Shariah-compliant Private Equity Secondaries
Middle Eastern Wealth Manager | Q3 2021
Engagement at a glance
|Client Country/Type:||Middle Eastern Wealth Manager|
|Asset Classes, Geography:||Shariah-compliant Private Equity Secondaries, Global|
|Portfolio Size:||USD 50 million|
|Structure:||Pooled fund or separately managed account (subject to Shariah compliance)||Service Provided:||Manager selection||Investment Objectives:||Portfolio diversification and enhanced returns (minimum net IRR of >10%)|
This Middle Eastern wealth manager sought bfinance’s assistance in building a portfolio of Shariah-compliant private equity secondaries. Although the client was intent on accessing globally focused managers with a tilt towards buyouts, it was also willing to include growth and venture capital investments as smaller allocations. Participating managers were required to provide solutions to address Shariah-derived prohibitions on allocating to specific industry sectors—such as investments associated with conventional finance, alcohol, gambling, adult entertainment, tobacco and the production of weaponry/armaments—while still proving themselves capable of delivering market returns across a well-diversified portfolio.
- Laying the search groundwork: since the client was a first-time investor into private equity, the bfinance team worked closely with its internal management team to provide in-depth education about identifying appropriate options in line with its investment parameters and risk appetite.
- Expanding the manager universe: bfinance worked closely with firms that wanted to participate in the request for proposals but had no direct experience of working with Shariah-compliant investors.
- Bringing transparency to potential costs: the growing complexity and lack of transparency surrounding fees and incentives in secondary structures can make it challenging for investors to compare the costs of different offerings; with this in mind, bfinance provided in-depth analysis to support the scoring of different fund offerings.
- Delivering meaningful quantitative analysis: using its proprietary quantitative methodology, bfinance provided a detailed comparative overview of managers’ track records in what is undeniably a newer part of the private equity market, where benchmarking is limited in depth and composition.
Our specialist says
With the client’s encouragement, research included managers that did not have a pre-existing Shariah product or strategy, where they were investing in assets that appeared readily applicable to Shariah investment parameters. Although many GPs were keen to be considered, very few firms could readily support a Shariah-compliant mandate as part of a comingled fund solution and still provide a high-quality investment proposition. That said, one of the two selected managers had no Shariah experience. Looking ahead, we feel that private equity firms have a major opportunity to develop and deliver Shariah-compliant products alongside their standard pooled fund solutions for this community of LPs.