Data & Intelligence

Navigating Islamic Private Equity: An Interview with Iqbal Khan of Fajr Capital

Iqbal Khan is the Chief Executive Officer of Fajr Capital, a Dubai-based principal investment firm with a focus on strategic, high-growth sectors across key Organisation of Islamic Cooperation (OIC) markets. Fajr Capital’s shareholders include sovereign investors from Abu Dhabi, Brunei and Malaysia, and private investors from the Gulf and beyond.

In this interview, Mr. Khan provides an overview of the evolution of Islamic private equity, and discusses both what factors distinguish Islamic private equity from conventional private equity and what global investors interested in the growing markets of institutional investors in the OIC world should pay attention to in the coming decade.

In what ways has Islamic private equity evolved—both globally and in emerging markets—over the last decade?

Islamic finance in its modern form began in the 1970s and early 1980s. During this period, the industry focused its efforts on commercial banking—with an emphasis on financing trade, commodities, commerce and real estate—rather than traditional private equity. When the focus shifted towards private equity in the late 1990s, high net worth individuals and family investors committed to Islamic finance supported the Islamic private equity proposition via both co-investment structures and LP commitments with opt out provisions. 

Over the last decade, however, as the Islamic world has increasingly accumulated wealth in pensions, endowment funds, sovereign wealth funds and other institutional platforms, these institutional investors have increased their appetite for private equity in both the OECD and the OIC world. As these individual investors gained experience with Islamic finance and Islamic private equity firms, they have gone back to their corporate constituencies, such as pension and endowment funds, to undertake transactions within a Shari’a-compliant framework. 

Institutional investors are now increasingly committing to Islamic private equity and broadening and deepening the market. The growing shift from conventional private equity towards Islamic private equity will be a very important driver of growth for the regional private equity industry going forward. For regional private equity transactions, the broad base of Shari’a-compliant financing and its inclusive nature gives it additional appeal.

Another area of improvement has been the convergence of Shari’a standards between more liberal standards in Asia, such as the standards led by Malaysia, and the more conservative frameworks in the Middle East, which are led by Gulf Cooperation Council (GCC) countries. Today, there are accounting, auditing and legal policies and frameworks in place that are compatible between both standards. 

Finally, the symbiotic relationship between conventional private equity and Islamic private equity has evolved over the years. Many large Western private equity institutions now partner with Islamic private equity institutions when conducting private equity deals. Both parties are benefiting from each other’s best practices. Islamic private equity firms are benefiting from the experience and best practices of Western institutions, while Western institutions are benefiting from the insights and access of Islamic finance. This model of partnership between Western private equity and Islamic private equity platforms will enable the industry’s long-term development and reach.

How would you differentiate Islamic private equity from conventional private equity, and for institutional investors looking to commit to the asset class, what options are available?

Conventional private equity is, in fact, already quite close to Islamic finance—the broader category that Islamic private equity falls in—because it shares risk and reward with its investors and portfolio companies. However, since Islamic finance is based on Shari’a principles, three main features distinguish Islamic private equity from its conventional counterpart:

  1. Sectoral guidelines outline which investments are permitted. Islamic finance has always focused on putting money into the real, value-producing economy. Accordingly, investments in businesses that create employment and introduce capital into the productive economy are allowed. However, Islamic private equity cannot invest in products or services that destroy value or are destructive to human society, so sectors such as armament, casinos and tobacco are avoided. Infrastructure is one example of a sector that tends to be well suited for Islamic finance—including Islamic private equity—because it connects economies, creates jobs and increases the embedded capital of countries in which investments are made. Infrastructure in this case not only includes roads and airports, but also universities, hospitals and telecommunications infrastructure. 

  2. Companies cannot hold excessive leverage. Islamic finance allows for a certain degree of leverage, but it must be asset-backed. For Islamic private equity, this means that both the private equity platform and the company must always borrow responsibly; private equity fund managers cannot leverage companies beyond their capacity just because money is easily available at cheap rates. 

  3. A partnership between the private equity firm and company management is necessary. This partnership is optional in conventional private equity, but it is mandatory in Islamic private equity. Partnerships between fund managers and portfolio companies allow fund managers to enact principles of fairness that extend not only to the company’s management, but also to its employees.

As for what options are available to potential investors, an increasing number of specialized private equity firms are now offering Islamic finance opportunities. Some conventional private equity firms have dedicated offerings that mirror offerings on the conventional side, but that allow investors to opt out when investments are not in line with Islamic finance guidelines. There are also firms that solely offer Islamic private equity funds, as well as firms that offer both Islamic private equity funds and co-investment opportunities. 

Where do you see the Islamic private capital industry going over the next ten years? What should the emerging markets private equity community be paying attention to?

In the last decade, the flow of capital has evolved – first from the Islamic world to OECD markets and later to more developed emerging markets. Looking ahead, the flow of funds will soon go from the Islamic world to the frontier markets. This is a great opportunity to alleviate poverty, as good private equity investing is not simply about financial returns, but also about building enduring businesses.

If there is a limiting factor to the growth of Islamic finance and private equity that may prove a challenge, it is the lack of experienced and knowledgeable fund managers. Much is being done through training programs and educational institutions, but more must be done to train and retain talent.

Overall, the Middle East is opening up to both conventional and Islamic private equity players, and governments in the Islamic world are becoming more aware of the industry. Governments are not only beginning to embrace the private sector, which is creating huge opportunities for private equity investments in infrastructure and elsewhere, but they are also realizing that their role is that of a referee and umpire. Governments now understand that a healthy economy must be rooted in transparency and openness. The digital revolution and social media are also pressuring fund managers to behave according to ethical principles. All of these factors indicate that the growth of Islamic finance and its relevance will continue to increase in the next decade.

EMPEA represents the leading global investors in EM. I look forward to working alongside to drive much-needed capital for financing entrepreneurs and businesses worldwide.

Renuka Ramnath | Founder, Managing Director & Chief Executive Officer, Multiples Alternate Asset Management Private Limited

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Brian Lim | Partner and Head of Asia and Emerging Markets, Pantheon Ventures

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David Rubenstein | Co-Founder and Co-Executive Chairman, The Carlyle Group

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Dr. Andrew Kuper | Founder and CEO, LeapFrog Investments

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Torbjorn Caesar | Senior Partner, Actis

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Drew Guff | Managing Director & Founding Partner, Siguler Guff & Company