Islamic Funds Islamic Private Equity Funds

Islamic Funds – Islamic Private Equity Funds 2nd BaFin Conference on Islamic Finance Frankfurt, May 10, 2012 Prof. Dr. Bernd J. Hoefer Chairman & CEO ...
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Islamic Funds – Islamic Private Equity Funds 2nd BaFin Conference on Islamic Finance Frankfurt, May 10, 2012 Prof. Dr. Bernd J. Hoefer Chairman & CEO

Agenda

• BAHRAIN – The Financial Services Centre • The Challenges of the Islamic Funds Industry • Islamic Private Equity Funds

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BAHRAIN - The Middle East’s most respected & established financial services centre • Long established, tested and credible regulatory framework – 40+ years history with focus on high regulatory standards

– Positively assessed by rating agencies, IMF, MENA-FATF • Strong across many different areas – Main wholesale banking center in the region and leading regional centre for funds and insurance – Global center for Islamic Finance (e.g. AAOIFI) • Reached critical mass in people and institutions: cluster effect – Largest concentration of financial institutions in the region (400+) – Broad range of international, regional and local players • The Middle East’s freest market (e.g.100% foreign ownership, tax free) www.A9C.com 2

Lean and Effective Regulatory Framework • Setup in 2006 as fully independent entity to succeed the Bahrain Monetary Agency Responsibilities of the Central Bank Bahrain

• Key functions – Central Bank – Single Regulator of financial sector – Development of financial sector

Market friendly regulatory philosophy

• Single jurisdiction for financial services, i.e. no free zones, provides legal clarity and regulatory simplicity • Open and transparent supervisory approach, supportive of market innovation

www.A9C.com 3

Agenda

• BAHRAIN – The Financial Services Centre • The Challenges of the Islamic Funds Industry • Islamic Private Equity Funds

www.A9C.com 4

The Challenges of the Islamic Funds Industry

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Market size: Limited impact of Islamic Funds - Global Mutual Fund Industry: USD 25.6 trillion AuM/1Q2011 - Global Islamic Fund Industry: USD 58 billion AuM/2010; - Islamic funds only 5.6% of total Islamic financial services industry

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Performance: Outperformance is statistically barely significant however, these days Islamic Funds may outperform their peers

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Fund Manager: Tough times ahead only 30% of Islamic fund managers have more than USD 100m in AuM and top 10 have ~80% market share; 30 % compression in management fee since 2007; 23 new funds / 46 liquidated (2010)

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Investment universe: Limited options in equity markets GCC Islamic Equity Fund has an investment universe of 104 stocks after Shariah compliance and market capitalization/liquidity screening thereof 71 % KSA / 81 % Materials, Telco, Islamic Finance

www.A9C.com Source: Ernst & Young Islamic Funds & Investment Report 2011

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Agenda

• BAHRAIN – The Financial Services Centre • The Challenges of the Islamic Funds Industry • Islamic Private Equity Funds

www.A9C.com 6

Most asset classes are unattractive for conventional investors and/or “haram”… High-level assessment of different available asset classes

Real Estate

Significant revaluation globally during the last 12 months; oversupply in regional markets.

Hedge Funds

Tighter regulation, higher transparency threaten business model. Leverage difficult to obtain.

Fixed Income

Historically low interest rates in major countries, pushing yields down across all rating classes.

Stock Markets Commodities

Price appreciation due to excess liquidity, pushing valuation up to increasingly unattractive levels. Current valuation levels include “flight-to-safety” premium. No current yields.

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… but Private Equity is a serious option for conventional & Islamic investors Private Equity has attractive features…

• Attractive return potential (15%+ IRR) due to strong growth and low current valuation levels • Productive assets create economic value from return, diversification, inflation protection • Diversification benefits in terms of asset class, geography and currencies

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More tailwind for Islamic Private Equity Funds

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Structural Shariah compliance of Private Equity (partnership approach) if underlying business is allowed (Industry/Financial Screening; Musharaka, Mudaraba) plus e.g. Shariah Board

2

Dynamic convergence between Non-Islamic PE and Islamic PE regarding debt financing (max. 30%); in terms of sectors too; Managerial, operational PE business, no financial engineering !!!

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Credit crunch has dried up bank funding (e.g. Europe, Middle East); SMEs, family businesses etc. are more open for PE investments; low valuation levels and weak Euro create excellent buying environment

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Islamic Private Equity is the ideal vehicle for social development projects, diversification, sustainability and job creation; Sectors: health care, education, infrastructure, industrialization

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Interregional vs. intraregional Private Equity Funds

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Europe - Europe strict limitations of the investment strategies by sectors and regions; max. Europe-Europe, often single target country or region MENA - MENA PE Mgt: Abraaj Capital, Amwal, Citadel Capital, Global Investment House, Gulf Capital, Injazat Capital, Investcorp, Sana Capital etc. Hot Spots: Egypt, Jordan, KSA, Turkey, UAE Special Funds Business Angels, VCs are even more regional … and finally SWF Cross-border & cross culture transactions are key ! High potential for cross-border PE Funds to bring Islamic Finance to Europe and deals to MENA (know-how, innovations, diversification) e.g. Gulf-German Industrial Growth SPV (A9C Capital, Bahrain)

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“The best way to predict the future is to create it” Abraham Lincoln

Thank you very much ! Prof. Dr. Bernd J. Hoefer Chairman and CEO [email protected] Mobile (+973) 36444216

Bahrain Financial Harbour East Tower, 11th Floor P.O. Box 60074, Manama Kingdom of Bahrain

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