IFN Annual Guide 2022: Private Equity & Venture Capital
Awaiting the breakthrough
2021 was anything but typical year for venture capital and private equity. While the conventional funds were setting new fundraising records, the world of Islamic equity finance was just beginning to show the signs of life.
Nowadays the industry is oscillating between two diametrical and conflicting investment ideas. On one hand, the valuations of private and tech companies are no longer rational, and the investors are forced to overpay to enter into projects. On the other hand, the true winners perform spectacular and thus bring its backers colossal multiples.
Review of 2021
The year 2021 had witnessed two major funding declarations:
- In March 2021 Malaysia’s Employees Provident Fund announced the start of a new US$600 million Shariah compliant private equity fund co-managed with the Swiss-based Partners Group.
- In June the UK-based Ethos Invest launched the world’s largest ethical Shariah compliant fund with Al Imna Investment Company and BMO Global Asset Management. The new Financial Services & Technology Fund planned to raise GBP1 billion.
These two fundraising exercises would bring twice as much cash as was raised by Islamic venture capital funds (US$400 million) and Islamic private equity funds (US$350 million) in 2020.
The Islamic venture capital industry had witnessed no major fundraisings in 2021, but it is not really discouraging, as most Islamic tech ventures are still funded by conventional funds.
Among the usual suspects are Gobi Partners with its ‘Taqwatech’ Islamic friendly investments, Ficus Venture Capital Fund, SVC, Nuwa Capital and Saudi Watheeq Financial Services which launched a SAR 100 million fund for the MENA.
Shuaa Capital has taught us a lesson by showing that Sukuk can become a viable funding tool for some recent startups — in 2021 it helped structure a US$50 million Sukuk for Pure Harvest, a UAE-based agrotech firm.
Many investments in 2021 were made outside of the proper Islamic private equity and venture capital channels. Evermos, an Indonesian Halal social commerce startup has raised US$30 million in a Series B from an investment consortium led by UOB Venture Management’s Asia Impact Investment Fund II.
Having raised US$40 million and US$37.5 million, Waheed and ALAMI went on the shopping spree and bought Niyak and BPRS Cempaka Al-Amin rural bank respectively. Alif Bank of Tajikistan raised a whopping GBP 42 million in debt and equity from Jefferson Capital, its shareholder.
Preview of 2022
Last year I made several projections for the year 2021 which failed to materialize. I still stand by them, although to come about in the following year, as I naively expected that by the mid-2021 the COVID story would be behind us.
So, the year 2022 is going to be different due to these following factors and trends:
· Substantial liquidity. There is some serious ‘dry powder’ in the above mentioned Shariah compliant funds. Also, the spillover from conventional funds will also take place onto the worthy projects such as ALAMI.
· Small ticket players. Islamic crowdfunding platforms are finally coming of age. They fulfill two very important functions in the Islamic finance universe — they increase the availability of Shariah compliant financing opportunities, and provide funding to those pre-VC and pre-PE companies. I would specifically note IFG.VC by Islamic Finance Guru with an average investment ticket of GBP250,000, as well as Qardus, KapitalBoost and Ethis.
· Emergence of new funding sources — the ESG investors. Most Islamic finance professional like to pinpoint out that environmental, societal and governance principles have been advocated by Shariah since the ancient times. Professor Kevin Haines of Bedford Row Capital is now one of the most active proponents of bringing together ESG and Shariah principles. The company is quickly becoming a leader in the ESG fundraising.
· Emergence of more local regional funds such as Gobi Partners’ Fatima Venture fund in Lahore, Pakistan.
· Introduction of Islamic Asset Acquisition Companies. This Sukuk-funded Shariah compliant response to conventional SPACs was developed by the scholars at Alpha Strategies. These IAACs are pressed on time due to the nature of their Sukuk funding and thus are be forced to make their investment decisions expeditiously.
The 2021 Global Islamic Fintech Report by DinarStandard, Elipses and Salaam Gateway has cited that 56% of surveyed Islamic fintechs expect to raise equity funding of at least US$5 million in 2022.
And as the capital tends to always flow ‘from liquidity to opportunity’, I suggest that the targets should start paying attention to other factors that impede their development — namely, the lack of consumer education and the challenges in talent acquisition.
Islamic banks will finally (!) enter the venture capital market in 2021. The active Islamic fintechs are reinventing the global Islamic finance services through technology-enabled disruptions. Still up until this moment most Islamic banks still viewed fintechs as competitors seeking to seize their market share.
I just hope that the banks will fork out cash to become more technologically advanced, and not merely to buy and shut down the more agile challengers.