CASE STUDY

Shariah-compliant Private Equity Secondaries

Middle Eastern Wealth Manager | Q3 2021

Engagement at a glance

Client Country/Type: Middle Eastern Wealth Manager
Year: Q3 2021
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%)

Shariah Compliant PE Manager Selection

 

Client-specific concerns

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.

Outcome

 

  • 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, we reached out to talented managers that were investing in assets that appeared readily applicable to Shariah investment parameters—irrespective of whether they had a pre-existing Shariah product or strategy—and invited them to consider submitting proposals. Perhaps unsurprisingly, we received considerable interest from the general partner universe, but 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, however, the ultimate allocations went to one firm with Shariah experience and one without, so we considered our approach to be a success. 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.

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