Private Equity and VC Investing in Muslim World

islamic investing in private equity and islamic venture capital

IMPROVING GLOBAL MARKET FOR ISLAMIC PRIVATE EQUITY AND VENTURE CAPITAL

Islamic private equity (PE) remains a very small component of the global PE market but showed signs of strength last year with an increase of mergers and acquisitions (M&A) activity in the Middle East hitting a four-year high. Islamic venture capital (VC) continues to face an uphill battle in the region but demonstrated signs of improved market perception and attention. SUHAIL AHMAD writes.

Global alternative investment assets reached US$7 trillion in 2014 according to Preqin’s 2015 Global Alternatives Report. PE including VC was the largest component of alternative assets with US$3.8 trillion under management, an increase of 12% over the previous year.

Review of 2014

Aggregate capital raised by PE and VC firms worldwide in 2014 was a strong US$495 billion, with 85% of the activity in North America and Europe. PE returns as measured by public pension fund holdings reviewed by Preqin Performance Analyst remained strong at just under 20% for the year and clearly beating other alternative asset classes such as real estate and hedge funds with the latter closing out 2014 with a measly 2.9% average investment return as measured by the Barclay hedge fund index.

The Middle East witnessed some strong deal-making with publicly announced M&A across the Middle East increasing 23% to reach US$50.3 billion last year, the highest amount since 2010. Despite the strong M&A activity in the region, international private equity firms were not as aggressive as expected and inbound M&A activity declined 30% last year to US$4.2 billion, according to Thomson Reuter’s data.

One of the region’s largest PE firms, Dubai-based Abraaj Capital had an active year teaming up with the US-based TPG Capital to bid for Saudi fast-food chain Kudu, although it lost out to multinational cereal giant Kellogg in a bidding war for Egyptian biscuit maker BiscoMisr.

The sector in 2014 also saw the successful fundraising of the largest PE fund since 2011 with Gulf Capital of Abu Dhabi closing its largest and third private equity fund; GE Equity Partners Fund III with a US$750 million raise. Although Gulf Capital is not a dedicated Islamic PE firm, the closing is a positive development for the region and should spur more activity in PE in the coming years.

In the VC space we expect 2014 investment levels to improve over the US$29 million in funds raised in 2013 according to the MENA Private Equity Associations 4th Venture Capital in Middle East and North Africa Report. Similar to the regional PE data, it is unclear how much of the VC deal flow was Islamic but nevertheless the VC sector in the region continues to remain embarrassingly low compared to the rest of the world which had total VC investments of US$86 billion last year including the closing of 273 new VC funds!

Preview of 2015

PE firms will be increasingly interested in the Middle East region as investors look at diversifying geographically, better valuations than in the US, and capitalizing on the growth opportunities of the young demographics of the region.

Interestingly, a series of interviews of 75 corporate executives across the Gulf Cooperation Council (GCC) in the GCC Investment Outlook report late last year revealed only 45% of respondents think that the opening up of GCC stock markets to foreign direct investments will be one of the main drivers for investment in the region. However, 51% of respondents do believe PE transactions will increase significantly in 2015.

Small mid-sized enterprises (SMEs) and start-ups that do not have access to traditional Islamic banking credit options for a lack of collateral or operating history are desperate for an increase in venture capital options in the region. The 10th World Islamic Economic Forum (WIEF) held in Dubai last year had a lively panel discussion on the role and future of crowdfunding to fill the VC void in Islamic finance. The discussion and increased interest in crowdfunding is a positive step and will help increase awareness of VC as an important tool for positive socio-economic development in the region.

Conclusion

Islamic PE and VC have an opportunity to substantially contribute to the economic growth in the region by supporting businesses of all sizes reach the next level. However, it will continue to be a challenge for the industry to differentiate itself from conventional PE.

However, there are encouraging signs for VC with the growth of crowd equity funding which is inherently compatible and mutually reinforcing with Islamic values of building and supporting local communities, encouraging risk and wealth sharing, promoting real economic activity, and equity ownership over debt. These goals should be near and dear to all investors and participants in Islamic PE and VC.

Published in the IFN 2015 Guide (pg.44)

RBS: Global to Gone in 10 Years

RBS flyer with military tatoo

On thursday The Royal Bank of Scotland (RBS) reported another disappointing earnings and formally took itself off the global stage.

“This is a plan for a smaller, more focused, but ultimately more valuable, bank with the vast majority of its assets in the U.K., and for RBS marks the end of the stand-alone global investment bank model,” stated Ross McEwan, Chief Executive Officer of R.B.S.

I don’t invest in banks or insurance companies.Haven’t worked under a bank since 2004 when I left a member of the Royal Bank of Canada (RBC) group to join an independent. And usually don’t comment on the banks unless it has to do with investment strategies, innovation or ethics. All three of which are often lacking in good measure at banks these days.

However having lived, studied and worked in and around Edinburgh for most part of the past five years. I still scratch my head when driving by the RBS Gogarburn headquarters or walking by the historical RBS offices across St. Andrews Square; How did an iconic institution with almost 300 years of history get it so wrong!?

Here is a glimpse of how the bank went from being at one of the largest financial services group in the world to a small U.K. bank. Erasing tens of billions in shareholder value during the process:

March 6, 2000: RBS offer for NatWest is declared “unconditional”. Fred Goodwin replaces Sir George Mathewson as chief executive and shares close at £2.70.

May 4, 2004: Charter One bought for £5.8bn. RBS launches £2.5bn rights issue to fund takeover of US bank. Deal fails to hit income targets, prompting investor criticism. shares still higher at £4.81.

September 14, 2005: Queen opens new £350m headquarters building at Gogarburn. Yeah!

May 28, 2006: Sir Fred, having been knighted in 2004, is voted most powerful businessman in Scotland for the fourth year in the Scotland on Sunday Power 100 list. Share price hasnt’ move much in two years and sits at £4.74.

April 16, 2007: Consortium led by RBS enters bidding war for Dutch bank ABN Amro, which was already in advanced talks with Barclays for a friendly merger. Shares climb to £5.78.

October 10, 2007: RBS declares takeover of ABN “unconditional”, just as market value of assets plummet in midst of credit crunch.

April 22, 2008: under pressure from Government, RBS announces £12bn rights issue to shore up its weak capital base. shares still holding up surprisingly at £3.

October 13, 2008: a week after accepting emergency funding, RBS receives multi-billion pound bailout as it comes close to collapse, leaving taxpayer as its majority shareholder. Shares hit 65.7p

November 2008: The Government takes a 58pc in RBS for £15bn, with a further £5bn of preference shares.

February 26, 2009: RBS reports a loss of £24.1bn for 2008, the biggest in British corporate history.

February 10, 2009: Sir Fred and former chairman Sir Tom McKillop appear before MPs. Sir Fred and Sir Tom apologise for the near collapse of RBS and the “distress” it caused. Shares 23.8p.

I’d like to get some comments from the bankers out there and particularly with any that may have had the pleasure or pain of working at the bank. How did it RBS. get it so wrong, so many times?

Disclosure: I do not have any position in RBS shares.

Source: RBS Investor Relations, The Telegraph

Alternative Investment Assets Reach $7 Trillion USD

“The alternative assets industry has reached $7 trillion in assets in 2014,” said Preqin CEO Mark O’Hare in a statement. “The past year has seen significant growth in the assets held by alternatives managers, most notably in the value of unrealized assets in manager portfolios. Even with the sub-par performance seen by hedge funds over the course of the year, these managers witnessed the largest growth in their asset base as investors looked ot the true value investmens in hedge funds can bring.

“The recent news of CalPERS cutting hedge funds and reducing the number of private equity partnerships within their portfolio does not reflect the wider sentiment in the industry,” “From our conversations with investors, the majority of investors remain confident in the ability of alternative assets to help achieve portfolio objectives. Indeed, across all asset classes, a much larger proportion of investors plan to increase their exposure rather than cut back their allocations to alternatives. However, as the investor base for alternative assets grows and becomes more sophisticated, fund managers continue to face the challenge of how to attract this new capital. Those fund managers that continue to innovate with new products and solutions, as well as listening to investor demands for better alignment of interests and lower fees, may well be winners in 2015.”

Size of the alternative investment asset classes at the end of 2014:

  • Private Equity $3.8T
  • Hedge Funds $3.02T
  • Real Estate $742Bln (managed assets)
  • Infrastructure $269Bln

Source: Preqin’s 2015 Global Alternatives Report

Global M&A Growth Challenged by Regulation

During first half 2014, a total USD1.57 trillion worth of M&A deals were closed, making it the busiest six-month period in cross-border M&A since 2007, according to Mergermarket data. With an estimated EUR1 trillion in current reserves at European-listed companies, the strong pace of dealmaking is expected to continue but not without its challenges.

According to a new report by law firm Paul Hastings, “Global M&A: Momentum for Growth”, which is based on interviews with 40 top European corporations, investment banks, private equity funds and other business leaders. The potential limitations on a company’s freedom to manoeuvre, due to ever-stricter competition laws, meant that other forms of corporate combination may come back into favour as companies try to navigate antitrust regulations.

“We are witnessing a major increase in the amount of sometimes extra-territorial regulation, in areas such as anti-trust, anti-corruption and tax,” says Guillaume Kellner, partner in charge of the Corporate Department at Paul Hastings in Paris. “This trend is increasing the legal risks for M&A transactions, forcing acquirers to think ahead and adopt increasingly sophisticated approaches.”

Download the complete report: Global M&A: Momentum for Growth (PDF Format)

Lunch with Warren Buffett

lunch with warren buffett

Every year the legendary investor Warren Buffett gives anyone (with a few dollars to spare) an opportunity to have lunch with him. All proceeds going to the Glide Foundation providing meals for the needy. This year the auction will begins today on June 2nd, 2013 for five days.

Before you get excited, I’d like to remind you the previous year’s winning bid was $3.4 million! Unfortunately well above my charitable contribution budget for the year.

However dozens of books have been written about Warren’s investment philosophy, style and strategy. Hundreds more in articles and resources can be found in the public domain and on the Internet.

Interestingly early this year, fund manager Mohnish Pabrai shared some of the insights  on the Motley Fool site from his 2007 bargain $650,100 lunch with Warren and his partner Charlie Munger.

Key lessons Mohnish took away from the lunch were:

  1. Be patient.
  2. Don’t use leverage or borrow to invest.
  3. Look at what other successful investors are doing.
  4. Invest in “cannibals”, companies buying back their own shares.
  5. Carefully study “spinoff” companies.

That’s it! If you’d like to learn more about value investing, I’d be happy to give you more tips over lunch anytime. And no it won’t cost you a little fortune.

Happy bidding: eBay Auction Link for lunch with Warren Buffett