Sharia-compliant funds had been proving increasingly popular until the global financial crisis and then the Arab Spring frightened off investors and stymied private equity activity in the Middle East.
Fundraising volumes have collapsed, with not a single sharia fund raised so far this year, acacording to data provider Preqin.
Sharia-compliant funds, which enable investors to comply with Islamic law, are simple to structure and are guided by certain principles relating to interest accrual and the types of investment they can make.
Funds could be restricted, for example, from investing in businesses related to alcohol, gambling, pornography, weapons, tobacco and pork-related products. The funds are overseen and approved by a sharia supervisory board.
Sharia funds have varying degrees of flexibility depending on their target investors, which can include ultra high net worth individuals, institutional investors and sovereign wealth funds, according to Richard Hughes, a senior fund services manager at fund administration specialist Vistra Group.
Private equity firms based outside the Middle East can target Muslim investors by offering side-vehicles set up alongside existing funds that are not sharia-compliant.
Before the onset of the financial crisis, interest in sharia funds had been on the rise, with private equity firms raising $5.6bn of capital through six such funds in 2006.
Climate of caution
However, fundraising volumes have since dwindled to just $533m last year and none so far in 2011, according to Preqin.
Nigel Denison, head of wealth management at the Bank of London and the Middle East, a European Islamic bank based in London, said: “The climate is one of caution. Institutions in the Middle East are only interested in cash, gold and some select property.
“Investors have discovered they are probably underwater on investments in hedge funds and private equity and can’t get out. They are not interested in deals that offer great yields over time but nothing along the way. Liquidity is very important right now.”
Middle Eastern buyout activity, like fundraising, has also receded, according to Nick Garland, an Abu Dhabi-based partner at Linklaters.
“Fundraising has been quite muted, as has the amount of activity of these funds and what they are spending on M&A,” he said.
So far in 2011, private equity-related M&A in the Middle East accounted for $1.1bn, compared with $1.5bn in the first three quarters of 2008, the busiest year over that nine-month period since the financial crisis, according to data provider Dealogic.
In the first three quarters of 2009, private equity-related M&A accounted for $503m while in the following year, M&A activity in the region over the same period was down to $365m.
Garland said: “We are in a slowdown and the Arab Spring has led to a bit more caution in the region. I suspect that the dust still needs to settle before people start looking at making large investment decisions again.”