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The Story Behind Abraaj Group's Stunning Rise In Global Private Equity

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This story appears in the November 22, 2015 issue of Forbes. Subscribe

Arif Naqvi, chief executive of Dubai's Abraaj Group, hates the way Westerners speak about his part of the world. His private equity firm, he says, does not operate in emerging markets or, worse, frontier markets.

"We have taken the risk out of investing in what the West mistakenly calls 'emerging markets,' " he says in elegant, Pakistani-accented English from a Madison Avenue outpost. "They're growth markets," he insists.

While his remarks contain a healthy dose of marketing, Naqvi has a point. His $9 billion private equity firm--currently the largest investor in emerging markets outside of Brazil, Russia, India and China--has a track record many developed-world money managers would kill for. Despite operating in places where the rule of law often comes into question, limited partners report an impressive 17% annual return since inception in 2002.

Naqvi, 55, considers the notion of risky emerging markets a myth--part of what he calls "universally practiced hypocrisies." He reminds a visitor that in 2008 the biggest risk on the planet came not from the developing world but from the financial capital of the modern era, New York City. Why, he asks pointedly, "have you not attached a risk premium to doing business with Wall Street banks?"

In a clubby world of global dealmakers, Blackstone, KKR and Carlyle get most of the headlines, but Abraaj is the undisputed private equity king of investing in the seemingly dangerous markets of Asia, Africa and Latin America. There is no shortage of big investors wanting to get into its newest funds. So far in 2015 the firm has sucked in $1.4 billion in fresh capital, giving Abraaj the largest pool of institutional money now pointed at sub-Saharan Africa in the world.

The firm currently has 300 limited partners, including the Gates and Skoll foundations, the World Bank's International Finance Corporation (IFC) and the European Investment Bank.

"I view them as having more depth and breadth [in emerging markets] than the bigger players," says Jin-Yong Cai, CEO of the IFC, which has invested $200 million in Abraaj funds and $70 million directly with Abraaj in deals, including an electric company in Karachi and a home loans company in Ghana.

Adds Josh Lerner, professor at Harvard Business School, "Arif was a decade-plus ahead in terms of really understanding the potential for investors in private, family-owned companies in fast-growing markets."

Naqvi has a simple formula for success. While you might think investing in places like Egypt or Nigeria or Vietnam means winning over the corrupt players or finding ways to move in lockstep with whatever government is in power, Abraaj instead relies on a boots-on-the-ground network of small local offices to help it navigate around the corruption.

"I have out there a man who runs our Colombia business. I have another colleague who runs our Indonesian business. They happen to be in New York today," says Naqvi, gesturing out to Abraaj's small space on Madison Avenue. "What is different about them is the way they perceive the local market. So a guy could come to them and say, 'This is a fantastic deal. You can make $200 million,' or whatever. And they would look at him and say, 'No, thank you,' because they know the guy who runs it is a crook."

Abraaj's staff of 300-plus includes people from 50 countries, from Kenya to Kazakhstan, and almost all of those working in local offices have local roots, the company says. To deepen connections, Abraaj works with young leaders through the World Economic Forum's Global Shapers program; about 100 leaders under 30 are being mentored by Abraaj, and others have attended classes given by the firm.

They are rising leaders such as Raman Singh Saluja, who founded Gramco Infratech, an agricultural-services company for farmers in India, and Alejandro Maza, CEO of a Mexico-based data services startup, OPI. Such programs make Abraaj visible in its markets and allow it to quickly identify key players. The aim is for Abraaj to be able to soft-shoe through geopolitical turmoil. In 2014-15 it had 13 full exits, realizing $450 million.

Perhaps the best example of Abraaj's moral-cum-pragmatic approach is its investment in Egypt. The firm has investments in companies like Integrated Diagnostics Holdings (IDH), acquired in 2008. Abraaj held on to IDH through Mubarak's regime, through the Arab Spring and then through the government tied to the Muslim Brotherhood. After the coup by Abdel Fatteh el-Sisi, Abraaj invested $300 million in five other companies, including Cairo Medical Center and private school operator Tiba. As Egypt's economy has stabilized, Abraaj looks prescient. In May Integrated Diagnostics' IPO on the London Stock Exchange put the value of the company at $668 million. In two exits Abraaj is estimated to have doubled its partners' money.

"In the worst years of the Brotherhood government, our businesses in Egypt were growing at a rate of 25%," Naqvi says. "All our companies continue to do well partly because we were not targeted in any hate campaigns. But we were doing good things in the country."

While Abraaj occasionally makes bad investments, like its ill-timed 50% purchase of Turkish yachtmaker Numarine in 2008, its loss ratio is under 5% so far. In total, according to Abraaj, it has returned some $5 billion to investors since 2002. "They've been delivering exactly what we wanted in the portfolio," says Erik Hirsch, CIO of Hamilton Lane, a Philadelphia-based fund of funds that manages about $225 billion in private equity assets for institutional investors.

A perennial outsider, Naqvi was born in Pakistan and built his career in the Middle East, no easy feat in a region where Arab prejudice against Pakistanis is common. The fourth child of a plastics manufacturer in Karachi, Naqvi graduated from the London School of Economics. After four years at Arthur Andersen and a short stint at a Saudi conglomerate, he used $50,000 in savings to start an investment advisory firm, Cupola, in Dubai in 1994. In his first deal he raised $8 million for a duty-free-kiosk business and received an $800,000 advisory fee. Five years later, in 1999, he pulled off a complex deal that involved purchasing another business-services company, Inchcape Middle East, for $102 million, with $4.1 million in equity. Naqvi then sold off pieces of the company for a total of $173 million. With the proceeds of that transaction he founded Abraaj in Dubai in 2002.

One of his first major deals was to take over Nasdaq-traded logistics company Aramex. Abraaj paid $65 million for the majority of the company; Aramex went public again on the Dubai stock exchange three years later, earning Abraaj 5.7 times what it had invested.

"Abraaj not only improved the ecosystem, it created the private equity industry in the Middle East," says Fadi Ghandour, Aramex's founder.

In summer 2012 Abraaj acquired London-based Aureos Capital, which gave it a global network of offices. Now the combined company does deals in the range of $20 million to $100 million. It has majority stakes in nearly half its portfolio companies, such as the Colombia-based D1 supermarket chain, which grew from 18 stores in 2010 to more than 280 today; Ghana-based ice cream maker Fan Milk International, a coinvestment with Paris' Danone; and Pakistan's Karachi Electric Supply, into which Abraaj invested $360 million in 2008.

Besides finding connected locals in key markets, Abraaj has four important "macro" questions it asks before considering a region: How open to reform is the government? To what degree is urbanization taking place? Is there a rising middle class? And what is the average age of the consumers?

"In your world," Naqvi says, "the average age is 40. In the markets where we invest, it's 26. What happens when you're 26? You want to spend it like crazy. You want to buy jeans. You want to buy the TV set. You want to buy motorcycles."

Two Millennial-focused examples: Orca Global, a provider of English-language training in Singapore, Indonesia and Malaysia, and Wine Connection, which has more than 50 outlets in Singapore and Thailand.

Another key to Abraaj's deft navigation of treacherous markets is being city-centric. "Lagos was there long before Nigeria," Naqvi says. "The nation-state is a 19th-/20th-century construct."

Of the more than 200 investments Abraaj has in growth markets, the biggest concentrations are in sub-Saharan Africa, Southeast Asia and the Middle East, including North Africa. The firm has also been active in the Pacific Alliance, a trade bloc that includes Mexico, Chile, Peru and Colombia.

Abraaj, for example, owns a minority stake in Acurio, a Lima-based operator of about 50 eateries founded by celebrity chef Gastón Acurio. Riding a growing global taste for ceviche and guinea pig, the fast-growing chain is already in 13 countries.

Because of Abraaj's roots, the Middle East and especially North Africa are its comfort zone. In Tunis the firm bought into Clinique Taoufik, a private hospital it rolled up into North Africa Hospital Holdings, which so far has a total of 400 beds. In Casablanca Abraaj recently acquired chocolatier Kool Food.

"The Middle East remains a place where there are islands of stability and opportunity in an ocean of serious turbulence," Naqvi says.

In an effort to stay one step ahead of firms like KKR and Carlyle, which have recently opened developing-world branches, Naqvi remains hands-on, spending 250 days per year traveling among the firm's 23 offices in places like Accra, Bogotá and Bangkok. "I live something like a hermit and something like a nomad," he says. "If I'm not having seven or eight meetings a day in a market, I'm highly annoyed."

Two years ago Naqvi signed the Giving Pledge, though the decision didn't come easily. For some Muslims boastfulness or notoriety relating to charitable endeavors is frowned upon. But Naqvi's desire to dismantle stereotypes plus some gentle nudging from Bill Gates about setting an example changed his mind.

So while his private equity business thrives, Naqvi's foundation, funded with $100 million, operates an 80-vehicle ambulance service in Karachi. It is also experimenting with the Gates and Packard foundations in a program to deliver contraceptives in the city.

"One of the pillars of what I consider success is when I change the narrative of what people hear about Muslims," Naqvi says. "Unless people like me stand up and change the narrative, it's not going to change."