An investment firm linked to Abu Dhabi’s royal family is embroiled in a nasty fight with a U.S. private equity shop that claims the Abu Dhabi firm defaulted on its capital commitments and forfeited a more than $20 million investment.
Emirates International Investment Company has initiated an arbitration proceeding against ECP MENA Growth Fund, a poorly performing fund of $1.8 billion Washington D.C. private equity firm Emerging Capital Partners, and claimed in a recently filed lawsuit that ECP has invoked a “draconian interpretation of the default provisions as a retaliatory measure to cause maximum financial harm.”
In the high powered and big money world of private equity, investors who have committed capital nearly always make sure to meet capital calls in a timely fashion because of common and strict default penalties that kick in if they don’t. Failure to perform on a capital call might not seem like a big deal and a boring technicality. But this kind of thing can result in investors losing the bulk of the cash that they have already contributed to a private equity fund. In this case, the controversy over an allegedly late capital call could result in a $20 million loss and cause something of an international incident.
According to a legal filing made by Emerging Capital Partners, Emirates International Investment is directly owned by Sheikh Seif Bin Zayed Al Nahyan, the deputy prime minister of the United Arab Emirates and a member of the Abu Dhabi royal family. In 2007 Emirates International Investment committed $40 million to ECP MENA Growth Fund, a $104 million private equity fund created to invest in the Middle East and North Africa regions. The fund’s investments have been a disaster, declining in value by 50%, a court filing says. But that has not stopped Emerging Capital Partners, which is led by Hurley Doddy, from continuing to charge its management fee of 2% of committed capital, court documents say.
Things appear to have come to a head a year ago, in January 2011, when ECP issued its sixth capital call to pay management fees, court documents show, meaning a nearly $1 million contribution was due from Emirates International. What happened next is in dispute, but Emirates International claims it was “concerned about the tumbling value” of the fund’s portfolio and “the manager’s excessive and disproportionate fees,” leading it and the fund’s other investors to collectively terminate the fund’s commitment period and releasing Emirates International from further commitments. ECP claims Emirates International had a habit of being late and made only one of its six capital calls in the fund on time. In another related private equity fund, Africa Fund II, ECP claims Emirates International was late 10 times. A kind of solution that emerged at one point was to use a distribution of $568,117 due to Emirates International from Africa Fund II to partially offset the ECP commitment.
Either way a showdown of sorts finally happened in a Paris meeting on April 7, 2011. There, Emirates International claims, it agreed to pay the remaining balance of the sixth capital call and that ECP’s Doddy said he would work up a liquidation plan for the fund’s assets and terminate the commitment period. In a court-filed affidavit, however, Doddy claims that at the Paris meeting he only “emphasized unequivocally the importance of shareholders making their capital contributions on time.” Emirates International did wire $408,807 to ECP on April 21, 2011, but never authorized the Africa Fund II set off, according to ECP. ECP sent Emirates International a default notice on April 26, 2011, saying the Abu Dhabi investor still owed $568,117 of the capital call. The next day Emirates International hurriedly paid the $568,117 balance and Africa Fund II made a distribution to the Abu Dhabi investment firm in the same amount.
For investors in private equity funds, a default like this might be the kind of thing they have nightmares about, but it rarely ever happens. ECP claims it has suffered damages and while the consequences “without a doubt may be harsh,” that Emirates International has forfeited its entire $20 million investment in the fund.
In legal filings, Emirates International says that ECP is seizing on the late capital call contribution in retaliation for the Abu Dhabi firm’s role in coordinating with other shareholders to force the fund to wind down. In September, Emirates International initiated arbitration in the ICC International Court of Arbitration and argued that ECP is invoking an incorrect and overly broad interpretation of the contractual default provision of the fund, which ECP denies.
The arbitration is in the early stages, however, and Emirates International Investment sued ECP in Manhattan’s federal court in December to stop the fund from selling assets and distributing the Abu Dhabi firm’s share to other shareholders, which include Doddy and his fellow partners at Emerging Capital Partners. ECP has argued no such injunction is required because no liquidation of assets will occur until the middle of 2012 at the earliest because the portfolio is in such bad shape.
Lawyers for Emirates International did not respond to request for comment. In a short statement, an ECP spokesperson suggests that Emirates International may have withdrawn its request for a temporary injunction, even though there is no evidence of this in the federal court. Either way, ECP is not backing down from its default claim.
“The facts of the case are these,” said an ECP spokesperson, “The withdrawn filing for a temporary restraining order in the NYC court by EIIC is part of a lawsuit filed by EIIC following their default in the ECP Mena Growth Fund. EIIC is in default because of a failure to pay capital calls that were significantly overdue despite receiving repeated notices.”
