Malaysia’s EPF to up shariah-compliant investments

The Employees Provident Fund of Malaysia plans to invest more in shariah-compliant private equity funds as is assets increase to $180bn.

The Employees Provident Fund of Malaysia, the country’s largest retirement savings fund, is seeking to increase its exposure to shariah-compliant private equity funds, Private Equity International has learned.

“We are targeting to increase our private equity portfolio exposure in shariah-compliant investments in line with EPF’s investment asset size which has been growing consistently,” Dato’ Mohamad Nasir Ab Latif, deputy chief executive for investment at EPF told PEI. “While all of our private equity investment is ethical, majority of them are non-shariah compliant.”

EPF’s total investment portfolio reached MYR 759.8 billion ($180 billion; €152 billion) as of the second quarter of 2017, up from the MYR 731.1 billion recorded in December last year. Out of its total investment assets, MYR 362.5 billion, or 47.7 percent, were in shariah-compliant investments. The pension’s current exposure to private equity is about 2 percent of its total investment assets.

While the Nasir declined to disclose its target allocation for shariah-compliant private equity funds, he stressed the difficulty in finding such funds because of the “very strict parameters that define shariah investments”.

In order to qualify as shariah-compliant, a fund’s investment policy must typically contain restrictions that prohibit investment in industries considered to be forbidden or haram as per the Islamic principles. These restrictions prohibit investments in conventional financial services, tobacco, gambling, alcohol or pork products, among others. In addition while a sharia-compliant fund may engage in leverage through the use of Islamic financing instruments, it may not obtain or provide conventional loans or invest in conventional interest-bearing instruments, including convertible debt securities.

“Other than the restricted industries and limited leverage levels, a shariah-compliant private equity fund would also need to have a Shariah Advisory Committee (SAC) to assess if potential investments are shariah-compliant. This results in additional costs for potential GPs. On top of that there is a limited universe of limited partners who are interested in shariah-compliant private equity funds,” Nasir said.

When asked what the private equity industry needs to do for shariah-compliant finance to gain more influence, Nasir said: “The private equity industry needs to reach out to potential LPs who have interest in shariah-compliant private equity investments – but they still need to show track record of successful exits and attractive returns in order to lock in potential investors.”

In Asia, some of the fund managers that offer shariah-compliant private equity products include pan-Asian firm Navis Capital Partners and South Korea-focused STIC Investments.

A recent World Bank report highlighted increasing interest in Islamic finance from non-Muslim countries, with recent transactions including sovereign issuance by the United Kingdom, South Africa, Hong Kong and Luxemburg. Total assets of the global Islamic Financial Services Industry were value at approximately $1.9 trillion in 2016, while Islamic finance assets in Asia reached $425.5 billion in 2016.