Abraaj investor considers tougher termination terms in future funds

CDC Group, the U.K.’s development finance institution, will take a much harder line on GP-removal-type terms in future funds after Abraaj Group collapsed, Mark Kenderdine-Davies, general counsel with CDC, said at an industry conference this week.

CDC was one of a group of investors in an Abraaj healthcare fund that raised $1 billion.

Investors in the fund raised concerns about how fund capital was being used, which led to multiple audits and, eventually, criminal charges against Abraaj’s founder, Arif Naqvi, and former Managing Partners Mustafa Abdel-Wadood and Sev Vettivetpillai.

Earlier this month, TPG took over management of the healthcare fund and changed its name to Evercare Healthcare Fund.

“It’s made us as an LP investor think very carefully at what happened and lessons learned,” Kenderdine-Davies said on a panel at the EMPEA/IFC Global Private Equity conference in Washington.

CDC is considering taking a harder line to make sure fund contracts include terms that would allow investors to remove a GP from managing a fund and allow LPs to inspect GPs’ books, he said.

The organization also is considering pushing for provisions in fund contracts that would allow an investor not to fund a capital call in the event of GP bad behavior, known as a draw-stop provision, he said.

“I think [the situation] will lead to us asking for slightly tougher … LP rights than we historically asked for,” he said.

CDC has long been an emerging-markets investor. This field already has some of the toughest terms in the industry, designed to protect investors who are building exposure to managers in regions that lack the investor protections that exist in developed markets.

Draw-stop provisions, for example, are generally a part of emerging-markets funds, even though they are considered the “nuclear option,” Buyouts reported last year.

“We’ve never implemented one, but it’s an important right,” Elizabeth Tirone, associate general counsel with CDC, said at the EMPEA/IFC conference last year.

Tirone said draw stops are not something LPs take lightly and are used only in situations with GPs acting badly. “I don’t think anyone has ever used it in any funds we’re in,” she said.

Fund contracts can also include for-cause GP-removal terms, or no-fault divorce provisions that have a lower threshold before they can be triggered (though such trigger mechanisms vary from fund to fund).

It’s not clear what kind of terms governed Abraaj’s healthcare pool or other funds. The firm did agree to return capital after investors raised concerns about more than $200 million that was ostensibly slated for investments but was sitting unspent in fund accounts.

SEC said in its April complaint against Naqvi and the firm that firm principals were calling capital from the health fund’s investors and using it to cover cash shortfalls in the broader Abraaj organization. LPs paid about $544 million in drawdowns, but Abraaj Investment Management had invested only about $265 million in fund portfolio companies, the SEC said. Abraaj never informed fund investors about the true use of this capital, the SEC said.

All three have denied wrongdoing.

Action Item: Check out the complaint here: https://bit.ly/2KyaN4Y