarket barricades up, AbrAj stayed the course, betting that passing out food for free would buy goodwill among the militiamen.

"You cannot succeed in these markets without being local to these markets," he says.

"Most of our competitors fly in and out," Mr. Naqvi says.

Mr. Naqvi, a Pakistani, is sitting in an elegant wood-panelled room in the company's London office, one of 20 AbrAj outposts around the world, in the city's billionairepacked Mayfair. He is stout, with a full head of pepper-grey hair, and speaks polished English, thanks to his education at the London School of Economics, where he studied Soviet national planning systems before launching himself into a career in Western-style capitalism, which pays better.

Though relaxed, he keeps popping Nicorette gum into his mouth while I sip a coffee. He is 57 and quit smoking five years ago, but the nicotine cravings persist. He looks a bit tired, with good reason.

He travels incessantly, breaking now and then to play cricket with friends on the pitch he built at his country estate in Oxford. "I live in Dubai, but I have been in Dubai for less than 30 days since the start of the year. I live on the airplane," he says.

He had just finished making a presentation on sustainable investing at a conference sponsored by the Financial Times and EMPEA, the global industry association for private capital in emerging markets. Though his talk was studded with jargon ("active investing" and "investing for impact"), I was struck by one figure he tossed out - $9-trillion (U.S.) - which represents the global investment in negative-yield bonds. "How can this possibly be rational," he asked in his talk. "The plumbing of the financial system is broken. There is a massive opportunity for capital to earn strong returns. Look at the big shortfalls in health care, education, energy, clean water and housing. Only the private sector can solve these problems sustainably."

The message was that parking fortunes in bonds guaranteed to lose money is foolish when so much money can be made in emerging markets, or "growth markets," as Mr. Naqvi prefers, noting that China can hardly be considered "emerging" any more.

Mr. Naqvi founded AbrAj in 2002. Today, it has $11-billion in assets under management, covering 200 investments. They include India's Big Basket online retailer, Fan Milk International, a maker of frozen yogurt, milk and ice cream in West Africa, Peruvian restaurants, a pancake chain in the Philippines, an offshore oil and gas servicing business based in Dubai, a fashion footwear company in Mexico that caters to teenage girls, English-language training schools in Vietnam, an Ethiopian brewery, medical diagnostic centres in North Africa and a piece of Air Arabia.

AbrAj mostly avoids the cyclical resources sectors, preferring instead consumer companies that are expanding quickly as regions that we once pejoratively called the "Third World" develop middle classes who want to spend. "Most investors see Africa as a naturalresources story. We see it differently. To us, it's a consumer story," he says.

But aren't emerging markets highly risky? And isn't that why many big PE funds generally give regions such as sub-Saharan Africa and parts of the Middle East a pass?

This is where Mr. Naqvi begs to differ. He notes that the greatest source of risk in the past decade was Wall Street, which handed us the 2008 financial crisis, not the emerging markets (though Brazil, once an emerging-market star, became a source of great risk in 2015 and 2016, when it tumbled into deep recession).

To prove his point, he claims that AbrAj's loss ratio - the amount of investment capital it has written off - has been under 3 per cent against an industry average of 10 per cent or more. "Political headline risk should not be equated with investment risk," he says.

AbrAj doesn't publish its returns, but an investor who knows the numbers says they are better than decent, with net returns in the solid middle-teens and internal rates of return (IRR) even higher. Certainly, the returns are reliably strong enough to have attracted some big-name investors.

AbrAj's roster of investors includes the Bill and Melinda Gates Foundation, the World Bank's International Finance Corp., the European Investment Bank, big health-care companies such as Medtronic and some Canadian institutional investors. Mr. Naqvi won't identify the Canadians, but he is well-connected in Canada, where his contacts include Brookfield Asset Management CEO Bruce Flatt (Mr. Naqvi appears on a panel hosted by McKinsey's Dominic Barton at the Toronto Global Forum on Oct. 30).

Mr. Naqvi is the youngest of four children from a middle-class Pakistani family. His father was a plastics manufacturer in Karachi.

Calling himself a "young idealist," his studies in Soviet economics were rendered rather meaningless when the Soviet Union collapsed, he says. So, after graduating with an economics degree, he worked as an accountant at Arthur Anderson in London and landed in Saudi Arabia in 1990.

After a stint at Saudi Arabian investment conglomerate Olayan Group, Naqvi took his $75,000 in savings and set off on his own. In 1994, he started an investment advisory firm called Cupola in Dubai and got his first big break in 1998, when he and his team of a dozen young managers piled into a twobedroom apartment in London so they could be close to the bidding action for the Middle East businesses of Inchcape, the old British conglomerate that was slimming down into a car-distribution business.

In a highly leveraged buyout, Mr. Naqvi's team landed Inchcape Middle East for $150-million and earned "several multiples on our capital," he says, by selling off businesses that included oil and gas, shipping and retail. Flush with cash, Mr. Naqvi hired McKinsey consultant Kito de Boer to define a business model for him.

"Who are we, I asked Kito. He told me 'You are a private-equity firm,' " Mr. Naqvi says. (Mr. de Boer, who later became a member of the Quartet with Tony Blair to mediate the Israeli-Palestinian peace process, recently became an AbrAj managing partner).

Four years after the Inchcape deal, AbrAj, which means "towers" in Arabic, swung into action, becoming a PE pioneer in the Middle East before expanding into other emerging markets. "There was no private-equity industry in the Middle East at that time," Mr. Naqvi says. "The Middle East had always been an area where large global private-equity firms came to raise capital, not to deploy it. I was the first, or among the first, to actually deploy capital there."

AbrAj became a deal-making machine. By 2008, Institutional Investor labelled Mr. Naqvi "The Gulf's Buyout King." Managing geopolitical risk has always been one of AbrAj's strengths. During the tumultuous and violent Arab Spring in Egypt - where AbrAj owned eight businesses, from health care to farming - the firm didn't panic. It stayed put and watched those businesses grow by 25 per cent a year, even as governments rose and fell and mass protests paralyzed the cities. "We always used a stakeholder-engagement model, not just shareholder returns," Mr. Naqvi says. "We were seen as empathetic to the community and that protected us."

Once in a while, AbrAj gets nasty, in a clever way. In Karachi, where the company bought the country's biggest integrated electrical utility, K-Electric, in 2008, the losses were horrendous since more than half the electricity was being stolen, largely by industrial users.

Instead of cutting off their electricity and triggering factory shutdowns, AbrAj launched a naming-and-shaming campaign.

"We named the big players who stole the electricity," he says. "We put full-page adds in the newspapers and even had a reality-TV show that exposed the illegal connections. As a result, our line losses went from 54 per cent to 18 per cent" (the now-profitable K-Electric is being sold to the Shanghai Electric Power Co. for $1.8-billion).

AbrAj is now embarking on a sustainable-development investing campaign, internally known as "impact investing," which Mr. Naqvi defines as "making a return while doing good for society."

Many of these investments are being made in clean energy and health care, and his enthusiasm for them earned him a spot on the board of the United Nations Global Compact, an initiative to encourage businesses to adopt sustainable and socially responsible policies.

I ask Mr. Naqvi if impact investing is a heroic, feel-good idea that doesn't work, in the sense that investors typically want the highest returns possible on their investment, and damn the consequences.

He strongly disagrees, citing Unilever as an example of successful stakeholder engagement, where maximizing investor returns is not necessarily the priority. "Unilever is geared to a social message," he says. "Lifebuoy is not just about selling soap; it's about creating hygienic conditions."

Mr. Naqvi is probably one of Pakistan's richest men and is giving his wealth away. His family founded the Aman Foundation in Pakistan and endowed it with $120-million, which is used to subsidize health, education and women's-empowerment charities.

In spite of his gruelling schedule, he shows no sign of slowing down.

There's too much money to make, too much money to give away, more work to be done to cement AbrAj's reputation as a competitor to the world's biggest - and largely Western - PE funds. "Retirement?

That's up to the big boss," he says, pointing a finger to the sky.

Associated Graphic

Arif Masood Naqvi, seen in his London office, founded private-equity firm the AbrAj Group in 2002. Today, it has $11-billion in assets under management across 200 investments, covering sectors such as food, fashion, education and medicine.


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