Mr. Khaled Rahsed Presentation

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  • Private equity The provision of equity capital to companies whose shares are not listed on a recognised stock exchange. Business Model Investment is typically carried out through a Limited Partnership structure in which the Private Equity firm serves as the General Partner. The Limited Partners consist largely of institutional investors and wealthy individuals who provide the bulk of the capital. The General Partner has an agreed time period in which to invest the committed capital. Each limited partnership is essentially a closed-end fund with a finite life. The General Partner invests capital in exchange for an equity stake in the ownership of the target company. The funds raised through private equity are typically used to develop new products and technologies, to expand working capital, to make acquisitions, or to strengthen a company's balance sheet. The Limited Partner’s returns are dependent on the growth and profitability of the acquired businesses.
  • The Concepts Partnership where risk and reward are shared by both parties (PE company & investor) according to agreed terms. This is the purest form of Islamic investment Additionally, Islamic principles require that money should be directed to “real” goods and services which is in line with PE business. The long term nature of the investment further precludes speculation which is prohibited by Shariáh. One of the fundamental principles in PE is alignment of shareholder and management interest, which marries risk to reward in line with Islamic teachings The Process Private equity players actively manage their portfolio companies and Shariáh compliance can be easily monitored on an ongoing basis along with other monitoring done by PE companies. Clear sector prohibitions required by Islam can easily be built into the investment strategy. Furthermore, to enable the prohibition of un-Islamic activities and be able to monitor companies regularly and apply income purification or recapitalizations as seen fit, Shariáh principles would require that investments involve majority/ controlling stakes in companies, which is the typical PE model traditionally. The Structure Partnership structured as a Mudaraba Mudaraba - a contract between two parties whereby one party, the “rabb al-mal” (beneficial owner or the sleeping partner), entrusts money to the other party called the “mudarib” (managing trustee or the labour partner). The mudarib utilizes it in an agreed manner and then returns to the rabb al-mal the principal and the pre-agreed share of the profit. He keeps for himself what remains of such profits. The following characteristics of mudaraba are of significance Wakala fees charged by management company Wakala – a Power of Attorney contract between two parties whereby one party, entrusts another to act on its behalf for an agreed fee
  • Mr. Khaled Rahsed Presentation

    1. 1. Islamic Private Equity Arab Economic Forum May 2006 By: Khaled Hassan Rashed
    2. 2. Private equity provides long-term, committed share capital, to help private (unlisted) companies to grow and succeed. It can be used to develop new products and technologies, to expand working capital, to make acquisitions or to strengthen a company’s balance sheet. What is Private Equity (PE)? Key Elements <ul><li>Investments in unquoted companies </li></ul><ul><li>Equity Capital by nature </li></ul><ul><li>Targeted at companies with growth potential </li></ul><ul><li>Medium to long term investment </li></ul>Categories <ul><li>Buyouts </li></ul><ul><li>Venture Capital </li></ul><ul><li>Growth Capital </li></ul><ul><li>Angel Investing </li></ul><ul><li>Mezzanine Capital </li></ul>Source : Abraaj Capital Analysis Private equity investment helps in nurturing young companies throughout various stages of growth as per the diagram below: Exit Consolidation Maturity Expansion Early Stage Buyout Venture Capital
    3. 3. PE Has Outperformed the Other Asset Classes Over the Last 20 Years Current Industry Size <ul><li>The current regional PE industry size is less than USD 2.0 billion; </li></ul><ul><li>The regional allocation to PE ranges from 0-5% with only a fraction in the region. </li></ul>Value for investors <ul><li>Investors can achieve supernormal returns on their PE investment in the region. </li></ul>Choice of Fund <ul><li>Investors should choose funds with a credible performance track record and a strong management team. </li></ul>First Quartile PE firms have consistently and significantly outperformed the US large stocks for 20 years Source: Venture Economics
    4. 4. Sources: Start Consult Analysis Screening & Selection Deal Sourcing Investor Relations <ul><li>Industry expertise and credibility </li></ul><ul><li>Networking </li></ul><ul><li>Communication & presentation </li></ul><ul><li>Trust building </li></ul><ul><li>Responsiveness </li></ul><ul><li>Industry analysis </li></ul><ul><li>Market intelligence </li></ul><ul><li>Contact management </li></ul><ul><li>Data gathering </li></ul><ul><li>Structured problem solving </li></ul><ul><li>Communication </li></ul><ul><li>Industry analysis </li></ul><ul><li>Company analysis </li></ul><ul><li>Financial analysis & modeling </li></ul><ul><li>Process management </li></ul><ul><li>Organization & corporate governance </li></ul><ul><li>Process & operations </li></ul><ul><li>Management accounting </li></ul>Private Equity Value Chain Exit Portfolio Management <ul><li>Legal structuring </li></ul><ul><li>Financial structuring </li></ul><ul><li>Documentation </li></ul><ul><li>Process management </li></ul>Structuring & Execution <ul><li>Legal structuring </li></ul><ul><li>Organizational structuring </li></ul><ul><li>Financial structuring </li></ul><ul><li>Documentation </li></ul><ul><li>Process management </li></ul>Core Skills
    5. 5. Potential for Private Equity value creation Low degree of intervention High degree of intervention required Passive ownership Financial engineering/ leverage Financial engineering/ conglomerate break-up Strategic re-positioning of single company Consolidation through ‘bolt-on’ acquisitions <ul><ul><li>Leverage management incentive systems and influence through board representation to create value in portfolio company </li></ul></ul><ul><ul><li>Across industries, owner-driven companies with strong but non-incentivised management </li></ul></ul><ul><ul><li>Acquire under-valued company to generate value through leverage as well as arbitrage between entry and exit multiples </li></ul></ul><ul><ul><li>Companies with potential strategic buyers </li></ul></ul><ul><ul><li>Industries with stable cash flows and heavy assets </li></ul></ul><ul><ul><li>Create arbitrage by divesting separate divisions of conglomerate to distinct strategic buyers and reducing the conglomerate discount </li></ul></ul><ul><ul><li>Expat-owned mid-sized conglomerates due to higher trader mentality and financial pressures </li></ul></ul><ul><ul><li>Improve market value through new strategic focus, re-branding and improving key operational levers </li></ul></ul><ul><ul><li>Companies with under-utilized products and/or strong market position across industries </li></ul></ul><ul><ul><li>Acquire platform company and expand/diversify by acquiring similar companies through leveraged build-up </li></ul></ul><ul><ul><li>Most industries with private ownership fragmented </li></ul></ul><ul><ul><li>Focus on high potential company to serve as platform </li></ul></ul>Opportunity Levers Source : Abraaj Capital Analysis
    6. 6. Shari’a Principles: The diagram below illustrates the Shari’a principles guiding investments: Islamic Private Equity * Investments in financial services, tobacco, breweries and cinemas are examples of non acceptable industries to investment in according to Shari’a ethical guidelines. Source : Abraaj Capital Analysis Musharaka- shared risk & reward Real goods & services Non speculative Ethical* 33% leverage cap Interest free Alignment of interests Equity investment The Principles
    7. 7. Islamic Finance has slowly ventured into the Private Equity industry despite the significant growth in the industry as a whole.   - Islamic financial institutions worldwide has risen from 1 in 1975 to over 300 in more than 75 countries. - Total assets and financial investments of the world’s Islamic banks are estimated to stand at US$ 262 billion and over US$ 400 billion respectively. They are estimated to grow at a rate of 15% annually over the coming years. - The Islamic equity funds worldwide total assets is currently estimated over US$ 5 billion and is growing at rate of 12-15% annually. Source : www.failaka.com , Abraaj Research Database & Zawya Growth in Number of Islamic Funds The Islamic Space is still missing out on several high return areas due to limitations that can easily be overcome by creative structuring and innovation. PE is one such area. Islamic Finance & Private Equity Industry
    8. 8. Islamic Banking Assets & Global Sukuk Total Global Islamic Banking Assets - (US$ billion) CAGR 38% Islamic Banking Assets in GCC - (US$ billion) CAGR 18% Global Sukuk Issuances - (US$ billion) CAGR 129% Islamic Debt by Country (Feb 05-Feb 06) - (US$ million) Source : Islamic Finance News Feb 2006, Mckinsey, E&Y
    9. 9. Private Equity is a natural fit for Islamic Investments Source : Abraaj Capital Analysis All Industries Equity Investment PE Concept Partnership- shared risk & reward Long Term Value Alignment of Interests Islamic PE Concept Shari’a Compliant Industries Equity Investment Musharaka- shared risk & reward Long Term Value Alignment of Interests Favorable Unfavorable Natural Fit
    10. 10. Sources: Start Consult Analysis Screening & Selection Deal Sourcing Investor Relations <ul><li>Industry expertise and credibility </li></ul><ul><li>Networking </li></ul><ul><li>Communication & presentation </li></ul><ul><li>Trust building </li></ul><ul><li>Responsiveness </li></ul><ul><li>Industry analysis </li></ul><ul><li>Market intelligence </li></ul><ul><li>Contact management </li></ul><ul><li>Data gathering </li></ul><ul><li>Structured problem solving </li></ul><ul><li>Communication </li></ul><ul><li>Industry analysis </li></ul><ul><li>Company analysis </li></ul><ul><li>Financial analysis & modeling </li></ul><ul><li>Process management </li></ul><ul><li>Organization & corporate governance </li></ul><ul><li>Process & operations </li></ul><ul><li>Management accounting </li></ul>Islamic Private Equity Value Chain Exit Portfolio Management <ul><li>Legal structuring </li></ul><ul><li>Financial structuring </li></ul><ul><li>Documentation </li></ul><ul><li>Process management </li></ul>Structuring & Execution <ul><li>Legal structuring </li></ul><ul><li>Organizational structuring </li></ul><ul><li>Financial structuring </li></ul><ul><li>Documentation </li></ul><ul><li>Process management </li></ul>Core Skills Adhering to Shari’a Principles
    11. 11. The Fund Structure <ul><ul><li>Limited Partner </li></ul></ul><ul><ul><li>PE Firm </li></ul></ul><ul><ul><li>Partnership </li></ul></ul><ul><ul><li>(the Fund) </li></ul></ul>Investments $$ Mgmt. Agreement Mgmt. Fees, Carried Interest - closed-end fund with a finite life Screening Due Diligence Post Acquisition Mgmt Exit Source : Abraaj Capital Analysis The private equity & Islamic private equity fund structure are essentially the same, however the Islamic PE funds will be Shari’a complaint such as type of investments, industry, etc.
    12. 12. Islamic Private Equity Value Proposition Islamic investors should apply the model of private equity firms whose strategy evolves around taking majority stakes in privately held companies engaged in the real economy. This will enable them to maintain control, which ensures the company’s adherence to Shari’a principles. Better value proposition compared to other assets classes in terms of: Value Proposition <ul><li>Performance </li></ul><ul><li>Diversification </li></ul><ul><li>Higher long term returns </li></ul><ul><li>Price stability </li></ul><ul><li>Lucrative investment opportunities </li></ul><ul><li>Sharing risks & rewards </li></ul>Source : Abraaj Capital Analysis
    13. 13. Islamic Private Equity Issues Governed by Shari’a principles, the parameters set for Islamic Private Equity investors will cause: <ul><li>Increase in research costs compared to conventional counterparts. </li></ul>Islamic PE Issues <ul><li>Specialized skill set needed to screen, evaluate, negotiate, execute, manage and create value, sourcing commercially viable deals that are Shari’a compliant and structuring them accordingly is a very exhaustive task. </li></ul><ul><li>Holding a majority control in companies to ensure their compliance to Shari’a principles on a continuous basis and maintaining a diversified portfolio become a challenge for Islamic investors with small amounts of capital to invest. </li></ul>To address the issues above, the concept of creating Islamic Investment Funds was cleared in accordance with the definition and parameters set by the Accounting and Auditing Organization of the Islamic Financial Institutions . Source : Abraaj Capital Analysis
    14. 14. Perception Breadth of Products Fee Structure Distribution Channels Marketing challenges faced by Islamic Funds <ul><li>The number of Islamic products and innovative Islamic structures is very limited compared to conventional products. </li></ul><ul><li>Islamic product providers charge premiums due to the added complexity of structures, added layers of screening, higher research costs and scarcity of products. </li></ul><ul><li>Direct marketing efforts are lacking and the industry is dependent on a pull strategy. </li></ul>Client Education & Spread of Awareness by Scholars Innovation Competitive Fee structures Push Strategy <ul><ul><li>Perceived to be restricted to Muslims </li></ul></ul><ul><ul><li>Viewed as a complex form of conventional finance </li></ul></ul><ul><ul><li>Regarded as Emotional Behavior </li></ul></ul><ul><ul><li>Perceived to yield lower returns </li></ul></ul><ul><ul><li>Association with Terrorism </li></ul></ul>Source : Abraaj Capital Analysis
    15. 15. Lack of Information Human Capital Structures Limited investment opportunities Control Investment challenges faced by Islamic Funds <ul><ul><li>Research originated by Islamic product providers is very scarce and updated industry data is very difficult to find. </li></ul></ul><ul><li>There’s a limited pool of skilled talent in the industry due to limited education. </li></ul><ul><li>Acquisition finance and mezzanine instruments are not available. </li></ul><ul><li>The pool of available investments is limited by Shariáh screening requirements. </li></ul>In house research, research houses Training & focus on top talent recruitment Innovative structuring <ul><li>Due to the requirements of ongoing Shariáh compliance monitoring, a majority stake is mandatory, further limiting investment opportunities. </li></ul>Source : Abraaj Capital Analysis
    16. 16. Opportunity Comments Key Segment Divestment Partnerships Family Groups <ul><li>Groups may divest their business due to generational issues, strategic focus or to diversify shareholder base. PE groups can provide them with viable exits with minimum risk to the reputation of the family. In addition, PE groups can resolve succession and ego issues </li></ul><ul><li>Groups could also partner with PE funds to benefit from their value creation discipline, corporate governance, compliance, etc </li></ul>Corporate Refocus Distressed Sale Multinationals <ul><li>Companies may sell their non-core business for strategic reasons such as concentration on core businesses or region </li></ul><ul><li>Alternatively they may need to sell part of or all their business for financial reasons or to raise capital for organic and acquisitive growth </li></ul>Sector Liberalization Privatization Sector Liberalization/ Privatization <ul><li>A number of industries are affected by liberalization and lowering of entry and exit barriers which provide investment opportunity </li></ul><ul><li>There is a paradigm shift in the mindset of regional governments from an ownership role towards regulatory role to promote the privatization of state-owned enterprises to attract foreign investment, greater efficiencies and higher returns </li></ul>Consolidation Small/Medium Enterprises (SMEs) <ul><li>Fragmented nature of industries and regulatory changes such as WTO and GATT are likely to fuel consolidation </li></ul><ul><li>Credible management looking for opportunities to own a stake in their business </li></ul>Management Buy-outs Regional Private Equity Opportunity.. Source : Abraaj Capital Analysis
    17. 17. Sector Opportunities Power & Energy Print Media Financial Services Insurance Pharmaceuticals <ul><li>Privatization of power assets and new IPP projects currently in progress in a number of countries including Jordan, Algeria, Oman and Pakistan </li></ul><ul><li>Directories businesses among the most successful business models worldwide </li></ul><ul><li>Regional market is underdeveloped and has potential for significant growth and value extraction </li></ul><ul><li>Financial Planning slated for high growth, driven by mature investor base and rapidly increasing demand for FP products. Exchange houses presenting another opportunity </li></ul><ul><li>Large sector with approximately US$ 3 billion premium revenues in GCC alone, with growth rates over 5% per annum across the region </li></ul><ul><li>High growth due to low historical penetration and lowered pricing </li></ul><ul><li>Availability of privatisation and acquisition targets with strong brands and significant market share </li></ul>Telecom <ul><li>India, a major supplier of bulk drugs worldwide has various consolidation and pre-IPO opportunities. </li></ul><ul><li>Growth opportunities for small ME companies particularly in Jordan, UAE and Saudi Arabia </li></ul>Main sectors that offer substantial value creation potential Source : Abraaj Capital Analysis
    18. 18. Thank You

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