De-risking Islamic venture capital investments
Venture investing is inherently risky. For every Facebook there are dozens of Theranos and Wongas. And rather often, the previous track record of venture capital fund managers provides poor forecast of their future performance. Take SoftBank, for example — it is a great collection of striking successes (think of NVIDIA and Alibaba) and spectacular failures, such as WeWork and Uber.
Still, venture capital has become an essential part of our business life — it is an engine that propels our technology-based economy forward. And as with any fuel that assures forward movement, there is never enough of it. Especially in Islamic financial world where Shariah compliant investment products tend to be conservative — investment grade Sukuk being the best example.
So, how to achieve three objectives simultaneously:
· to keep investments safe;
· to make sure that they are Shariah compliant, and
· to earn formidable venture capital returns?
This may be possible by employing structured finance notes — VCSN (venture capital structured notes) — a new product developed by VlaGA Advisory in Dubai. The 7-year note consists of two fractions — a Principal Protection (PP) part and a Variable Profit (VP) one. The Principal Protection part (appr. 73.5% of the note value) is funded with investment grade Sukuk from the UAE banks. At maturity, the PP part of the Note grows to approximately 100% of the Note value, so no financial losses may occur for the noteholders. There are, of course, FX and inflation risks, by those are mitigated by the Notes’ upside.
The upside, of course, comes by the capital gains associated with the VP part (approximately 26.5% of the note value). It is invested in reputable venture capital funds, and/or venture funds of funds. The capital gains from the VP section of the VCSN drive the yield of the Note itself.
VlaGA’s CEO Alex Alemkhanov said: “In order to tap into GCC’s liquidity pool, it is essential to find balance between capital preservation and growth. With VCSN we offer exactly that”.
So, we end up with a conservative investment product with a very limited (if any) downside and a chance for a cash bonanza in the form of a next Google or Airbnb. I would only suggest to my colleagues to raise the term of the VCSN from 7 to 10 years to better capture the superior returns of successful venture capital investments, while keeping the same low risk profile.
The biggest news this month in the Islamic venture capital world is, of course, the doubling of capital in Aramco Ventures to US$7 billion by the mother holding. At least one fourth of the final amount is expected to fund Shariah compliant projects.
Dr Vladimir Malenko is the director of FairFinance. He can be contacted at malenko@youxianinvestments.com.
