Dubai-based private equity group Abraaj Capital invested $360 million in Karachi Electric Supply Company in 2008. At that time, the latter company was a troubled utility that served the largest city in Pakistan. Two years after, Abraaj Capital has greatly achieved the improvement of the utility company. However, that was just the start. It has yet to start working on rebuilding the social contract and addressing internal company management issues and other concerns.
Josh Lerner; Asim Ijaz Khwaja; Ann Leamon
Harvard Business Review (812019-PDF-ENG)
February 01, 2012
Case questions answered:
- What are the unique challenges that face investment professionals when investing in restructuring deals in emerging markets?
- Should Abraaj invest in companies like KESC? What criteria should it apply when evaluating such companies? What assumptions are necessary for this to be a good investment?
- What should the priorities be in “fixing” the KESC deal?
- If you were an LP in Abraaj’s fund, what would you think about the KESC investment?
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Case answers for Abraaj Capital and the Karachi Electric Supply Company
1. What are the unique challenges that face investment professionals when investing in restructuring deals in emerging markets?
Investing in emerging markets requires a toolset outside the standard private equity strategies used in developed markets, mostly due to the many challenges encountered already prior to the investment. Those challenges arise not only from company-specific issues but also from issues affecting the overall economic and social landscape in the target market.
On the broader level, emerging markets are usually characterized by higher volatility levels despite their attractive growth rates. This volatility comes in the form of high inflation levels, volatile exchange rates, and irregular growth paths. Exchange rate fluctuations, in particular, can have a noteworthy impact on returns as usual funds will be raised in more stable currencies while investments are carried out in local currencies. Unpredictability is also linked to the instability and unreliability of the whole economic system, which often creates other regulatory and bureaucratic risks.
Furthermore, there is usually inadequate investor protection in place, which adds an extra layer of risk to investments, especially in downside scenarios. The operational restructurings required in most available investment opportunities in emerging markets are significantly impacted by the adjacent landscape described as having sizable effects on the investment plan. Sometimes operational capabilities are inexistent altogether. In those cases, value creation arises from “building companies” rather than by simply restructuring them for a quick re-sale in 3-5 years. Hence, successful restructurings would typically require longer investment horizons.
At the company level, labor laws and political influence might reduce flexibility in overhead management posing a significant limitation to HR restructuring measures. While key executives might hold the best company information, they will not necessarily be the ones who possess decision making power, as often their decisions can be strongly influenced by other stakeholders. This means, in most cases, investors must allocate…