Islamic Private Equity Funds

www.islamicfinancenews.com
Introduction…..
• VENTURE CAPITAL

 Capital that is made available to small and medium

sized enterprises with perceived exceptional growth
potential.
 Build substantial additional business value within a
certain time frame (mostly 4-6 yrs), then exit through
an initial public offering, merger, or buyout strategy
 Other Islamic Funds…
• Commodities and money markets
• Real estate
• Fixed income
• Trade finance contract (Murabahah, Ijarah)
• Equity listed on stock exchanges
• mixed
 Real Islamic Finance
• Risk/profit-and-loss-sharing (PLS) partnership
 Shared investment of money and labor
 Benefits and losses that are shared equitably
 Generates efficiency through sharing risk and play a more important
role in private equity investment

• Assets-based trade finance contracts

( Murabahah,Ijarah and Salam)
 Lending of money against interest is riba and haram(prohibited) ,
so that will need to be asset-based instead of debt-based.
 3 Major groups of private equity investment :

i. Investment in organic growth

ii. Increasing the value of the core business
(restructuring)
iii. Buy and build (growth by synergy between
the target companies in a portfolio)
Islamic Private Equity Funds (IPEFs)

Invest0rs

S.S.B IPEF M.T

TC TC TC TC
1 2 3 4
INVESTORS
They are :
• high net worth individual
• family trust
• corporation
• instituation

They want diversify their portfolio

achieve higher return on investment for
their medium to long term finan.

by
Optimizing the innovative exploiting the strong growth
characteristics potential of the target
company
 what influence the range of possible investment

The origin @ residence of certain

Underlying investors

the legal structure & home

regulation of the IPEF struc.
that is witheld

the regulation of the host

countries of the target co
 MANAGEMENT TEAM
is necessary to verify whether or not the presented
strategies
First stage : the mngemnt team has the crucial
responsblty of identifying the target co. that meet
the desired investment profile and that match the
fixed return on invstmnt
Second stage : to add new financial resources, the
mngemant team could add value to the target co
through intellectual capital synergy
Third stage : the mngmnt team will negotiate and
finalize the envisaged exit strategies.
 Investment Strategy
Taking the following criteria into consideration:
• Geographical distribution
• Business and industry sectors involved
• Currency risk
• Term of investment
• General risk profile
• Projected return

The strategy should be clearly defined, manageable.

 Target company
• Haram activities
non-exhaustive list of possible elimination criteria that would classify an
investment opportunity as haram or unlawful
• Financial Ratio
– Total debt
– Total interest-bearing securities and cash
– Accounts receivable
Legal Challenges
• The legal documentation related to compliant project must be compliant
with the Shariah

Islamic liquidity management

• Invest the funds through Islamic compliant means invest in Shariah
compliant product or compliant stock, commodity Murabahan, and other
contract approved by Shariah advisor

Shariah adviser and compliance officer

• Assume responsibility for the Shariah compliancy of the IPEF, and
eventually the target companies and management team.
Shariah awareness
• Provide and raise awareness among members and keep close contact with
the target company and the SSB

Coexistence with conventional finace

• One can envision the intervention of a local Islamic financial institution to
assist the target company if possible through a facility framework
agreement in refinancing Shariah compliant financial products where
needed.