Dana Gas 3Q 2018 Earnings: "Woof, Woof"

Earlier this year, I took a look at DG’s 1Q18 earnings and made some predictions for the full year.  A best case 4.5% ROE or worst case a break-even year.  As you’ll note, the best case falls well short of what would be an adequate return given the risk profile of DG.  

So how does AA’s prescient prediction look with a full three quarters of data?  

Frankly, not so good.                  

DG reported USD 41 million in net income for the first nine months of the year.  Pro-forming this for the full year, would result in roughly USD 55 million for the full year or an ROE of 1.9%.  

But to get a sense of the return from ongoing operations, we need to exclude two special items.  Those are USD 8 mm in 2Q18 sukuk restructuring expenses and a 1Q18 reversal of 13 million in previously accrued expenses.  If we exclude both amounts—a net of negative USD 5 million--, DG earned some USD 36 million over the first nine months of the year.  Pro-forming this over 12 months results in projected full year net income of USD 48 million or an ROE of 1.7%.  

Inadequate when one considers what would be a normal ROE for a stock investment.  

Dismal indeed when considers the higher ROE that that a risky stock like DG should deliver. 

To boot DG’s ROE remains well below its current roughly 4% cost of borrowing which is artificially depressed from the appropriate risk adjusted cost by the restructuring.  

Of course, there could be a miracle in 4Q18. 

The hoped for settlement with NIOC could materialize.  The US Government could graciously facilitate Iran's payment of the settlement proceeds to DG and, perhaps, as well give DG a license exempting its transactions from newly re-imposed US sanctions on Iran.  

At this point, it appears that the best value creation opportunity DG has is to repay its debt in full.  That will result in a net "benefit" of some 2.1% per annum to shareholders.  Dividends are another option - as it might be expected that shareholders could find other investments to return more than 1.9% a year.

To end on a rare (for AA) positive note,   all things are relative.   

DG may be a “mutt” investment, but AA suspects that investors in Gulf One Investment Bank Bahrain might find it quite attractive. 

Gulf1 has not reported a profit since FY 2013 and appears poised to continue that "run" in FY 2018.  Over the period FY 2014 through FY 2017 Gulf1 “lost” (that doesn’t mean “misplaced”) some 57% of its total equity:  from USD 133 million at FYE2013 to USD 57 million at FYE 2017.  

It’s hard to say how FY 2018 will turn out, though the loss this year for nine months is larger than for the comparable period last year.  But as is well known providing an opinion on fiscal year audited financials generally concentrates the minds of auditors more sharply than the  signing off on interim unaudited financials.  In 2017, the bulk of G1's USD 27 million loss was booked in 4Q.

On another somewhat positive note:  Gulf1 is equity funded so there are no lenders with significant exposure and thus in significant danger.

Brexit: Bishops Pray for Politicians' Integrity Amid Brexit Turmoil

"Father" Ethan Rushes to Join Prayers

According to The Guardian, Church of England bishops have said they are praying for “courage, integrity and clarity for our politicians” after a week of turmoil over Brexit.

According to the Bible, "With God all things are possible".

However, as you'll note, while the Bible speaks about "possibility", it is silent on "probability".  No doubt to cover situations like this.

How to Mitigate Against PE GP “Sharp Practice”

Fait ou fiction?

Ahmed Badreldin, Former Head of MENA for The Abraaj Group, has written an interesting article on the above topic for Private Equity International.  

He emphasizes enhanced controls over the GP by LPs and proper due diligence.  

A lot of good common sense suggestions. 

Some quotes that particularly resonated with AA:  

1. “A key element of diligence is maintaining skepticism until the very end.”  
2. “Furthermore, funds shouldn’t have large positive cash balances and alarms should go off if there are drawdown requests from funds that already have large cash balances.“ 

What I found particularly interesting was his focus on a three specific examples of GP “sharp practices”.   

Do you wonder if he witnessed these “sharp practices” first-hand during his career at one of his previous employers? Or is he just applying his theoretical knowledge to identify key risks?  

AA has his own opinion, but what’s yours? 

In his own words:

“A recent case involved a fund that had externalized fund administration, but where drawdowns were made despite the fund having large cash balances.  Monies ultimately went to a bidco SPV where the bank accounts and the SPV were controlled by the GP without external oversight by independent directors or fund administration (despite the actual fund having fully externalized its fund administration).”

“Funds should not have large cash balances for multiple quarters, especially given the risk of fund bank account balances with “quarter end window dressing”, where the cash balances of the fund can be temporarily shored up from external funding sources, which can be difficult to detect, resulting in reported cash in the GP reports not actually existing for the reporting period.”  

He also focused in on valuation of portfolio companies.  Suggesting that these be audited by independent third parties with perhaps the inclusion “simple” metrics such as EV/EBITDA versus comparables as a way of providing a check on the GP's valuation.  

AA would note that selection of “comparables” can allow the GP a great deal of discretion to achieve a desired result.  And there is always the possibility of manipulation.  

Bahrain International Bank valued its investment in Burger King franchises it owned in the Carolinas using a multiple based on an unconsummated offer to buy the Burger King company. Note that is comparing the value of a franchise (part of the chain) to the main company (ex the franchised outlets).  

That’s not to say the DCF produces a more accurate result.  Small changes to assumptions (discount rate, growth rate) can result in big changes to valuation.  

As he notes, valuation is an art not a science.  When the intended result is known, the artist can employ all of his talents to achieve that result.  Or just enough.  One hopes though that the arts employed are not the "black" arts.

Американский Е́льцин (America’s Yeltsin)

слава россии!

слава США! 

слава олигархам!

Скорее всего, в США сделают то, что сделал Борис в России.

Dubai and L'Affaire Abraaj - Realism Amid Emotion and Financial Fairy Tales

Perhaps Better to Wait Till the Dust Settles to Get a Clearer Picture?

As you might expect, in the wake of the Abraaj scandal, financial journalists are examining the impact on GCC markets and in particular Dubai. 

Nicholas Parasie at the WSJ took a look at Dubai earlier this week.  “Once Billed as a Financial Haven in the Middle East, Dubai Turns Investors Wary”   

As usual, I have a slightly contrarian view which I’d like to convey by responding to quotes from his article. The point of this exercise is not to cast doubt on the article, but use several of the points mentioned to highlight areas of difference. 

“Investors are questioning whether Dubai’s young financial center can police itself as the meltdown of its marquee private-equity firm highlights broader concerns about placing money in the region.”

That’s a perfectly natural human reaction.  I’ve got a problem so first let’s identify all the people who let me down and are responsible for my misfortune.  Perhaps, but perhaps not, I’ll eventually get around to examining my own behaviour. 

There’s another element.  Realistically, where is that well-policed market that Dubai should measure up to? That sought after “haven”? 

The Bernie Madoff scandal, the dot.com bust, the almost a Second Great Depression, Lehman, Libor all occurred in what are generally described as the “mature” “well regulated” markets in the OECD.  These scandals are widely attributed to regulatory and corporate governance failures which is the central “charge” against Dubai in L' Affaire Abraaj. 

Given the dollar magnitude and number of these scandals relative to those in Dubai, shouldn’t investors be questioning the ability of these “Western” markets to police themselves much more than questioning Dubai? If not, why not?  

Should Dubai be held to a higher standard?  If so, why?  

“Dubai was supposed to be a rules-based haven in the Middle East’s opaque financial world, but fears about corporate governance and conflicts of interest are rising."

I suppose if one didn’t look too closely but rather relied on the promotional advertising alone one might have imagined that Dubai was a “rules-based haven”.  But one would have had to be pretty oblivious.  It's like reading "The Art of the Deal" and thinking that the chap on the cover is America's #1 DealMeister.  In both cases your credulity would have gotten the better of the facts. 

I know that for some—usually bankers and investors--ten or fifteen years in the past is an age unknown probably before recorded time.  

But back in 2004 Ian Hay Davison, Chairman, and Philip Thorpe, CEO, both of the DFSA were summarily sacked. Ian by mobile phone.  Philip was "escorted" from the DFSA’s offices.  Both “lost” their jobs because they had the temerity to suggest that the real estate transaction for the Gate was freighted with conflicts of interest among certain high “personalities”.   Read it here.  If you read it in the Torygraph, you know it must be true. 

After the Dubacle--which in itself might have suggested causes more than just irrational real estate exuberance--, a number of high ranking officials were relieved of their positions.  One chap, the former head of the DIFC, was “encouraged” to return “bonuses” that were alleged to have been improperly obtained. There is of course more but those are two rather glaring examples.  A good rule of thumb is that if you suspect there are ethical issues at a regulator or in government departments or corporations, you should be wary of ascribing high standards to the jurisdiction.  Focus like this can simplify your due diligence greatly.  

“Unlike in the West, where corporate executives are often held accountable by supervisory boards, “there are no checks and balances in the Middle East in some companies,” she said.”  The “she” in this quote is Alissa Amico, a Paris-based former executive at the Organization for Economic Cooperation and Development.

Quite!  As to the “developed” Western markets, there are “checks and balances” indeed but mostly on paper. Rarely do independent board members take action to prevent corporate malfeasance.   In some cases, they appear to aid and abet it. See Hollinger. See Enron whose board composition on its face ticked every box in good corporate governance.  See Volkswagen and dieselgate.  For more on supervisory board failures in Germany read this article from Handelsblatt. 

The clear lesson here is that corporate structures and rules while a necessary condition are not sufficient to prevent malfeasance. People are the critical variable that make these structures and rules effective. If they are wanting, the entire structure fails.     

“The longer it waits, the more Dubai’s ability to attract foreign capital could be at risk, said Oliver Schutzmann, chief executive of Iridium Advisors, an investor-relations firm.” The “it” in this quote is the DFSA.

No doubt immediate action might satisfy investors who no doubt are looking for vengeance. 

But a proper investigation needs to be conducted to determine the extent of the malfeasance, if any, and the parties involved.  

MF Global collapsed in late 2011.  In 2013 the US CFTC filed charges against the former Chairman and CEO that involved allegations of “misuse” of client funds similar to allegations against officers of Abraaj.  

There are risks to too-quick action.  

1. Failure to punish all those, if any, who should be punished.  
2. Failure to punish for all offenses.  The DFSA would look rather incompetent if it later turned out that there were transgressions more serious than “borrowing” client funds at Abraaj and that it failed to punish these. 
3. Or if in the rush to take action, it inadequately prepared its case and wrongdoers, if any, were subsequently acquitted.  

As well, while vengeance may be  satisfying, it won’t result in investors being made whole.  Rather cold comfort for Mr. Jaffar: I’ll get a jail sentence against Brother Arif, but I still won’t get my US$300 million.  

It’s perfectly natural for investors who have suffered a loss or think they have to get quite emotional and thus irrational.  

Sadly, there’s often a tendency for others to get caught up in these emotions of the moment. Cooler heads are needed, but few are found. 

1. False comparisons are made.  Dubai compared with the mythical conflict-of-interest free well-policed Western markets.  
2. Double standards are applied. Dubai must be purer than Caesar’s wife.  
3. Dire end of the world or end of the market predictions are made. No one will invest here anymore.  But why didn’t that happen after Hay/Thorpe, Bin Sulaiman, et al.? Or after the Dubacle?  Or in Bahrain after TIBC, Awal, GFH?  Or in Kuwait after TID and Global?  Or in KSA, after the typical SAMA response to prefer local banks over foreign in the TIBC and Awal affair? Or in the USA after the Almost a Second Great Depression? 
4. Fundamental issues can be missed.  Nuances lost.  What really makes a market investable?  A fancy building, some imported be-wigged English-law judges, an impressive rule book? Or are other things more important?  
5. Remedies are prescribed before there's enough information for a thorough diagnosis.  We really don’t know exactly the extent and type of malfeasance in L'Affaire Abraaj.  Is it equivalent to MF Global or Bernie Madoff?  Who was involved?  Yet, hobby horses are trotted out from the stable and vigorously ridden.  Sometimes very specific prescriptions given.
6. Sometimes meaningless platitudes are given.  Meaningless because they are not specific.  “Regulators and boards need to step up their game.”  Or perhaps “work smarter not harder”.  Indeed, if only the UK had “stepped up its game” in the World Cup, they would have won.  If Abraaj had “stepped up its game”, no doubt it would have realized the sale of K-El and there wouldn’t have been a cashflow problem.  
7. Can we be that far away from a suggestion to use Blockchain to “disrupt” old patterns of corporate governance? In some places it promises the disruption of courts. Why not corporate governance?  Let's step boldly forward together to the “bleeding edge of leveraging the Blockchain space to disrupt the existing paradigm of corporate governance”.

In Some Parts Apparently Scarier Than President Putin!

Extremely Scary Highschool Graduate (The Girl not the Man)

في بعض الأماكن على ما يبدو أكثر مخافة من الرئيس بوتين

в некоторых местах явно страшнее, чем президент Путин !!

If you're not prone to excessive fear, you can check out this scary story here.

On to law school!

Storm Signals in Private Equity

A Severe Warning Flag Given the Amounts Involved

Chris Schelling’s article in Institutional Investor flashes some very clear warning signals about PE.  

“Private equity sponsor-to-sponsor transactions are on the rise. But lately, some firms have begun selling companies to other funds in their stable — a far more worrying development.”  

Chris outlines the risks of both sorts of transactions:  

1. a private equity firm selling a fine investment to another PE firm and 
2. the more worrying one a private equity firm selling a fine investment from one of its own funds to another of its own funds. 

When "exits" aren't via trade sales or IPOs are they really exits?  Or are they symptoms of real problems?  When they represent a large percentage of declared but perhaps not real "exits", are the problems severe?

Let's look at these in order.

First inter sponsor sales.

One-third of all private equity “exits” in 2017 were the first type:  one sponsor selling to another sponsor.  Data for 1 H 2018 show a similar trend. 

There probably are some situations when these transactions can be economically justified in terms of value creation for the limited partner not just for the fund manager/sponsor.  

But such instances are clearly not one-third of all exits.   More likely to be for a fraction of that percentage.  3%? 

Essentially what the fund manager who sells is saying is that he can no longer increase the value of the investment.  What the fund manager who buys is saying is that he can.  

There could be special situations where this is true, e.g., a further increase in value of an investment requires that it be integrated with other companies that the selling fund manager doesn’t own and is unable to buy.  The buying fund manager may own those companies.  

But if the buying fund manager has no special advantage like that and is relying on making traditional operating or financial improvements to generate IRR, then:  

1. The buying fund manager believes he has the skills to make a PE like return on the investment at his higher entry price 
2. If the selling fund manager is realizing a profit that triggers carried interest, then the ultimate return on the investment must be such that two managers will separately and independently be able to generate PE like returns. That would be some investment! 

AA has a hard time believing that the probability of this happening is significant enough to justify one-third of all exits as sponsor to sponsor deals.  

As an aside, through this transaction, one or both of the fund managers may be displaying reasons why they are likely not to be good stewards of your money.

1. If the first manager can't use traditional methods to enhance value but the second can, then an LP might wonder if it's particularly wise to be investing in the first manager's funds
2. If the second manager is wrong and can't generate additional PE-like returns, then he's probably not a wise choice for LPs.

Naturally suspicious folks like AA would want to know if there are reciprocal deals.  Fund managers are helping each other out "exit" less than ideal investments.  Fund Manager A sells “fine” investment #1 to Fund Manager B.  Fund Manager B sells “fine” investment #2 to Fund Manager A.  Each generates an IRR which allows them to sell future funds, to earn carried interest, quiet current investor unease at lack of exits. Hopefully, the purchased investment turns out to generate a decent return or can be buried among other returns if it’s not so decent. 

In other words, are GPs passing around less than stellar investments among themselves?  Investments that they cannot place with a trade buyer or IPO?  That the volume of inter sponsor transactions is at one-third of all "exits" suggests something is not right.  When one factors in the rise intra sponsor sales, the red flag gets even bigger.

Or is the explanation the need to use so-called “dry powder” (uninvested funds) now perhaps as much as some US$1.5 trillion? LPs can't be happy seeing their univested funds earning cash returns that likely don't even cover the 2% management fee.

Fund managers are merrily raising more money.  One might question why any additional money needs to be raised, other than to increase GP's management fees—which as you know or should are independent of fund performance.  I

Interested in more on the topic of “dry powder”?  Check out this article by Melissa Mittleman from Bloomberg.  

An ocean of money looking for investments is more likely than not to be on average an ocean of particularly dumb money.  Overpayment and poor underwriting choices will be the result.  Limited partners’ future returns will be diminished. 

But even if firms have discipline to avoid these mistakes, they will generate lower returns for their LPs because of the earnings drag on the overall portfolio from cash holdings.  

So here's another worry for LPs to add to worries about asset quality, lower returns for a long-term commitment.

Second, intra sponsor sales.

But all this pales when one considers the even more troubling intra-sponsor sales. A sponsor sells a “fine” asset from one of its own funds to another of its own funds.   This is a major red flag.  

As before, there are no doubt excellent reasons why this should be done sometimes, but the incidence of these “sometimes” is likely to be less than observed demonstrations of probity by the political class.  That would take this to much less than the 3% for sales of “fine” investments from one sponsor to another sponsor.  

I’ve mentioned before that we were once approached by a prominent PE firm pitching us on their new fund and touting the return on a predecessor fund.  A closer look at that fund disclosed that its return was almost all generated by a single deal.  A sale of a “fine” investment from that fund to another managed by the same GP.  We, of course, declined the opportunity to invest and struck that firm off our list of “serious” firms.  No further due diligence needed.  When you don’t trust the people, due diligence really isn’t needed at all.  

And finally a shout out to Chris’s first comment:   

“A well-known GP in our portfolio has been known to say that PE performance “isn’t a return until you can buy a beer with it.”

Quite!   

But if your GP is generating beer rather than champagne returns, you might consider interviewing additional fund managers.  "Beer and pretzels" is the lowest stage of FY money among investment bankers.

Corporate Governance: It's Your Responsibility Too – Some Inconvenient and Uncomfortable Truths

Hate to Be Contrary But You Have A Responsibility for Corporate Governance

Warning:  This post contains some inconvenient and uncomfortable “truths” about your responsibility for corporate governance.  To make corporate governance work, you actually have to do something more than whinge about the failings of others.  Or issue calls for vague enhancements to corporate governance like calling on firms, auditors, regulators, and others to “step up their games”.     

Corporate governance generally focuses on roles and responsibilities of the board of directors, external auditors, and regulators.  Shareholders’ roles and responsibilities are not sufficiently discussed.  You can see this in the “founding document” of corporate governance the Cadbury Report (1992) which was sparked by perceptions of corporate misgovernance in Robert Maxwell’s companies. 

Typically the role of shareholder is summarized in a single sentence:  

“The shareholders’ role in governance is to appoint the directors and the auditors and to satisfy themselves that an appropriate governance structure is in place.”  

This post argues that there are clear defects in that formulation and more importantly shareholders’ responsibilities exceed those outlined therein.  If corporate governance is going to be built on this slender reed alone, should we expect brilliant results?  

First to the defects. 

As a practical matter, the shareholders’ role in “appointing directors and auditors” is generally to vote on the candidates proposed by the board of directors.  Often there is a nominations committee of the board generally structured to be “independent” of executive directors (e.g., senior management) that recommends candidates to the full board (which includes executive directors).  There’s a great deal of reliance on “independence” of the nominating committee here.  

In general boards have not demonstrated a lot of “independence”, but perhaps they are when we're not looking.  Or perhaps not.  The full board then decides whether to approve the candidate.  There’s a potential conflict of interest in this arrangement. The full board includes executive directors.  Management may therefore have a significant role in hiring those who are supposed to monitor its performance.   

But there’s more.  

Generally the board only recommends a single candidate for a position.  If there are 6 director slots open, shareholders get to vote on six candidates. If it’s time to appoint auditors, one firm is proposed. Shareholders have all the choice given voters in “democratic” elections in one-party states.  On a positive note for shareholders, a “no” vote doesn’t usually lead to unhappy consequences. In either case it is “take it or leave it” which probably explains why the directors’ recommended candidates win, except in extreme cases.   

There are two reasons for this state of affairs. 

1. As a practical matter how would shareholders—usually an unwieldy large number--select potential board members or auditors?  Do they have the skills, contacts, knowledge?  How would consensus be achieved among shareholders over their competing candidates?  If consensus cannot be reached, there could be a plethora of candidates which could be as problematic as having only one candidate. 
2. While individual shareholders generally have a right to nominate directors, the directors’ candidates have a much easier road to election.   If you look at a typical US proxy, shareholder resolutions are included in a separate section with management arguments as to why these should be rejected. When a hedge fund or other professional investor wishes to get its own slate of directors elected, it typically hires third parties to draft, print, and mail its own proxy to each shareholder.  Why does it incur this not inconsiderable expense? It doesn’t believe that management will give its slate a fair shake in the management proxy.  It can’t wait until the meeting to propose directors and make its case because “management” proxies will already have been voted for directors and most shareholders skip the AGM.  They do give management representatives the right to vote their shares, but realistically are management representatives going to vote for the insurgent slate of directors?   
3. In some jurisdictions, if a shareholder owns 10% or more of the stock of a company, that shareholder can name a director and there is no requirement for other shareholders to support.  Differences in cumulative versus non-cumulative voting rights also affect the election of directors.  
4. But in general shareholders’ oversight through the election of directors is more theoretical than real. 

Given the very practical limitations on shareholder selection of directors and the numerous cases of board “failure” in corporate governance, including by ostensibly “independent” directors, shareholders need to do more to protect their interests and to foster good corporate governance.   

This is key because people are the critical variable in good corporate governance.  It wasn’t Enron’s corporate governance structure that caused problems at Enron. It was people. 

Let’s run through what the “more” shareholders must do by way of questions.  

These will allow you to check just how real your commitment to corporate governance is.  Are you Augustine of Hippo or St. Augustine of Hippo?  

Do Corporate Governance Principles  Inform Your Investment Behaviour?

Let’s assume that indeed you are firm believer in corporate governance. Or at least claim to be whenever there is corporate governance failure. 

Among the good practice principles you endorse is that the roles of chairman and chief executive officer be separated and that the chairman be an independent director, not an executive of the firm. Do you refuse to invest in corporations where the roles are combined? 

Suppose your principles also include a requirement for strong risk controls and non-manipulation of markets.  If your bank holdings include one that like Sea World has “whales”, do you refuse to invest or divest your holdings?      

How many of your firmly held corporate governance principles can a firm violate before you take concrete action?   

Remember that the road to corporate governance failure is a slippery slope.  It begins with a first bending of one rule and eventually the breaking of more.  If the firm is highly profitable, can you easily justify poor corporate governance?  Sure they lost US$ 6 billion but they still made a profit. 

In applying your corporate governance principles, do you allow yourself more slack that the CEO of a firm?  You wouldn’t tolerate his breaking even a single rule, but you can let your own principles slide a bit and perhaps even quite a bit, depending on profitability.  

Do You Perform Proper Due Diligence Before Investing?

Do you read more than the glossy pitchbook they give you?  Consider more than the cut of their suits and flash of their MontBlanc cuff links?  Read beyond the gushing appellation “Goldman Sachs of the GCC” or similar in the local press.   Or a shrieking recommendation delivered by Brother Jim on the TV?  

Does that due diligence include checking on corporate governance?  And situations that might cause corporate governance to fail, i.e., distressed financial conditions? 

Do You Know How to Perform Due Diligence Properly?  

Have you bothered to learn how to do due diligence on an investment?

Do you know the tricks used to enhance the presentation of performance in sales pitches?  When you were presented with financial performance, did you check what standards were used for reporting?  A good rule:  No GIPS no investment.  Were there model portfolios included?  Projections to the past:  “Using our strategy on a proforma basis, over the past 10 years we would have earned an IRR of 35%”.  What they don’t say is:  Of course, we didn’t, but it sure looks good.  And if we pick the right time period, we can find a sweet spot IRR.”  

If they're lying to you or stretching the truth in their pitches, what should infer about their ethics and their corporate governance?  

Do you know a bit about financial statements so you can at least spot if cashflow is not in line with reported income?  Would you have noticed that despite Dubious Gas’s reported income, the KRG and Egypt weren’t paying DG what they owed it?  

Understand that under accrual accounting, there can be different methods of recognizing the same transactions both on the balance sheet and the income statement? 

Do you know what the role of auditors, regulators, stock markets are? And what reliance you can or cannot put on them to look after your interests?  

Know what to look for in corporate governance structures, if you're looking for one that is complete and well-structured?  

Do you know the “red flags” of corporate distress?  As stated in my previous post, unless a firm is set up as a criminal enterprise, corporate misgovernance is more likely to occur when management is dealing with a serious problem than when things are going well.  

Some practical examples, before investing in one of Abraaj’s funds, did you look to see where their parent, the management company, etc were incorporated?  Did you understand that offshore companies in the Cayman Islands and other similar jurisdictions are lightly regulated (first euphemism of this post and in a long time)?  Did you ask why? A plausible answer might have been tax planning, but the flag of light regulation should have caught your eye.  

Did you ask for audited financials?  A good but not necessarily foolproof way to check if the firm is in financial distress.  The sort of “occasion of sin” that might lead to corporate misgovernance.   It's also a good way to check on the business performance.  If the funds they manage are performing well, that is, have a flow of exits and good returns, the bonanza of carried interest fees should show up here.  

But they might have told you: “No PE firm publishes financials.  We’re a partnership.  Our partners don’t want their remuneration disclosed.”  Did you know that Charterhouse Capital Partners and associated companies publish financials and that you can obtain a copy at Companies House?  You don’t get individual details but you get an aggregate number.  

Ask about performance of their funds?  If you had asked about their flagship “infrastructure” fund (IGCF) you might have noticed rather dismal performance as Arkad has pointed out. The delay in closing the “sale” of Karachi Electric might have caught your eye. You might have noticed that the GOP wasn’t paying K-El.  Or that K-El had been in Abraaj’s portfolio for some time. Might you have wondered about their wisdom in plunking down a whale-sized amount to invest in power in the subcontinent?  Or wondered what made this investment different from others in the subcontinent?  Enron Dabhol.    

If you looked at that fund’s investments, you might wonder, as Sabah Al-Binali did, why a Private Equity firm was buying listed stocks and what this meant about their stated investment mandate and adherence thereto.   Assuming it was a pure private equity fund, if they won't keep to the mandate, what other promises might they not keep?

What Post-Purchase Investment Monitoring Do You Perform? 

The Abraaj scandal came to light because a few investors saw something that raised red flags and they acted on that information.   

Do you read the company’s financials and investor presentations carefully and not just rely on company press releases or puff pieces in the press for your monitoring?   Local press analysis often being little more than a regurgitation of the press release.  

Do you look for changes in behaviour or reporting by the firm that are red flags of potential problems? 

Do You Exercise Your Corporate Governance Rights?  

Do you attend the annual shareholders’ meeting?  Ask questions you have from your post-purchase monitoring?  Listen to the questions of other shareholders and management’s responses?  React and participate? 

Where there are proxy materials, do you actually read them?  Do you vote your proxy?  Do you do more than “tick” yes on the management recommendations?    

In some jurisdictions there aren’t proxies. Some of this information is in the audited annual report.  Or in separate corporate governance reports.   

If you've got a problem with information provided have you ever complained in the AGM (with auditors, representatives from the MOIC or equivalent, and directors present) that information in financials and disclosures is insufficient.  Ever make similar complaints in writing to your stock market or local regulator about insufficient, unclear or misleading disclosures?    

CONCLUSION 

At this point I imagine that some of you are thinking.  

But this is hard work. It’s unrealistic.   We don’t have the skills or time to do all of this. The auditors, the board, the regulators should do their jobs properly and we won’t have to.  Quite!  Police and neighbors should be keeping watch to prevent burglaries.   I shouldn’t have to lock my door. 

Or wait just a minute, AA.  Are you seriously arguing that if we do this, there won’t be corporate misgovernance?  

No!  But you may make it harder.  You may create an environment that encourages other shareholders to take similar actions.  

You may deliver a very clear message to board members that you are watching.  Auditors, regulators, the MOIC may be awakened to action.

On the other hand, you can decide that this is too much and not really your responsibility. You can remain among the sheep. That entitles you to bleat on-and-on about corporate misgovernance whenever you’re sheared.