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Wed 27 Oct 2010 08:27 PM

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Distressed deals alluring for Shariah funds

Islamic private equity funds want to 'take advantage of massive dislocations' in the market

Distressed deals alluring for Shariah funds
MASSIVE DISLOCATIONS: Islamic private equity funds in the Arabian Gulf plan to take advantage of lower asset prices after Dubais property market tumbled

Islamic private equity funds in the Arabian Gulf plan to take advantage of lower asset prices after the property market in Dubai tumbled as much as 50 percent from its peak in 2008.

“We want to take advantage of massive dislocations that have taken place in this market over the past three years,” Yahya Jalil, director of private equity at Abu Dhabi based investment and advisory company The National Investor, said in an interview Oct 18.

He added: “We have gotten over that hump in the cycle when there were a lot of liquidity constraints.”

Middle East and North Africa investment groups have about $10 billion available after raising a record $5.4 billion in 2008 that they haven’t been able to spend, Gulf Venture Capital Association said in a July 20 statement.

Mid sized businesses in the Gulf may need as much as $1 billion from investors, Jalil said. The Bloomberg GCC 200 Index of regional stocks has declined 26 percent since the end of September 2008 after credit markets collapsed.

The National and Kipco Asset Management Co, a Kuwaiti investment bank, started a $200 million Shariah compliant fund this month, Jalil said in Abu Dhabi.

Bahrain’s Capital Management House plans to complete a transaction and buy stakes in companies specializing in aviation and energy, Chairman Khalid Al Bassam said in an Oct 25 telephone interview.

Islamic funds received $8.9 billion of commitments from investors from 2003 through July this year, of which about $4.5 billion has been invested, Kuwait Finance House, the country’s biggest Islamic bank, said in an Oct 8 report. About $75 billion of deals have been completed since 2003, the bank said.

“The private equity market is coming back,” said Al Bassam, whose firm has stakes in energy, banking and real estate companies.

Shariah compliant equity companies raised and completed deals worth about $3 billion worldwide last year, mostly in the Middle East and North Africa, Dubai based Yasaar Media, a media and research company that specializes in Islamic finance, said in an August 2009 report.

Sales of Islamic bonds from the Gulf are starting to pick up after Dubai World, the state owned holding company, reached an agreement with 99 percent of its creditors in September to restructure $24.9 billion of debt.

Regional companies have sold $1.25 billion of sukuk since the announcement, bringing this year’s total to $3.7 billion, according to data compiled by Bloomberg.

Sukuk returned 12.2 percent this year, according to the HSBC/NASDAQ Dubai US Dollar Sukuk Index. Bonds in developing markets gained 16.3 percent, JPMorgan Chase's EMBI Global Diversified Index shows. Islamic bonds in the Gulf returned 12.6 percent, the HSBC/NASDAQ Dubai GCC US Dollar Sukuk Index shows.

The difference between the average yield for emerging market sukuk and the London interbank offered rate narrowed 10 basis points this week to 362 on Oct 26, according to the HSBC/NASDAQ Dubai US Dollar Sukuk Index.

The yield on Malaysia’s 3.928 percent Islamic note due in June 2015 has climbed 11 basis points to 2.58 percent this week, prices from Royal Bank of Scotland Group show.

The extra yield investors demand to hold Dubai’s government sukuk rather than Malaysia’s has narrowed nine basis points to 378, according to data compiled by Bloomberg.

Economic growth in the Middle East and North Africa will accelerate to 5 percent in 2011 from 3.8 percent this year and 1.1 percent in 2009, the International Monetary Fund said on Oct 24.

The National’s Islamic buyout fund will focus on companies that are having difficulty raising finance and is looking at opportunities in the transportation, consumer and media sectors, according to its website.

Arcapita Bank, a Bahrain based investment bank and buyout firm, said Islamic takeovers will increase over the next six months. The bank has raised $920 million from an initial public offering of its real estate assets.

“When valuations slumped, a lot of people who wanted to sell pulled their deals and banks stopped lending,” Mohammed Chowdhury, head of financial management at Arcapita, said in a telephone interview yesterday from Manama.

He added: “What we see now is asset prices bottoming out, and we see more deals in the future as we reach the bottom.”