Can do, will do

Arif Naqvi, founder of Abraaj Capital, never intended to build a private equity business. Today, he presides over the largest such entity investing in the Middle East and North Africa. An eloquent spokesman for the asset class' importance in the Arab world, he recently shared his vision for the industry and the region with Philip Borel.

Dubai: boomtown of the age, a 21st Century metropolis staking a claim in the desert to build a future beyond oil. As a first-time visitor, you don't have to be told that this is a place committed to development. The city is barely half way through a stupendous transformation process, a bold bid to reinvent itself as a financial services hub between Asia and Europe. To get a sense of the ambition driving its residents, all you need to do is look up.

The number and scale of construction sites populating this urban sprawl along the shores of the Persian Gulf appear to defy common sense. Billboards everywhere advertise the trappings of the prosperity that Dubai promises – sea front condominiums, luxury cars, golf courses, international travel. People are busy here, and the traffic at rush hour can be appalling. Epitomising the city's aspirations are architectural landmarks such as the iconic Burj Al Arab hotel and Ski Dubai, an artificial indoor mountain offering the only downhill skiing slope in the Gulf. The Burj Dubai, which will stand as the world's tallest building, is currently being built. An underwater hotel is nearing completion.

Arif Naqvi arrived in the town in 1994 aged 34. Things were different then. Looking over the city from his spacious office in the prestigious Jumeirah Emirates Towers in what is now downtown Dubai, he makes the point that there was very little here when he first came. “Let me show you a brilliant picture,” he says, jumping to his feet. Moments later we're hunched over two photographs of Sheikh Zayed Road, one of the city's main arteries. Both pictures are taken from the city's World Trade Center – one is dated 1990, the other stems from 2003. The contrast could hardly be more striking.

Why Dubai? Born in Karachi into an industrialist family in Pakistan, Naqvi moved to Britain in 1979 and read economics at the London School of Economics (special subject: “Soviet economic institutions and national planning”) before training as a chartered accountant with Arthur Andersen. He returned to Pakistan in 1987 to work for American Express Bank back in Karachi. His next stop was Riyadh, Saudi Arabia, where he arrived in 1990 to spend five years with the Olayan Group, one of the country's largest privately owned trading companies. He did well, and left Olayan as head of business development, eager to do his own thing.

Naqvi says he came to Dubai “with no thinking, no business plan, no strategy, just that I wanted to start my own business”. So why Dubai? “Because of all the places in the Middle East, this was the most open in terms of being able to set up a business, in terms of the culture, in terms of the environment, in terms of logistics and connectivity. And it's a ‘can do, will do’ location, a very driven culture.”

Even if Dubai ever was a big bubble, today that bubble has been shown to be of very, very resilient rubber, incapable of being pricked, and so the bubble has become a bit of a reality

Having established a company called The Cupola Group, Naqvi helped Western firms such as Kidder Peabody to raise capital in the region and worked on a number of local advisory mandates. Success came quickly, and Naqvi brought in some external investors to help fund Cupola's development into a dividend-paying investment company focused on buying and selling Middle Eastern corporate assets.

Cupola's big break came in April 1999 when it acquired Inchcape Middle East, a distributor and wholesaler of food products, beverages and other consumer goods operating through 15 companies across the region. Naqvi bought the company in what was essentially a $101.8 million LBO that used just $4.3 million of equity and proceeded to sell off the company's non-core components. Some three years and ten disposals later, Inchcape had generated $173 million in proceeds and a gross capital gain of 16.3x Cupola's investment. It was a milestone LBO in the region, and Naqvi emerged with his asset-trading skills honed substantially.

At this point, according to Naqvi, Cupola's corporate structure was becoming a hindrance to further growth, because it could not accommodate the capital it was beginning to attract. Change was required, but Naqvi says it never occurred to him that the business had evolved into something more akin to a private equity firm than anything else.

“In 2001, I brought in McKinsey and asked them a simple question: ‘Who are we?’ McKinsey did a two to three months piece on us, came back and said, ‘look, you are a private equity firm, so why don't you structure yourself as a private equity fund?’ I have to give credit where credit is due – it seemed a very smart idea.”

McKinsey also advised that to launch the new entity and to start raising capital, a signature deal would come in handy, so Naqvi and his colleagues “went and dreamt up the Aramex deal” as he himself puts it.

Aramex International is an Arab-based logistics group, which in 1997 became the first Middle Eastern company to list on NASDAQ. Naqvi knew the company's CEO, Fadi Ghandour, and in 2001 the two men decided to take Aramex private again to grow the business further. A $65 million public-toprivate was completed in February 2002, the first M&A transactionon NASDAQ after September 11. Says Naqvi: “An Arab company taken off NASDAQ by an Ar ab private equity firm three months after the attacks – you can imagine the amount of scrutiny that must have gone into that deal.”

In order to complete the take-private, Naqvi had formed a platform called Rasmala Partners in partnership with Rasmala Investments, a Dubai-based asset management and investment banking group. The two entities went their separate ways soon afterwards, leaving Aramex in Naqvi's care, and in September 2002, Rasmala Partners was renamed Abraaj Capital. Since then, the firm has grown dramatically.

I brought in McKinsey and asked them a simple question: ‘Who are we?’ They came back and said, ‘look, you are a private equity firm, so why don't you structure yourself as a private equity fund?’

The first generation of Abraaj-sponsored limited partnerships comprises Abraaj Buyout Fund I, a $116 million vehicle closed in June 2003; the $33 million Abraaj Special Opportunities Fund (December 2003) focused on listed stocks and pre-IPO situations; and the Abraaj Real Estate Fund, which closed in December 2004 on $113.5 million.

In 2005, the firm raised $500 million for Abraaj Buyout Fund II, having attracted more than $900 million of interest from regional and international investors according to Naqvi. Most of the capital in the fund came from local sources, but New York-based institutions Citicorp Venture Capital and Wafra Investment Advisory Group invested as well. The firm also closed a second special opportunities fund on $100 million, taking total assets under management beyond the $1 billion mark.

Abraaj currently has over 75 employees, many of whom Naqvi has worked with since the Cupola days. The majority of the staff are professionals. English is the firm's language of business, but Arabic, Urdu, Hindi, French, German, Spanish and Italian are spoken as well.

The reason the firm has such a large team is to do with the lack of professional infrastructure into which it was born. “A lot of the work that firms elsewhere would outsource without thinking about it we do in-house. When we first started, the quality of service providers was just not that great. Today we've got the investment banks, lawyers, accountants serving us, it's all come into place and it's much, much easier to get high quality advice. But having built the team, we just kept building up the assets under management and trying to do innovative deals.”

Abraaj has a board of seven non-executive directors, “carefully chosen” Arab businessmen who each have a five percent stake in the business. Another five percent is held by Deutsche Bank, 25 percent is shared by a group of senior staff, and 35 percent is owned by Naqvi.

Naqvi agrees that the board has been crucial in helping Abraaj apply the “private equity mindset” as effectively as possible to the various investment activities it engages in. The board helps the deal teams originate deals, “although not as much as people think”. Beyond that, “they play a very important role in overseeing the growth of the business: the strategy, evolution, succession plans in respect of me. They're all extremely active.”

”Has the board been of critical importance to us?” asks Naqvi rhetorically. “I would say absolutely. There have been very few examples where the investors play a very active part in the governance of the processes that lead to the right decisions being made.”

Business culture in the Middle East, perhaps more so than anywhere else in the world, is famous for requiring access to locals. Has the fact that Naqvi himself came to the region as an outsider ever been a hindrance to Abraaj's development, let alone his personal goals?

Naqvi, typically, does not hesitate: “I was initially a little bit worried about that but not any more. Maybe this is personal to me, I don't know, but I have never felt excluded from any environment in the MENA [Middle East North Africa] region in which I operate. In terms of my personal assets, I think I have more of a stake in the ground here than many of the people I interact with. People see that, and they respect that.”

Naqvi's commitment to the region does indeed seem unquestionable. In addition to his business interests, he is the only non-Arab member of the Arab Business Council, a think tank attached to the World Economic Forum focusing on Middle Eastern policy debate and reform. Be it as a public speaker or in private conversation, he never tires of discussing the opportunities he sees as ripe for the taking in a part of the world where many foreigners see little more than risk.

A gifted communicator, Naqvi is at his most engaged – and engaging – when discussing the benefits private equity can bring to the region and vice versa.

Here is an example: “Why do I sound so excited? I'll tell you: the view that you see from this window is one of constant growth – you see cranes, you see buildings coming up, you see deployment of capital. But at the same time, the view from my window is so different from the view of a fund manager in Frankfurt. The difference between them and us is this: they look at the Middle East and see a region of instability – they look at Iraq, they look at Palestine. We sit here, and we see opportunity. Of course I see issues; of course the region has turbulence, but within that turbulence there are islands of calm, which is where we operate. You'll never see me invest in Iraq in the next five to seven years. But because I sit here, I can isolate Iraq from the rest of the region and I see the opportunity.”

Naqvi, clearly warming to his theme, continues: “The second thing that excites me is that we are genuinely at an inflection point. The last time was between the first and second world war, when national boundaries were drawn up by the British and the French in straight lines across the desert, and countries came into being. Well I believe we're at that point again, and this time, borders are not going to be redrawn by states, but national boundaries are going to come down in the face of economic development, in the sense that the Arab multinational is beginning to emerge, regional super-companies from Saudi Arabia for example selling goods as far afield as Morocco. They're beginning to go past national boundaries, and when that happens, who will help them? The people with the regional perspective, and that's private equity.”

Another significant geographical element of this vision is the Middle East's proximity to South Asia. In late March, Abraaj unveiled a joint venture with Sabre Capital, an Indian private equity group based in Mumbai, to raise a $250 million Indian fund. A similar JV exists with BMA Capital, a Pakistani firm based in Karachi.

Naqvi says the strategic links and trading relationships between the subcontinent and the Gulf States are already strong and manifold, which to him is another fact of economic life in the region that outsiders fail to recognise.

“In the West, with respect, you have an ability to create blocks – ‘The Middle East’, ‘The Far East’ – but India has as much in common with the Middle East as it is lacking in commonality with China or Europe. People kind of don't pick that up but it's there, it's real. And you have to have a deep sense of knowledge of both societies and cultures to be able to recognise that this is an economic opportunity that is capable of development as well.”

As it moves to take advantage of opportunities such as these, Abraaj is beginning to look a bit like a regionally focused and smaller-scale embodiment of the large multistrategy alternative investment model that has been popularised by the likes of Carlyle and Blackstone in North America and Europe. Already the firm has a number of irons in the fire, and Naqvi mentions a turnaround product as well as a growth equity vehicle as potential additions to the portfolio at some point in the future.

Isn't there a danger of the firm and its founder spreading themselves too thinly as funds under management increase in size and number? Naqvi is unfazed. “Seize the opportunity when you see it”, he responds, adding that thus far, no investor has ever lost money with Abraaj. Then, for good measure, he adds: “There are only 24 hours in a day, but we're working on squeezing out another one.”

In the West, with respect, you have an ability to create blocks – ‘The Middle East’, ‘The Far East’ – but India has as much in common with the Middle East as it is lacking in commonality with China or Europe. People kind of don't pick that up but it's there, it's real

A London-based private equity professional who knows Naqvi well describes him as the sort of individual who responds to emails at 3am. Naqvi doesn't dismiss that: “I do think that I have slightly more energy than many people, and I am very driven. But I don't work all the time. I have a very rich social life, I love doing nothing, and I do take time off which people don't realise.”

Asked about prospects for the firm's new flagship buyout fund, Naqvi responds that $500 million is a very investible number, likely to be committed to 15 deals over four to five years.

Deal flow is coming from local families keen to extend their businesses; expat entrepreneurs looking for an exit; and local governments intent on privatising state-owned assets. In 2005, according to data compiled by the Gulf Venture Capital Association, $1 billion of equity was invested in the region, five times 2004's total. And, going forward, the consensus is that this number is going to grow markedly again.

Abraaj is of course not the only group that will be involved in making this happen. Already there are other local private equity firms such as Dubai International Capital, GCC Energy Fund, Gulf Capital, Istithmar and SHUAA Capital busy putting capital to work.

To Naqvi, the point about governments in the region divesting stateowned corporations is important: he anticipates a wave of privatisation, championed by a new generation of political leaders coming into power who are focused on reform and modernisation: “Local governments are beginning to realise that they need to be in the business of governing, they need to get out of the business of managing. They're making sure that the laws that are now being passed are the ones that enable the rest of us to comply with what is required, the regulatory standards are improving, but they're very much going to leave the business of managing to the private sector. This is an enormous opportunity for private equity, because you have these monoliths out there, where, with the right investment, right incentivisation, right thinking, you will be able to turn those companies around.”

Coupled with governments beginning to systematically channel oil surpluses into the region's infrastructure, privatisation is thus expected to be a major driver of private equity's development in the region.

For Abraaj to remain in the midst of private equity activity, avoiding complacency will be crucial, Naqvi says. The challenge to himself, he adds, at a time when personal wealth creation has arguably diminished as a motivator, is to continue to make a difference at a more macro-level.

Thus far he feels a difference has been made: “I think we've helped create an industry, we're in the vanguard of it, and I think it's so exciting to participate in its growth. And it doesn't matter if five years from now we're no longer the biggest. We certainly want to be the best, but if there are other firms bigger than us or doing more innovative things, the satisfaction of having got the industry there is well worth it.”

As for the decision to build a business based in Dubai, Naqvi says that move has been successful too: “I think it was the right choice because I have lived through Dubai's transition and seen it all from beginning to end. And like most people in this city, I too went through periods of selfdoubt and scepticism thinking, ‘when will all this end? Is it not just a bubble?’” Naqvi pauses. “The answer is, even if it ever was a big bubble, today that bubble has been shown to be of very, very resilient rubber, incapable of being pricked, and so the bubble has become a bit of a reality.” He smiles. “It is there for all to see.”