Amongst the various asset classes on offer (from equity funds to alternatives), Islamic finance has developed a wide range of products in the areas of real estate and private equity. There are various reasons for this, but key drivers include the predilection of Shariah-compliant structures towards asset-backed investments, and more recently the burgeoning activity observed across the GCC region in these two asset classes.
While the amount of transparency provided in this space is less than optimal (across both conventional and Shariah-compliant products), the following analysis endeavours to create an industry snapshot as well as to identify emerging trends in the marketplace. Our analysis combines both real estate and private equity funds due to their many commonalities (in fact private real estate funds dominate the fund spectrum over listed real estate funds). We also take note of leasing (Ijara) funds as a subset of real estate (as they have been under the radar for some time).
Industry Structure and Size
Overall, we count more than 112 of these products in our Islamic fund database (accounting for over 20% of the total universe, currently estimated at 550 funds across all asset classes), with real estate funds now representing over 60% of the total (leasing funds being a 10% subset) and private equity funds taking the remaining 40%. Figure 1 below outlines the industry’s consistent growth in recent years.
Figure 1: Industry Growth over the Years
In terms of assets under management, we can account for a base of US$9 billion across the three categories, but we recognise this number is understated due to several non-reporting funds. Furthermore, the bulk of the assets (over 70%) have been directed towards private equity, with the 30% balance going into real estate (leasing funds indeed representing a very small component).
The majority of these funds originate from the Middle East (at least 39% from the UAE, Kuwait, Bahrain, etc) and offshore jurisdictions are also prominent (the Cayman Islands being one of the most popular domiciles with 21%), as depicted in Figure 2. At the same time, the US dollar remains vastly preferred as a base currency as shown in Figure 3. This is a trend that is noticeable across Islamic products globally and is evident in both real estate and private equity launches (only a minority of funds being denominated in local currencies).
Figure 2: Funds by Domicile
Figure 3: Funds by Base Currency
New Product Launches
As far as new products, the most noticeable trends have occurred in the last two years, where over 60 launches have firmly doubled the size of the universe. In addition, the emergence of private equity offerings was solidified in the 2006 vintage – as depicted in Figure 4– with over 16 funds launched during this period. However, last year’s activity has not been sustained as much in 2007, while real estate products have shown a more consistent pipeline of projects across the board, currently averaging eight new funds per year.
Figure 5 corroborates the importance of the last two years by analysing new launches based on their geographical mandate. The MENA region is the object of most attention by private equity funds (again during the 2006 vintage). At the same time, real estate funds have sought to diversify their offerings by exploring opportunities in Europe and Asia (moving away from a traditional focus on North American investments). The overall result is a more balanced mixture of offerings (both in terms of asset classes and geographies).
Figure 5: New Fund Launches by Geographical Mandate
Although assets have grown consistently and a wider range of products is now available to investors, the key area of focus has been on differentiation. This is no different to the state of play of private equity funds in emerging markets, with similar drivers (searching for attractive returns) as well as challenges (a legacy of US-focused products). The current investment climate and talks of M&A slowdown in the global markets so far do not seem to have affected the appetite for these investments. What is likely to be one of the most important metrics is the performance resulting from the 2006-2007 vintages, as these funds explore more aggressive strategies (turnaround, pre-IPO, venture capital, etc) as well as more challenging markets (China, India, etc). The consequent results will certainly influence any further appetite for these investments.