Islamic private equity, like its conventional counterpart has a tough 18 months, but a number of new fund launches suggest that the worst of the excesses of an overvalued era are over. Or are they, asks Mike Gallagher
There was a time when (in certain parts of the world) almost as many companies were out on the road raising money for Islamic private equity (PE) funds as there was companies doing the same thing for conventional funds. Barely a week or a month passed without someone trumpeting the announcement of yet another $100 million Shari'ah-compliant PE fund. But then the bottom fell out of the market, round about the same time that Lehman Brothers went to the wall, the so-called darkest hour for capitalism.
The proponents of Islamic finance insisted that Islamic finance would feel less of a backlash than conventional finance because it was more risk averse, but it made no difference. The banks stopped lending almost completely and few made any distinction between conventional and any other sort of finance. How much has changed since the grim days of late 2008 and a good proportion of 2009? Not much say some of those who talk to the risk teams at banks.
Private equity funds which had managed to raise funds before the economic storm arrived found themselves in a difficult and almost paradoxical position. Some PE houses were sitting on hundreds of millions of dollars of funds (some of which had come from wealthy Middle Eastern or Asian family businesses) but during the boom found that valuations on targets were unrealistically high (for some). Those which wanted to buy out a company, whether using leverage or otherwise, were unable to, either because valuations were too high, or because the families involved wanted to ride the boom and adamantly refused to sell a majority stake in the company.
"Investing outside the Middle East region may represent a challenge for Islamic funds due to local peculiarities and different cultures on the ground," noted Thomas Gierath, a National Partner of Corporate & Securities at law firm Dechert.
"Local protectionist regimes might be in place requiring the fund to request approval from the local authorities prior to acquiring target companies operating in certain industries. This holds true for certain relevant energy, infrastructure or media companies in some Western countries. Other countries, such as Germany, generally allow local authorities to review and prohibit certain foreign investors from acquiring more than a specified stake in local enterprises (e.g., in Germany more than 25 per cent of voting rights in German companies). Avoiding delays and pitfalls regarding investor notification periods is vital and, if possible, clearance certificates should be applied for. "
"The reality is executing a Shari'ah-compliant private equity fund is very different from visualising it," said Harris Irfan, Head of Islamic Products at Barclays Capital, speaking at the Reuters Islamic Banking and Finance Summit. "The capabilities of producing Shari'ah-compliant private equity funds are actually very limited in the market despite the fact that people talk about private equity and Islamic finance as a natural fit."
Preqin noted that 2009 saw the lowest private equity fundraising total since 2004; evidence of the continuing caution displayed by investors when making new private equity investments. It said that two-thirds of survey respondents are considering investing in private equity funds targeting emerging markets, with China being seen as an area of interest by half of the investors.
The theme does seem to lean towards distressed funds and a number of Middle Eastern and South East Asian PE houses have been actively eyeing investments in the UK and the US. Some have sent bargain-hunting teams into the UK to look at prime real commercial estate which has fallen on tough economic times, and others have been attracted by the weak state of the British pound which has made valuations on certain companies more attractive.
Everyone's favourite billionaire value investor Warren Buffet seems to think that US real estate is due for a turnaround in 2011 as demand begins to outstrip supply. "Within a year or so, residential housing problems should largely be behind us," Buffett wrote in a letter to Berkshire Hathaway shareholders. "Prices will remain far below 'bubble' levels, of course, but for every seller or lender hurt by this there will be a buyer who benefits. Indeed, many families that couldn't afford to buy an appropriate home a few years ago now find it well within their means."
Fundraising is taking place and Islamic private equity has already seen some activity in the first few months of 2010. Al Rajhi Capital, the investment banking subsidiary of Saudi Arabia's Al Rajhi Bank, and Bahrain-based Arcapita Bank have set up a $500 million (SAR 1.875 billion) fund, the ARC Real Estate Income Fund.
The two companies said they will seed the fund with a joint investment of $50 million (SAR 187 million). They said they will combine their resources and expertise to source and acquire investments for the fund in "high-quality, income-generating" real estate assets in Saudi Arabia and other countries in the GCC. The focus, they say, will be towards logistics warehouses, as well as healthcare and education related assets.
Simultaneously, Al Rajhi Capital and Arcapita announced the completion of the first acquisition for the fund, the largest logistics and distribution centre in Riyadh. The logistics facility is the main distribution hub for Azizia Panda United Company, a supermarket company in Saudi Arabia. It was acquired for $79.7 million (SAR 299 million) and will be leased back to Azizia Panda for a period of 18 years.
Meanwhile, TVM Capital MENA said it had received the approval of the Dubai Financial Services Authority (DFSA) to launch its first regional healthcare growth capital fund.
The new healthcare fund, which has $40 million of subscriptions from founding investors, Saudi Health Investment Company (SHIC), the International Finance Corporation (IFC), and GE Healthcare, "is the first healthcare-dedicated fund in the MENA region to be operated by a global healthcare and life science manager with a significant track record in the sector," according to a press release.
"The fund will seek to capitalise on the substantial growth opportunities in the healthcare service and pharmaceutical/life science sectors in the Middle East and North Africa (MENA) region. On the services side, the focus will be on investments in specialised clinics, medical laboratories, small hospitals, diagnostic imaging centres, providers of outsourced services to healthcare delivery facilities, clinical trial management services, and healthcare IT and insurance. On the life science product side, investments will focus on pharmaceutical and other life science product companies that are involved in the licensing, import, manufacture and distribution of medicines, medical devices and diagnostics," it added.
There has been rather more activity in the South East Asian and Far East Asian emerging markets than in the more developed markets since the Lehman implosion. In July 2009, CIMB Standard was given the job of manager and advisor to a new $500 million Islamic Infrastructure Fund, jointly sponsored by the Asian Development Bank (ADB) and the Islamic Development Bank (IDB). CIMB Standard is a joint venture between Standard Bank and CIMB Group. Standard Bank is an African financial services group and its Middle East operations are based at the Dubai International Financial Centre (DIFC).
The Islamic Infrastructure Fund (IIF), Asia's first major multi-country Islamic infrastructure fund, "will make Shari'ah-compliant equity investments in emerging countries in Asia with significant infrastructure opportunities to meet their developmental needs. Amongst such countries are Azerbaijan, Bangladesh, Indonesia, Kazakhstan, Malaysia, Pakistan and other member countries common to both ADB and IDB," the banks said.
The IIF will receive an initial commitment of $250 million from the joint sponsors - ADB and IDB. The IIF will also help bridge the gap between Islamic investors who require Shari'ah-compliant products and project sponsors who need capital to build crucial infrastructure.
Qatar's QInvest (whose shareholder structure includes Qatar Islamic Bank) recently went out and bought a 25 per cent stake in India's Ambit Group, although the sum wasn't made public. QInvest's CEO, Shahzad Shahbaz, will join Ambit's board.
Commenting on the deal, Shahzad Shahbaz said, "This partnership will generate a number of synergies for both firms and will dramatically accelerate QInvest's ambitions in India, one of the world's fastest growing economies. We see significant opportunities for our clients and ourselves across investment management, investment banking, private equity and brokerage.
© Islamic Business and Finance 2010
