The origins of Islamic private equity in the Gulf

The Islamic private equity industry is a very young one and traces its roots back less than a decade. In 2003 Kuwait’s Global Investment House appears to have been one of the first institutions to explore Islamic private equity through the launch of a Kuwaiti dinar denominated Private Equity Fund where the investments were channelled into little-known unlisted Kuwaiti companies. Also in Kuwait during the same year, Kuwait Finance House’s $100m New Zealand Australia Private Equity Fund was launched.

Unicorn Investment Bank from Bahrain was not far behind and in 2006 launched its $150m Unicorn Global Private Equity Fund.

The most successful private equity funds are tightly targeted and so, to provide some focus, investments had to be in one of four categories: consumer products, heath care, business services, and light manufacturing.

That same year, 2006, also saw the establishment of Millennium Private Equity from the Dubai Islamic Bank stable Harking back to the point we made about the Islamic finance industry’s over exposure to real estate however, up to 70% of the funds will have real estate exposure.

Since those early days the industry has grown and developed to some extent around the world although there has been a growth focus on the GCC which stems largely from the massive petrodollar boom caused by sky-high oil prices.

Range of funds

Other noteworthy examples of Islamic private equity include the following:

In January 2007 the Enmaa (Dubai Growth Fund) from 3i Capital Group was launched. This $100m fund was intended to invest in public and private equity securities primarily in the Middle East and beyond.
In April 2007 Khaleej Finance and Investment of Bahrain launched its $200m
Indian Private Equity Fund with the aim of investing 50/50 in private equity and real
estate in India.
The Al Imtiaz Investment Fund is a dinar denominated open ended private equity
fund launched in October 2007 by Al Imtiaz Investment Company with a focus on both private equity and real estate.
Millennium Private Equity and Global of Kuwait launched the $500m Global DIB Millennium Islamic Buyout Fund in 2008 as a true private equity fund focused on companies located in the GCC, Turkey, Egypt, Jordan, Lebanon, Tunisia, and Morocco.
In March of 2008 the $1bn Dhow Gulf Opportunities Fund was launched by Qatar Islamic Bank (QIB) as a dollar denominated closed ended fund with a focus on telecoms, environmental recycling technologies, media, oil & gas, and infrastructure.
Arcapita, the Islamic investment bank from Bahrain, successfully exited its private
equity investment in US-fast food firm Church’s Chicken in mid-2009. The sale, to a San Francisco private equity group Friedman Fleischer & Lowe, is said to have seen Arcapita double its money on the $390m it paid for Church’s back in December 2004.

Industry snapshot
The pool of funds listed here, from IFIS, is rather small and because of the wide variations in published performance figures, an average return figure for such funds would be largely meaningless.

The figures tend to suggest that the great promise offered by private equity transactions to the Islamic finance industry has not been met and the Islamic private equity industry remains ready for the boom that is due.

In fairness there are not many asset classes that have performed well over the past few quarters so perhaps the kindest conclusion that can be drawn from these figures is that the Islamic private equity sector has not performed any worse than others.

Over the years a number of specialist Islamic investment banks has grown up, some with a specific focus on Islamic private equity and others with a more general investment focus.

We have already mentioned a number of the firms in this sector including KFH, Global, Unicorn Investment Bank, and Millennium Private Equity but there are also others including:

International Investment Bank of Bahrain which was established in 2003 with Islamic private equity was one of its main planks. To date the bank has undertaken a number of private equity deals. The bank reported a net profit of $13.5m for 2008 although Q1 2009 showed a loss of $0.9m compared to a net profit of $5.4m for the same period of 2008.
Rasmala from Dubai is another specialist in private equity and in January 2009
launched Rasmala Mena Private Equity Fund 2 as a Shariah compliant regional private equity fund with a target size of $350m. The fund will primarily target opportunities in Saudi Arabia, UAE and Egypt and targets target mid-cap opportunities with an enterprise value of $50m to $250m.
In the UK Prosperitus Capital Partners is a newly formed private equity and alternative investments advisory group focused on Shariah compliant private equity funds investing into emerging market real estate and infrastructure projects.
Bahraini bank Capital Management House launched a $150m Shariah compliant private equity fund called CMH Enterprise Fund I, back in March 2007. CMH Enterprise Fund I was to invest in manufacturing, utility, energy, healthcare, services and technology related companies.
Gulf Finance House is one of Bahrain’s leading Islamic investment banks which also focuses in Islamic private equity whose projects include Khaleeji Commercial Bank, Gulf Energy Holding Company, Gulf Holding Company, Bayan Holding Company, and Balexco. CIMB Islamic from Malaysia is also involved in private equity but through its mother organisation CIMB.

Future of Islamic private equity

As the Islamic finance industry grows, and as the financial services industry recovers from the global recession it is likely that the Islamic private equity industry will come back to life quickly.

The industry has never lived up to the promise that it had, in part because of the lack of skilled professionals in the industry and in part because there has been a lack of landmark transactions to act as benchmarks.

Islamic finance and private equity are natural bedfellows and therefore it can only be a matter of time before Islamic private equity takes off as a significant part of the financial landscape. The essential requirements for this to happen will include attracting and retaining skilled talent, the return of liquidity to the market, and a set of benchmark deals to give the industry some profile.

Both the Malaysian Venture Capital Association and the Gulf Venture Capital Association will have a role to play in this resurgence, but these institutions will be covered in the following section on Islamic venture capital.

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The origins of Islamic private equity in the Gulf

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