We extract three key points from a conversation between INSEAD Professor Claudia Zeisberger and Simon Clark, as they unpack lessons from the demise of one of the largest private equity investors in emerging markets, and whether impact investing can indeed make the world a better place.
The largest private equity firm in emerging markets, Abraaj was managing an estimated US$14 billion dollars, and active across places like South Asia, Middle East, Africa, and Latin America. Through their pitch to end poverty without compromising profits, Abraaj was able to secure the trust and finances of global investors only to ultimately become defunct due to fraud accusations. We look at three key learnings from this case as discussed by prominent Wall Street Journal reporter, Simon Clark and INSEAD’s Senior Affiliate Professor of Entrepreneurship & Family Enterprise, and the Founder and Academic Co-Director of the school’s private equity & venture capital centre (GPEI), Claudia Zeisberger.
- Legitimacy Still Requires Due-Diligence
With the backing and investment from some of the biggest names in the world, Abraaj was clearly standing on the shoulders of giants. From The World Bank, Bill and Melinda Gates Foundation, Goldman Sachs, to governments from UK, USA and Europe, the firm had convinced some of the most experienced and trusted financial institutions on the planet to buy into the vision of alleviating poverty, building schools, and attempting to solve healthcare problems of poor countries through low-cost clinics and hospitals.
Simon Clark mentioned it was only until 2018 when an anonymous email raised the alert outside of Abraaj, that investors began to realise that US$200 million were missing from Abraaj’s US$1 billion healthcare fund. Reflecting on this, Professor Claudia Zeisberger highlighted the loophole in the checks and balances, and why the alarm bells did not ring earlier.
Even though reputable and established entities are a part of a collaboration or partnership, it is vital to retain and practice the rules and processes on ways an investor’s money is treated, utilised and accounted for. The legitimacy of the involved organisations in any kind of partnership should not act as immunity against due diligence at every step.
- Pay Attention to the Red Flags
Before word reached Clark, he reveals a whistle-blower email was sent to all the Limited Partners (LPs) and institutions invested in Abraaj funds in 2017. One such institution was Hamilton Lane – one of the largest private equity investors in the world, which also had committed funds on behalf of pensioners based all over USA. In response to receiving this red flag of an email, the LPs and Hamilton Lane approached Abraaj’s founder for potential answers, only to be met with an outrageous response and strong denial. Instead of pursuing the matter further, the LPs and Hamilton Lane refused to continue to investigate.
It was later found that the reason behind closing an eye was due to the influx of emails and messages regularly received from disgruntled staff, or competitors stating similar claims. “And you ignore them?” was Clark’s response. According to him and his extensive journalistic experience, “Where there’s smoke, there’s usually fire,” and if the response to seeking answers is exaggerated, then it should make one more, not less suspicious. So, when a red flag surfaces, no matter how small, it is safer to examine the origins to seek clarity, before facing larger consequences.
- Positive Impact Is Possible
While the claim from Abraaj seemed too good to be true, it does not mean that impact investing or responsible businesses are unable to create positive social and environmental prosperity. Supporting the vision of business as a force for good, Clark weighs in that “making money for shareholders is not sufficient as an objective,” and lessons from failures and successes should be discussed and celebrated. While solving social problems as a business can be complicated, and even more so when combined with making profits, it is not impossible.
Citing the example of CelTel, Clark elaborated how its founder, Mo Ibrahim, went from designing the first cellular networks in the UK, founding his own company that grew worldwide, to deciding to go back to Africa to create a mobile phone company that would provide services in African countries where no one else would. Ibrahim eventually made billions from it while also solving the problem of inaccessible telecommunication for various communities in Africa.
Concluding his example, Clark said, “Companies can do amazing things, with or without the stated mission.” He mentioned the vital part is for organisations to be clear about these missions and transparent enough to change them if it is not feasible.
Wrapping up the conversation, Professor Zeisberger highlighted the importance and necessity of creating fund models that ensure transparency in impact investing, and channel funds to the most suitable enterprises. In addition, she echoed the message of convening the right kind of people, especially since many decision-makers “have never had an opportunity to experience what the issues actually are on the ground.” By ensuring the right people and regular accountability measures are in place, impact investing can be prevented from taking the wrong turn and ensuring it completes what it set out to do – positive social and environmental progress.
Also read this INSEAD Knowledge piece by Professor Claudia Zeisberger on whether private equity can make money while doing good.