Private Equity And Venture Capital Into The Islamic Finance Industry

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1. IFN SECTOR CORRESPONDENT How was your summer ? REAL ESTATE By Philip Churchill Well, the kids are back to school, so that must be the summer officially over. Asking about everyone’s summer recess, it seems to have been busier than most people expected, but perhaps the clues were already there. Just as we were settling in the summer months, Real Capital Analytics (RCA) shared its analysis on the cross-border acquisitions undertaken by Middle Eastern investors for the first half of 2019, and they were up. Materially up. With RCA recording US$8.6 billion of acquisitions for these six months, this was nearly 60% up on the volume for the first halves of both 2017 and 2018. Digging into the details revealed some further interesting findings. Investors from the UAE and Bahrain were particularly active, investing more than they had done for the whole of 2018. Half of the investment had gone into the US, representing the second-highest proportion since RCA started recording. While UK volume was down, at 21% of the total, RCA observed that it was not as bad as the political uncertainties of Brexit suggested it might have been. And last but not the least, China attracted Middle Eastern investors for the first time since 2012. So, plenty going on, but what of the summer itself? Speaking for our own 90 North, we found that investor engagement was far higher than we expected, with most seeking to line up transactions to close upon their return and which remains the focus. Meanwhile, reviewing the pages of Islamic Finance news, it seems that while SEDCO chose to exit US$338 million of real estate in the US and the UK, others were very much in acquisition mode in the US, as RCA’s analysis suggested that they would be. Arch Street Capital made a significant acquisition in Delaware of an office property let to chemicals company Chemours for one of its institutional investors. Meanwhile, Bahrain-based GFH Financial Group, again supporting the level of Bahraini activity reported by RCA, made a US$100 million tech office acquisition in Research Triangle Park outside Raleigh, North Carolina. Having bought and sold a property let to Lenovo on the Research Triangle Park, it is a fascinating and still fast-growing area. Which I guess brings us on to predictions for the balance of the year. Well, as you will know from the news there is plenty going on in the world, but Islamic investors are seeing through the noise to the opportunities that exist, so I predict plenty more activity. Wishing good luck to all! Philip Churchill is the founder and managing partner of 90 North Real Estate Partners. He can be contacted at pchurchill@90northgroup. com. Private equity and venture capital in the Islamic ϐinance industry PRIVATE EQUITY & VENTURE CAPITAL Disadvantages of private equity By Dr Emilio Escartin It cannot all be sunshine and rainbows. While private equity as a business funding option has some convincing benefits, you will also need to consider the following disadvantages: Private equity refers to investment funds that buy and restructure private companies. The capital provided by these investors can be used to restructure the business and help out with things like technology and acquisitions. • Typically, private equity is distributed so investors gain control of a private company, restructure it as they see fit, and then sell it for a profit. These investments will either come from a private equity firm, a venture capital firm or angel investors. No matter where it comes from, the capital is used to make the business more profitable. The following are what private equity firms look for: • Strong management team • Growth potential • Return on investment • Realistic business plan, and • Exit strategy. © Loss of control This equity does not come free. When you accept funding from a private equity firm, you are giving them partial ownership of your business. Because private equity firms offer large, concentrated funds, they typically expect a good chunk of ownership, if not all of it. This not only means you lose ownership but control as well. Private equity firms will want to be heavily involved in the managerial side of things as well, making decisions and calling shots you might not agree with. • Differing definitions of success Private equity investors pour money into a business, make it profitable and 22 then get out. All they care about is the financial success of the organization. This is not always a bad thing; the monetary status of a business is a key factor of success. However, if a business owner has other goals in terms of creating relationships and making a difference in the community, they can often get thrown to the side to make way for private equity investors’ financial interests. • Hard to qualify Private equity firms are picky, and they have every right to be considering they are financially fueling your business. Typically, private equity firms invest in businesses that are already established or show potential for growth and a big return in a short period of time. Your business may not measure up. Dr Emilio Escartin is the professor of Islamic finance at IE Business School. He can be contacted at eescartin@faculty.ie.edu. 11th September 2019