The Inchcape-Cupola Deal: Middle East’s first LBO

Reading Icarus by Brian Brivati had opened a lot of contexts for me in terms of PE in the Middle East. As I attempt to remove all forms of biasness as much as possible, in terms of conspiracy theories on Arif Naqvi’s case of fraud, one thing does stand out in the beginning of his career. And that is the case of Inchcape MENA, the first LBO deal of the Middle East.

In this section, I delve slightly into the early life of Arif Naqvi, as I eventually aim to write a report on the failed deal of the sale of Karachi Electric to Shanghai Electric, (which would have been worth over $1.2 billion, thought to be blocked by the US in terms of being anti-String of Pearls and Belt and Road Initiative) as well as the LPA agreement documents in the liquidation of Abraaj.

Going back to the topic, Arif Naqvi was born in Pakistan around 1960 into a professional middle-class family, Arif Naqvi entered finance without inherited capital or political lineage, developing early comfort with institutional ambiguity rather than formal privilege.

That background becomes relevant only insofar as it helps explain the logic of the Inchcape-Cupola transaction, which was less a conventional private equity deal and more an exercise in translating disorder into control. The acquisition of Inchcape Middle East in 1999 executed in a market without mature LBO infrastructure, standardized carve-out playbooks, or deep pools of institutional capital; what made the transaction distinctive was not the asset quality alone, but the structural context in which it occurred. Inchcape’s Middle East operations were profitable but operationally entangled within a FTSE-listed parent, dependent on shared services, guarantees, and treasury functions, and embedded across multiple jurisdictions with local partners. This transformed the sale into a high-execution-risk corporate carve-out rather than a clean asset disposal, sharply narrowing the buyer universe and depressing headline valuations.

Cupola’s advantage lay in its willingness to underwrite cash flow durability instead of structural cleanliness. While most strategic and financial buyers discounted the asset due to separation risk, Cupola focused on whether the businesses could continue to generate cash while complexity was unwound over time. This framing allowed the negotiation to shift away from price toward transaction certainty, with deferred consideration, seller cash retention, and third-party guarantees reducing Inchcape’s post-closing exposure. The resulting capital structure appeared aggressive on paper, with minimal sponsor equity and heavy reliance on debt and hybrid instruments but was tolerable precisely because downside risk was structurally absorbed and control was secured.

Early Life

Arif Naqvi was born in Pakistan around 1960, into a non-elite, professional middle class environment. Since, he was born into a middle-class family there was no inherited capital, no political lineage, and no business dynasty behind him. Especially in the 1960s, there existed instead was exposure to economic uncertainty and institutional weakness. This truly mattered. It shaped an early understanding that systems fail, rules are uneven, and outcomes favour those who can navigate ambiguity.

By the late 1970s, the United Kingdom represented the highest signal destination for ambitious South Asian students. Funnily enough, the UK is currently filled with innumerable South Asian immigrants that run the nation, for better or worse. The London School of Economics was already well known within these circles.

Naqvi was not known for being an academic prodigy, however, his admission to London School of Economics (merit-based) was made possible has as he arrived as with sufficient enough credentials. Arif was a striver, intent on acquiring legitimacy.

After graduating, Naqvi joined Arthur Andersen in London and qualified as a chartered accountant. This was big; he was provided with the institutional credibility (combined with LSE’s degree) and the rigour required to acquire technical expertise in global finance.

By the early 1990s, Naqvi had synthesized two worlds. From Pakistan, he carried comfort with disorder and informal power. From the UK, he carried formal structure and credibility signalling. He concluded that emerging markets were not dangerous because they lacked value, but because they lacked execution.

When working as a chartered accountant at Arthur Andersen in London in the early 1990s, Arif Naqvi was operating in a market where advancement for non-British, non-networked professionals was slow and bounded. Seniority was achievable. Ownership and control were not.

The Gulf presented a different equation.

Source: MEED (100 years of O&G in ME)

This meant that sophisticated transaction structuring was scarce relative to capital availability.

So, when Naqvi came to Dubai, UAE, he only had:

·       Formal qualification from a top tier global accounting firm.

·       Direct exposure to audit, valuation, and transaction structuring.

·       Ability to produce documentation, models, and deal logic that Gulf family offices were not accustomed to seeing.

This is important because early Gulf deal making was relationship first, structure second. Naqvi inverted that order.

Cupola Investments, also known as Cupola Group, was founded in 1994 by Arif Naqvi in Dubai as his initial investment vehicle focused on Middle Eastern opportunities. It marked Naqvi's entry into regional buyouts and diversified holdings before evolving into Abraaj Group around 2002.

The Inchcape Acquistion: Cupola and MENA’s first Leverage Buy-Out

Naqvi established Cupola post his time at ANZ Grindlays Bank, leveraging personal capital and banking ties to pursue leveraged deals in emerging markets. By 1999, it executed the Gulf's first major leveraged buyout, acquiring Inchcape Middle East's portfolio for $102 million with minimal equity. [1]

When researching about Cupola Group, the first thing that you read on the internet (apart from Abraaj’s liquidation and fall) is about Inchcape. At the time, Inchcape was a big deal; based in the UK, Inchcape had diversified their business portfolio (in their holdings) with the likes of Spinneys, wholesalers/retailers, brands such as Nestle, Reckitt & Colman, SmithKline Beecham, Pizza Express, TGI Fridays, Thomas Cook, and Estée Lauder franchises[2].  It spanned retail, distribution, FMCG, logistics, oilfield services, and more, with annual turnover around $600 million, 4,100 employees, and over 220 agency/distribution agreements.

However, for Inchcape, they wanted to restructure their global investments and exit their Middle Eastern portfolio. The UAE and KSA were not as shiny back in 1999, and for Inchcape, they needed to divest; this would bring Inchcape greater cashflow for the restructuring. Their Middle Eastern portfolio itself was worth $150 million, which was later negotiated down to $102 million by Cupola. 

When I first tried to understand how Cupola got this deal, I was overwhelmed by understanding both the deal sourcing and structuring at the same time. It was an LBO with a great post-deal cash flow risk, especially as the international financial centres in the Gulf were not as greatly institutionalized and LBOs had received a bad reputation from RJR Nabisco’s case.

Inchcape was in the middle of portfolio rationalization (initially, I had no clue what that meant). In practice, they were exiting businesses that no longer fit their strategic centre of gravity. The Middle East operations sat firmly in that category. They were profitable, but they were geographically messy and deeply embedded inside the parent. They were not standalone subsidiaries with clean balance sheets and independent systems. Treasury, guarantees, and shared services all ran through the group.

Reading and researching more into the structure of the deal, I later noted that this was termed as a ‘corporate carve-out’. Inchcape was effectively cutting a functioning organ out of itself and asking a buyer to reconstitute it elsewhere. Once you see that, the buyer universe collapses very quickly.

Most buyers walked because the execution risk dominated the economics. Multi-jurisdictional entities, shared IT and finance infrastructure that needed to be rebuilt, transitional service dependencies that could last years, and working capital dynamics that were hard to model ex ante. Strategic buyers prefer clean integrations. Large private equity firms want repeatable templates. This transaction had neither. By the time diligence progressed, bids either disappeared or came back at levels Inchcape could not justify internally.

Cupola approached the asset from a different angle; not focusing on the structure but rather if the change in management would be able to be withstood by the cash flows of Inchcape Middle East.

Would the business keep generating cash while the mess was gradually unwound? That is a very different risk tolerance.

Cupola addressed that concern structurally rather than financially. Payment was not fully upfront. Cash was left inside the business to support liquidity. Guarantees and third-party credit enhancements were introduced to make lenders and the seller comfortable. Each of these choices reduced Inchcape’s residual exposure post close.

This is also why Inchcape accepted a capital structure that, on paper, looked aggressive. Sponsor equity was thin. Leverage and hybrid instruments did most of the work. In a normal context, that would be a red flag. Here, it was tolerable because the structure included liquidity buffers, explicit downside protection, and a buyer with regional execution credibility. Inchcape effectively traded valuation for confidence that the carve out would survive the transition.

Despite the layered capital stack, this was still a leveraged buyout in the classical sense. Cupola had control, appointed management, and retained the residual equity upside. The other capital providers were financing the deal, not owning the business. This was not structured credit. It was an LBO executed in a market that did not yet have mature LBO infrastructure.

When you strip it down, Cupola won because it offered the highest certainty adjusted value rather than the highest nominal price. Inchcape believed this deal would close, function, and not create downstream problems. [3]That mattered more than extracting incremental headline value.

If I had to compress it into one sentence, I would say this. Cupola acquired Inchcape Middle East through a highly levered corporate carve out by underwriting cash flow stability, absorbing execution complexity, and structuring downside protection that neutralized seller and lender risk, allowing control to be obtained with minimal equity.

So, let’s breakdown the financing of the LBO.

The deal leveraged minimal equity against heavy debt and hybrid instruments for high returns:

Source: Arabian Business

This mix enabled control of 15 companies across 11 countries with 4,100 employees and 220+ agency agreements.

Reading the capital component breakdown confused me. I was unable to understand and differentiate the terms preferred shares, senior debt, deferred guarantees, credit enhancement, and quasi equity layer. Below are my notes to enhance my understanding of these financial terms.

Source: AI (Gemini, ChatGPT)

Deal re-structuring

Rather than pursuing a single bulk exit, Cupola unwound the investment through a sequence of piecemeal trade sales over a three-to-four-year period. Assets were sold primarily to local partners and regional individuals who already had operating or contractual relationships with the businesses.

Total exit proceeds reached approximately $173 million, generating an estimated $70 million profit and a reported 16.3x gross multiple on invested equity.

Fig2.1: Diagrammatic explanation of the Inchcape deal by Cupola, MENA’s first LBO

On paper, Cupola owned the businesses. In reality, many of the operating companies were joint ventures with powerful local partners. Those partners were accustomed to dealing with a FTSE 250 listed parent with brand, balance sheet, and reputational weight. When ownership shifted to a relatively unknown regional investment firm, the perceived counterparty quality changed overnight.

For my personal understanding

FTSE 250 company is a company listed on the London Stock Exchange and is part of the FTSE 250 Index. Concretely, the FTSE 250 is an index made up of the 101st to 350th largest publicly listed companies in the UK by market capitalization. It sits directly below the FTSE 100.

An FTSE 250 company is typically:

Hence, moving from a FTSE 250 multinational to a little-known regional investment firm did not necessarily change the underlying economics of the businesses. But it did change how local partners perceived risk, reliability, and bargaining power. The index membership functioned as a proxy for trust and institutional backing, even though it has no direct operational relevance.

However, local partners could not block the transaction legally, but they could make life difficult operationally. They could slow approvals, resist consent requirements, or signal to potential buyers that cooperation would not be forthcoming. Under those conditions, a clean bulk exit would have carried a significant discount because any buyer would price in partner friction and execution risk. Note for IJK: has IJK dealt with this in the past? What are some case studies of this and how did IJK overcome this?

The fragmented exit was not a strategic masterstroke from day one. It was an adaptation. Faced with resistance, Cupola shifted from selling the portfolio as a single asset to selling individual businesses over time, often to buyers already embedded in those markets or acceptable to the local partners.

That shift changed the economics; selling assets one by one reduced perceived risk for each buyer, allowed transactions to be structured around specific local dynamics, and avoided the “conglomerate discount” that would have applied to a bulk sale under strained relationships.

When Naqvi later called this a blessing in disguise, he was pointing to an unintended outcome. Partner resistance forced a slower, more granular exit, but that very fragmentation unlocked higher cumulative value than a discounted portfolio sale would have achieved. The sum of the parts was greater than the whole; and this exactly applied to the Cupola case.

In short, what looks like execution friction at the time ended up functioning as an informal value protection mechanism. The resistance did not disappear. It was worked around, and in doing so, it improved the exit outcome rather than destroying it.

Value creation in the Inchcape investment did not centre on operational transformation or cost restructuring. Instead, it was driven by contractual analysis and exit sequencing.

During diligence, Cupola’s team reviewed 134 local partner agreements in London and identified multiple clauses that allowed partners to dilute profits or renegotiate terms following a change of ownership. These findings materially increased perceived post-closing risk and were used to renegotiate both price and structure.

As part of the final agreement, Inchcape contributed approximately $10 million in cash to the business at closing, providing a liquidity buffer to mitigate post-closing cash flow risk during the carve-out transition.

Post-acquisition, Cupola spent several years managing partner disputes through negotiations, legal proceedings, and selective concessions. This process stabilized cash flows sufficiently to enable orderly trade sales without resorting to asset stripping or forced exits.

Abraaj Capital, founded by Naqvi in 2002, had no direct involvement in the Inchcape transaction or its value creation. The acquisition, management, and divestment of the Inchcape portfolio were conducted entirely under Cupola.

However, proceeds from the Inchcape exits seeded Abraaj’s formation, including its first institutional buyout fund of approximately $116 million raised in 2003.

The proceeds generated from exiting the Inchcape investments were realized cash, not paper gains.

Notes for self on the financial terms used in the case study 

Net Asset Value = fair value of all portfolio assets + cash – liabilities

When it comes to reversibility, when gains are realized, the value has already passed through the market. An asset was sold and cash was received. That outcome cannot be undone. Unrealized gains, by contrast, are valuation marks. They depend on assumptions about future exits, multiples, and operating performance. If any of those inputs change, the gain can disappear. This is why LPs treat unrealized value as provisional. So, when LPs treat unrealized value as provisional, they are effectively saying: this number is informative, but it is not yet reliable enough to base decisions on. It can move materially before an exit occurs.

In contrast, realized value is definitive. Once an asset is sold and cash is distributed, there is no remaining uncertainty about price, timing, or convertibility.

That is why LPs may acknowledge strong NAV growth but still hesitate to re-up unless there is demonstrated realization. Provisional value signals potential. Realized value confirms it.  

Moving to the use in fundraising as depicted in the table, realized gains function as hard evidence of a track record. They show that a manager can originate, operate, and exit investments. Unrealized gains are still informative, but they are discounted because they rely on the manager’s own valuation judgment. LPs will look at them, but they will not underwrite a fund purely on that basis.

On GP capital formation, the distinction becomes quite operational. Cash from realized exits can be used to fund GP commitments, operating expenses, and balance sheet investments. Unrealized gains cannot. They sit inside the asset. To access them, the GP would have to borrow, which introduces leverage and risk. This is why early platforms struggle to scale without exits. Paper value does not pay salaries or fund commitments. If we break it down further, a claim about having $100 in value and being able to extract that $100 and paying the salaries of a worker would be two very different things. One is illiquid, another is liquid and executable.

That liquidity was then redeployed to establish Abraaj as a formal investment platform. In practical terms, the Inchcape exits provided the sponsor capital needed to fund the firm’s early operations, make balance sheet investments, and, critically, demonstrate a realized track record to prospective limited partners. That track record, combined with a meaningful GP capital base, enabled Abraaj to raise its first closed end institutional buyout fund of approximately $116 million in 2003. The causality matters here. The fundraise was not independent of Inchcape. It was underwritten by realized exits that validated both the investment approach and the sponsor’s ability to return capital, which is the threshold requirement for institutional capital formation.

Firm-wide returns from this early period were reported at over 35 percent IRR across a nine-year horizon. This is quite high for the industry average in private equity.

Over three years, Cupola divested most assets for $173 million total, yielding $70 million profit, a 16.3x gross return on equity (35%+ IRR over nine years for Cupola overall). The strategy emphasized operational enhancements and trade sales, avoiding asset-stripping amid regional partner pushback[4][5].

Original on duazafar.com