CASE STUDY

Shariah-compliant Private Equity and Infrastructure

Middle Eastern Foundation | Q2 2022

Engagement at a glance

Client Country/Type: Middle Eastern Foundation
Year: Q2 2022
Asset Class: Shariah-compliant Private Equity and Infrastructure
Mandate Size: USD 80 million
Mandate Geography: Global
Mandate Type: Pooled fund or separately managed account
Service Provided: Manager selection
Investment Objectives: Minimum net IRR of 15% in PE and 10%–12% in Infrastructure; minimum cash yield of >5% for the Infrastructure allocation.

Shariah-compliant Private Equity and Infrastructure

 

Client-specific concerns

The client, a Middle Eastern foundation, was looking to enhance the returns of its overall portfolio and chose Private Equity and Infrastructure Equity as suitable asset classes. The client was willing to consider all investment types—direct investments as well as fund of funds—and strategies, whether those featured standalone or combined offerings (Private Equity plus Infrastructure). Shariah compliance, however, was of paramount importance to this client. Those constraints meant that leverage was limited, which was a major limitation on the Infrastructure element of this particular search. Within Private Equity, the Shariah requirement meant that buyout strategies were largely excluded from consideration, as companies in this segment tend to have high levels of debt. Growth and venture capital strategies, however, naturally provide limited debt exposure, and so were deemed more appropriate for this client. Although funds of funds presented challenges with regard to the complexity of Shariah monitoring, the offers received in Private Equity were balanced across direct investment and funds of funds.

Outcome

  • Developing an array of options: the value of bfinance’s collaborative approach was readily apparent in the context of this customised mandate, which had limited scope for an off-the-shelf offering; managers worked hard with to propose interesting solutions in the context of the client’s Shariah constraints.

  • Expanding the manager universe: with bfinance’s assistance, the client was able to look at a wealth of possible solutions in funds of funds, direct strategies and co-investments across venture, growth and renewables, among other styles.

  • Bringing transparency to Shariah implementation: bfinance assisted the client in understanding all of the different Shariah structures and the implementation avenues for the project, which ultimately informed the client’s chosen type of investment and strategy.

  • Delivering actionable analysis: using its proprietary quantitative tools and qualitative analysis, bfinance enabled the client to select the strongest possible managers for each asset class in keeping with the foundation’s own investment parameters and risk appetite.

 

Our specialist says

  • Helping this client explore different private market options allowed us to consider a wide range of possible solutions—and we encouraged our general partners to be creative in proposing solutions while keeping the client’s Shariah constraints at the core of their proposals. Although readymade solutions for Shariah-compliant investors are still quite limited in private markets, the space is evolving rapidly; investors are keenly exploring less-liquid asset classes within a Shariah investment context and managers are becoming more responsive to that rising level of interest.

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