Islamic Venture Capital 2.0 — the new models
Islamic finance is based on universally accepted concepts — the sharing of risk and reward, operating partnerships and conducting financial transactions that are based on real assets. Thus, venture capital is inherently Shariah compliant, and itself is rooted on a Mudarabah contract.
According to the GlobeNewsWire, the global Venture Capital Investment market size was valued US$ 347.6 billion in 2021 and is expected to expand at a CAGR of 16.14%, reaching US$ 853.3 billion by 2027. The Islamic VC market is dramatically smaller, generally less than 1% of its conventional counterpart. But on the other hand, many Islamic startups are funded by conventional funds as well.
A highly publicized report by IslamicMarkets.com showed that more than 41% of Islamic finance professionals questioned, predicted a dramatic growth in private equity and venture capital investments in the sector over the next five years with nearly half (49 per cent) forecasting a slight increase.
The Shariah compliant venture capital market is very innovative with new types of products coming out every year. In this article I would like to focus on just two of them — Islamic venture debt funds and Sukuk-based AMCs — actively managed certificates.
Shariah compliant debt funds offer a unique non-dilutive way to finance working startups that guarantee the founder a cheaper (than equity) source of growth funds that also brings minimum operational interference from the investors.
Most Shariah compliant loans are short-term in nature, senior secured with a lien on real assets, and fully amortizing. Most of them have an equity component in the form of warrants on the debtor company’s shares. Several GCC financial companies set up such funds in 2022:
· Shorooq Partners’ Nahda Fund 1 (Abu Dhabi) will provide debt to companies with valuation of no less than US$ via Commodity Murabaha and Ijarah agreements;
· Saudi Venture Capital will be offering growth stage investments to high growth startups and SMEs in Saudi Arabia to help realize the Vision Saudi 2030 devised by Crown Prince Mohammed bin Salman;
· The UAE-based Gulf Islamic Investments just launched a US$100 million Shariah compliant GDF-I debt fund to provide capital to GCC companies for team building, working capital and capex investments;
· SHUAA Capital, a leading asset management and investment banking platform in the UAE, launched the SHUAA Venture Partners, a $250 million Shariah fund, focused on venture debt investments — so far the largest in the region.
In 2022 Al Waseelah Plc came up with yet another innovative product — a Wakala certificate that assures investors’ participation in actively managed Shariah compliant impact portfolio of companies that operate in highly innovative hydrogen markets. This Sukuk-to-venture-equity US$100 million portfolio targets return of 15% per annum. Essentially, we are dealing with a SPAC-like product that is funded by Sukuk, rather than by outright equity.
The year 2022 has witnessed some examples of substantial development of Islamic venture capital activities. Among the primary reasons for this is the rapid digitalization of Islamic financial services.
