Raising cash was no problem for the Aga Khan's illustrious grandfather, Sultan Sir Mahomed Shah Aga Khan. He simply let followers hoist his 243-lb. frame onto a scale and then match his weight in diamonds or gold -- a quaint practice that lapsed long ago. The present Aga Khan, Prince Karim, retains the reverence that goes with his heritage: he is the spiritual leader of the 15 million Ismaili Muslims, who regard him as a direct descendant of the prophet Muhammad. But even though Prince Karim has long been ranked as one of the world's richest men, his financial clout suddenly seems less princely: last week a group of his banks and creditors seized the crown jewel of his business empire, the Ciga hotel chain, which runs some of Europe's most palatial lodgings.
The setback left business leaders and jet-setters abuzz over the billionaire's misfortunes. Says Baron Edmond de Rothschild, patriarch of the French banking dynasty: "Karim, like so many others, has been caught in a cyclical downturn more severe than any we have seen in Europe since the end of World War II."
The humiliation was particularly painful because the Aga Khan, 57, has long been regarded as a conscientious and sober-sided businessman. Unlike his playboy father, best known in the West for marrying actress Rita Hayworth, the Harvard-educated Aga Khan has kept a low-key image while raising Thoroughbred racehorses and amassing holdings that include resorts, newspapers and airlines. He spends most of his time overseeing a personal secretariat outside Paris that manages his Ismaili religious foundation and its 16,000 worldwide employees. The philanthropies fund dozens of clinics, orphanages and schools controlled by his followers in Asia, Africa and the Middle East.
The Aga Khan's business empire began to wobble in the late 1980s when the Ciga hotel group embarked on a spectacularly ill-timed expansion. The goal was to build on its world-famous string of $400-a-night hotels such as the Grand in Rome and the Danieli in Venice. Just as the global economy was about to falter, Prince Karim began piling up debt to pay for costly renovations and the purchase of more than a dozen new hostelries, including the Palace in Madrid. Banks remained eager to put up the money because Ciga could pledge real estate worth more than $1 billion as collateral. "This was a very hot company," says a London banker.
Then wave after wave of mishaps struck the now overleveraged firm. The world recession hobbled tourism just as Italy -- the home of most Ciga hotels -- was hit by scandals that toppled several governments. Officials devalued the lira nearly 50%, which almost doubled the cost of repaying Ciga's $670 million debt. Property values plunged, eating away at the collateral of Ciga's creditors, and the war in the gulf deflated what was left of the 1980s travel boom. Many of Ciga's hotels emptied virtually overnight. "They were good guys, really," says the London banker. "But the problem was they had no way to make money from the hotels despite the high prices they were charging."
The Aga Khan, who has always been something of a loner on the clubby Italian business scene, lacked financial alliances within the country and had nowhere to turn for help. His longtime friend Fiat chairman Giovanni Agnelli was preoccupied with the financial woes of his own scandal-tainted automotive empire.