Islamic Private Equity 2021: When it rains, it pours…
Over the previous months we have on numerous occasions discussed the shortage of exclusive Shariah compliant private equity (PE) and venture capital funds. And then, the 2021 came about.
February 2021 — A call from the South East Asia — Malaysia’s largest pension fund, Employee Provident Fund (EPF), announced the launching of the largest Shariah compliant fund and the first Shariah private equity direct/co-investment separately managed account with BlackRock, HarbourVest Partners and Partners Group. The fund’s size was to reach US$600 million (RM2.43 billion).
June 2021 — A reply from Europe — the UK-based asset manager Ethos Invest announced the creation of the largest Shariah compliant technology-based private equity fund. The fund would work with the PE management team from BMO Global Asset Management and its Saudi investor Al Inma Investment Company. The fund would focus on companies between US$50 million and US$200 million in size in areas including banking, asset management, payments and life sciences.
Will we now hear a response from the Middle East with yet another world’s largest Shariah fund?
As university endowment (a modified Waqf), PE fund model comes to us from the early years of Islam. In itself, the private equity and venture capital modus operandi incorporates one of the basic principles of Islamic finance — the risk sharing.
The critical feature of the both funds is often overlooked. They are set to be global. There had been, albeit smaller, the funds that aimed to promote the development of the local Islamic tech, whether it was in Malaysia, or in the UAE. These new funds are prepared to consider the Islamic tech as a global playing field and will strive to benefit the Global Ummah.
Running a Shariah compliant private equity fund is a challenging task:
· There are sectoral limits — the fund cannot invest in companies in haram industries (pork, gambling, weapons, etc.);
· There are leverage limits — the fund cannot invest in companies that carry substantial debt load, usually in excess of 30% of the companies’ market values;
· the partnership relationships with the target companies’ management are mandatory, rather than optional, as among the conventional funds;
· the fund itself cannot borrow from conventional sources to increase permittable returns through impermissible bank debt;
· the income of the fund has to through purification to remove haram elements;
· the fund has to carry additional expenses to finance operations of a Shariah board.
Therefore, I applaud this news of the year in Islamic finance. A properly managed Shariah fund will cause a substantial “pull effect”, like a wave of coupling railcars when a train starts moving, and that will have a system-wide effect on Islamic tech growth.
But there is still a nagging concern — what will the fund do when the time comes to return the moneys to its limited partners? What are the exit plans? Who would be the buyers? But we will worry about that tomorrow, today we celebrate.
Dr Vladimir Malenko is the director of FairFinance. He can be contacted at vm@fairfn.com.
