Considering compliance

As the economic crisis bedded in early last year, there were widespread predictions it would lead to acceleration in the uptake of Shariah-compliant private equity in the Middle East and beyond. In the midst of a crisis that had at its core an implosion in interest-based borrowing, which is forbidden under the rules of Shariah finance, Islamic rules seemed to offer a less greedy and fundamentally less risky alternative.

Fast forward a year, and there has been enough fallout amongst Shariah-compliant borrowers to take some of the shine off its reputation for safety in the world of debt. Chief amongst them is Dubai World, which revealed last year it would restructure $26 billion of debt, much of it Islamic finance.

“As recent instances of Islamic bond defaults prove, leverage is leverage regardless of whether it is traditional or Islamic – and if you cannot generate cash to meet commitments, it will result in problems,” says Dawood Ahmedji, a director and Islamic Finance specialist in the Bahrain-based office of global consultancy Deloitte. “Similarly, if you acquire an asset and mismanage it or face adverse market conditions, then clearly the fact it is financed in an Islamic way isn’t going to provide any protection.”

Leverage is leverage regardless of whether it is traditional or Islamic. Dawood Ahmedji

However, for the private equity world, there is another aspect to Shariah rules which often leads people to describe it as being safer: its prohibition of certain “unethical” industries such as gambling, pornography and alcohol.

Although the remit does not necessarily differ greatly from that of many conventional private equity investors, who might also avoid controversial investments and seek out defensive plays in times of economic distress, there is a perception on the ground that Shariah fund structures will bring better access to the region’s wealthy investors, many of whom increasingly want their investments to follow Islamic finance rules.

“The latest estimate on Shariah-compliant assets under management is $1 trillion. Everybody is trying to capture part of this pie, whether it is the banks, retail funds or private equity firms – especially because it is highly liquid,” says Nasser Saidi, director of corporate governance institute Hawkamah and chief economist of the Dubai International Financial Centre (DIFC).

At a time when fundraising is still incredibly hard-going, the lure of this pool of ready capital is predicted to catalyse more firms to join the ranks of Islamic private equity specialists like Rasmala, Arcapita and Millenium Private Equity.