Wednesday, August 21, 2019

“Abraaj Too Far” was the most recent triumph of salesmanship over sense as The Abraaj Group fleeced investors of billions of dollars by inflating asset values, using investors’ capital for personal expenses, living like pashas and relying on indolent investors accepting Abraaj’s rosy version of performance which rarely comported with the story on the ground in their investments. Abraaj, which focused on investing in emerging markets in Africa, Asia and South America, marketed its fund to appeal to investor altruism in addition to their needs for returns. The CEO of Abraaj signed the Giving Pledge, offering to donate billions to charity, a few years before his company was exposed as a fraud. He told Forbes, “Abraaj has taken the risk out of investing in emerging markets.” Fervent hyperbole coupled with faux charitable announcements of philanthropy, to be funded by investors’ capital, seemed to provide air cover for ample chicanery. Investors that try to blend social benefits with investment returns are hoping to blend two goals that are not always compatible and are consequently tolerant of the unreasonable in pursuit of the greater good.

As evidence that a great salesman can continue to make hope spring eternal, IPO buyers are soon to be offered shares in We Work. Adam Neumann, CEO of We Work, has convinced private investors that his office management company is a technology company wrapped inside of a social mission. He has described We Work as a “capitalist kibbutz” with a corporate mission to “elevate global consciousness”. He has mastered the language of high price-earnings multiples by describing his business as SAAS, space-as-a service. Tenant’s employees are described as members. He has pledged $1 Billion to charity over the next decade. He has banned expense accounts for meals containing meat. The S-1 mentions the word “community” 150 times. Yet, the kibbutz is not a commune. Tax benefits post the offering will not flow to the IPO shareholders, only to Neumann and to existing insiders. Super majority shares will be created for the CEO’s benefit. Were he to leave, his spouse is granted a critical role in appointing his successor. Neumann currently owns buildings that he leases to We Work. He has promised not to sell stock for a year after the offering, but as a hedge, he sold several hundred million dollars’ worth of stock privately a few weeks ago. The company has loaned him money at a rate of .2%. He has no employment agreement and the offering states, “We may see actions that shareholders other than Adam do not view as beneficial”. He trademarked “We” and sold it to the company this year for $5.9 MM. Life on the kibbutz.

If one turns away from the marketing to the fundamentals of the business, one is struck by its similarities to the strategy of the now extinct savings and loan industry. The S&L’s failed to match the maturities and costs of their borrowings with their assets which led to disaster when the cost of funds rose sharply, but the yield on their loans did not. We Work has $47 Billion of long lease obligations signed for the next 15 years and $4 Billion of short-term leases executed with tenants, many of which are small, thinly capitalized companies. Real estate is more cyclical than the Tour de France so when the next downturn and rent decline occurs, how will a business that has been built for a bull market fare? At the time of the IPO, banks have offered to lend We Work $6.0 Billion but, by covenant, the company has to maintain $2.5 Billion of cash on its balance sheet. If a downturn occurs, We Work will hear the bark of the covenant resisting its attempts to pour money into marketing. In 2018, We Work lost $1.9 Billion on revenues of $1.8 Billion. To distract the investors from the eye watering losses, they invented a new measurement – “Community Adjusted EBITDA” which is essentially EBITDA after eliminating the expenses required to run a company. We Work lost $220,000 per hour in 2018.

It’s S-1 is dedicated to “The Energy of We”. Decades ago, Senator Dirksen suggested “A billion here, a billion there, pretty soon we are talking about real money.” I certainly hope the Energy of We has a plan to earn some real money.

I’m Rob Morris and I approved this blog.

Abraaj Too Far