Sometimes I think that Islamic private equity (PE) funds resemble Bigfoot — a great many believe that it exists, but very few have actually seen it. In the 2010s, a number of the GCC-based large asset managers announced their plans to allocate funds to Shariah compliant equity operations (both public and private ones). Nevertheless, with the demise of Abraaj in 2019, the number of PE funds with dedicated Islamic operations in 2020 includes only the ‘usual suspects’ — Amanah, Fajr Capital, COPE PE, Gulf Capital and a few captive Shariah compliant funds operated by the major Islamic banks in the GCC and Southeast Asia.
Almost US$1.5 trillion was invested in venture capital (VC) deals in the last decade. In 2019, US$294 billion was invested in 32,800 deals worldwide. 2020 will see a smaller VC investment value of US$260 billion, which is not bad, given the direful expectations in the spring. The Shariah compliant VC deals dropped to under US$400 million, including seed funding. The key players in the sector are still conventional and mixed funds, like BECO, Gobi Partners and SFC Capital.
Review of 2020
COVID-19 has dramatically impacted the sector performance and outlook for the year. Still, it should be kept in mind that most PE funds have investment horizons in excess of five years, so the Wall Street’s drama of missing quarterly numbers is totally foreign to the industry. With US$276 billion in ‘dry power’ (according to Preqin), the funds can afford to wait for investment opportunities, especially in the ‘distressed asset’ sector. Forced isolation rules, coupled with underfinancing, are creating spectacular opportunities for the ‘buy-low-and-just-wait’ strategy.
It is projected that global PE fundraising in 2020 will likely reach ‘only’ US$450 billion (25% less than in 2019). Islamic PE fundraising will drop even more to under US$350 million (down by 53%). The signature deals were few and mostly in exits — Fajr Capital sold its stake in Bank Islam Brunei Darussalam, while SBI Islamic Fund sold its stakes in Sengenics and Sim Leisure.
The VC deal of the year is, of course, the US$25 million investment by Saudi Aramco into Wahed. Other notable deals include investments in the Jahez food delivery app by Impact46, and the agrotech company Pure Harvest investment by Wafra.
Preview of 2021
2021 is likely to bring some additional competitive pressures on the Islamic PE industry. The first challenge comes from the institutional investors with US$2.4 trillion in assets, who made it clear that the environmental, social and governance (ESG) considerations are now paramount in choosing a fund manager. These issues, which are Shariah compliant in principle, increasingly affect consumer behavior and business conditions, and there is evidence that the ESG programs improve returns and limit risks.
Still, the effect of another significant factor may be more detrimental to Islamic PE. A new investment model that combines a Murabahah with a unilateral promise (Waad) to enter into a Musawwamah may allow any Shariah compliant investor to become a limited partner of a conventional fund. At least two of the top five US PE funds will offer this option to Muslim investors in 2021.
There are several reasons to stay pessimistic about the Islamic PE industry in 2021:
• most of the classical assets are still owned (ineffectively) by Islamic banks and family offices
• the lack of later-stage Islamic tech projects translates into the absence of investees, and
• conventional PE funds will continue to invest in ESG and Shariah compliant projects — because they can.
Unlike the Islamic PE industry, the Shariah compliant VC sector is about to boom. In 2021, Kuala Lumpur will remain the center of Islamic VC. New programs such as Fintech Booster by Malaysia Digital Economy Corporation (MDEC) will spur entrepreneurship by providing essential support services — onboarding assistance, tax, legal and Shariah compliance consulting.
Saudi Arabia, the UAE and Malaysia will attend to the availability of Islamic seed capital. This essential funding will be distributed to viable projects via business accelerators. Saudi Arabia is looking to create one of the largest pools of Islamic seed capital (US$800 million) by allocating funds from its sovereign Public Investment Fund. In the UAE, The Mohammed bin Rashid Innovation Fund and 11 start-up incubators will be dispensing up to US$250 million in 2021. Malaysia is also well positioned to provide the ‘seeds’ to Islamic start-ups via its multiple government agencies — Bank Negara Malaysia, Malaysia Venture Capital Management and MDEC.
2020 has made many Muslim countries’ governments realize that the budgets must be expanded to support local economies. The year 2021 will see the rise of multiple government-sponsored co-investment schemes where government entities will provide up to 50% of capital to projects properly evaluated by the established VC players such as Gobi Partners, Cradle Fund, SHUAA Capital and RHL Ventures.
The competition for top start-ups will intensify. Saudi Arabia and the UAE will actively compete for Islamic tech projects with various relocation incentives, free offices, subsidized housing and ‘no strings attached’ seed funding. It is going to be a tough game for Indonesia and Malaysia.