BlackRock and Jeddah-based Sidra Capital held a $101 million first close on their debut sharia-compliant private equity fund in October, with high-net-worth individuals and institutional investors from the Gulf Cooperation Council as its main backers.
Capital raised for Sidra-BlackRock Asia-Pacific Private Equity Strategy, whose target is undisclosed, will provide co-investment capital to managers targeting mega-trends like TMT, healthcare and education. The first deal has been secured in the healthcare space, it is understood. Sidra expects to make between 20 and 25 investments over a four-year period.
Private Equity International caught up with Sidra chairman Hani Baothman to find out how the partnership was formed, the ins and outs of sharia-compliant deals, and how the fund plans to deploy capital in highly uncertain times.
How did Sidra’s relationship with BlackRock come about?
For decades, the characteristics of private equity have not allowed [PE products] to be an investable proposition for sharia-compliant investors. We felt there was an untapped potential to provide investors with private equity returns within a sharia framework in a region that provides extensive prospects and opportunities. We felt BlackRock would be the perfect partner in establishing such a product, having invested in APAC since 2007 with almost $2.4 billion deployed. This will be our first partnership with BlackRock, although we have directly invested with them in the past.
How does a sharia-compliant investment differ from a regular PE investment?
Sharia-compliant investing is grounded in Islamic finance principles… [Islamic finance] aims to meet investors’ financial needs with integrity and in a manner that is fair, trustworthy, honest and ensures a more equitable wealth distribution. In broad terms, anything discouraged or banned by sharia law is regarded as non investible, or haram, while suitable activities are halal. Haram activities notably include conventional finance (non-Islamic banking, finance and insurance; alcohol; pork-related products and non-halal food production, packaging and processing, or connected activity; gambling; adult entertainment; tobacco; and weapons and defence).
A sharia-compliant investment fund such as the BlackRock Sidra fund is made by filtering out companies that do not essentially follow these principles. Overall, the investment screening process is comparable to that of ‘negatively screened’ ethical funds using environmental, social and governance criteria. However, a sharia-compliant fund will also have a sharia board made up of Islamic scholars who decide or check which companies meet the rules.
How are rising interest rates impacting valuations of your existing portfolio?
AIn every investment, timing is everything. We felt that interest rates would increase, although the speed of the increase was astounding. As we sensed the market tilt towards bearish sentiment, we delayed the launch of the fund.
It is impossible to predict when [we will hit] the bottom of any market, but we noticed a decreased appetite for IPOs and asset valuations dropping, which is problematic for PE firms that might have planned their exits at this time. However, it’s beneficial for PE firms trying to find undervalued firms and assets, especially those that accumulated capital from the low-interest period. As such, the timing of our deployment is [strategic] in a period of heavily discounted valuation over the next four years.