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Do Investors Have Faith in Sharia-Compliant Funds? – August 2014

by Kathryn Sharpe

  • 22 Aug 2014
  • PE

Sharia-compliant funds are a comparatively new development, albeit one that possesses powerful potential given the rapid economic growth of Islamic countries and large representation of Muslims in the world’s population. With faith-based investments belonging to a still young industry, do Sharia funds have a budding future?

Real estate is the most prevalent type of Sharia-compliant private equity fund, making up half of the total number of vehicles currently in market. The fact that infrastructure is the second most common fund strategy suggests fundraising is opportunistic and sits in line with the burgeoning MENA economic environment, a region with extensive scope for property development, particularly in the commercial sphere. Real estate and infrastructure funds account for a 72% majority of all Sharia-compliant funds currently raising capital. The largest fund in market is the Arab Infrastructure Investment Vehicle which invests in projects across traditional economic and social sectors in the MENA region, with a particular focus on PPP projects.

A geographic breakdown using Preqin’s Funds in Market module reveals that of all Sharia-compliant private equity funds currently raising, those focused on the Middle East are targeting the most amount of capital, accounting for 53%. This percentage is an unsurprising statistic given that 50% of the Sharia-compliant funds are being raised by Middle East-based fund managers. Asia-based firms are the second most dominant player; 30% of Sharia-compliant funds are being raised by managers based here.

There are currently 10 private equity funds in market that are Sharia compliant. Together these funds are looking to collect $2.7bn in aggregate capital commitments, a slight fall from the $3.3bn sought at the same time last year. The difference between these two amounts is not very substantial, suggesting a somewhat static trend over the past 12 months rather than one displaying strong growth or decline.

However, data analysis on closed funds shows a much more exaggerated downward trend. 2006 saw the most capital raised for Sharia-compliant funds; in this year, seven Sharia-compliant funds gathered $6bn in aggregate capital commitments. This is compared to 2014 YTD which has only seen two funds closed, accumulating under $200mn in total capital commitments. The largest ever Sharia-compliant fund to close was the 2006-vintage BMB Capital Sharia Fund of Funds which invests in private equity funds, real estate funds and hedge funds in emerging markets.

Commanding hundreds of millions of dollars, Sharia-compliant funds still hold some significance in the private equity fundraising sphere, and bring specific advantages to those focused on or based in the MENA region in particular. The largest fund having closed in 2006 suggests that Sharia funds, like others, have not been immune to the global crisis. Despite the decline in fundraising statistics, investor appetite for Sharia-compliant funds will remain, especially given the opportunities that can be found in the emerging markets of MENA and beyond.

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