Abraaj Spent Money From a Fund That Was Not Its Own
A large emerging markets private equity firm collapsed in 2018 after investors questioned what had happened to money committed to a healthcare fund.
The Firm
Abraaj Group was among the largest private equity managers focused on emerging markets, managing billions of dollars and regarded as a leading institution in that segment.
It collapsed in 2018 following an investigation into a healthcare fund, and entered liquidation. Its founder faced criminal charges in the United States and separate proceedings elsewhere.
How Committed Capital Works
Understanding the failure requires understanding the structure. Private equity funds do not hold investor money continuously. Investors make commitments, and the manager issues capital calls drawing money when an investment is ready to be made.
Between the call and the investment, the manager holds investor money temporarily. That interval is the vulnerability, because the money is in the manager's control and is not yet deployed into an identifiable asset.
Capital called but not yet invested sits with the manager, and investors generally cannot see where it is held or what it is doing.
What Investors Found
Investors in the healthcare fund, including development finance institutions and a major foundation, questioned why capital had been called when investments had not proceeded as expected.
They commissioned an independent audit. It found that money had been used for purposes other than the intended investments, including supporting the firm's own operations.
Once that became known, the firm's other funds and its ability to operate collapsed quickly, since a manager suspected of misusing capital cannot raise or retain mandates.
Why Private Markets Are Structurally Harder to Monitor
Several features distinguish this from a public markets fraud. Assets are illiquid and valued by the manager rather than by a market, so there is no external price to contradict a reported figure.
Reporting is periodic rather than continuous, and investors receive what the manager provides. Custody arrangements are often less rigorous than for public securities. And investors cannot exit, since commitments are locked for years.
That combination means the discipline that markets impose on public companies operates weakly here, and it places correspondingly more weight on operational due diligence.
What Investors Should Check
The practical checks concern operations rather than investment strategy. Who holds the cash between a capital call and its deployment, and is that party independent of the manager. Who calculates valuations and are they verified externally. Is there an administrator independent of the manager. And what does the fund's auditor actually examine.
These questions are unglamorous compared with assessing a manager's investment record, and this case is a reminder that operational failure destroys capital more reliably than poor investment selection does.
The Bottom Line
Abraaj failed because investors could not see what happened to called capital until they paid for an audit. In private markets, ask who holds the money and who verifies the valuation.