Islamic Private Equity

1. Islamic Private Equity Arab Economic Forum By: Khaled Hassan Rashed May 2006

2. What is Private Equity (PE)? 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. • Investments in unquoted companies • Equity Capital by nature • Targeted at companies with growth potential • Medium to long term investment • Buyouts • Venture Capital • Growth Capital • Angel Investing • Mezzanine Capital Key Elements Categories Private equity investment helps in nurturing young companies throughout various stages of growth as per the diagram below: Source: Abraaj Capital Analysis

3. PE Has Outperformed the Other Asset Classes Over the Last 20 Years • The current regional PE industry size is less than USD 2.0 billion; • The regional allocation to PE ranges from 0-5% with only a fraction in the region. Current Industry Size • Investors can achieve supernormal returns on their PE investment in the region. Value for investors • Investors should choose funds with a credible performance track record and a strong management team. Choice of Fund First Quartile PE firms have consistently and significantly outperformed the US large stocks for 20 years Source: Venture Economics

4. Private Equity Value Chain Investor Relations Deal Sourcing Screening & Selection Structuring & Execution Portfolio Management Exit Core Skills • Industry expertise and credibility • Networking • Communication & presentation • Trust building • Responsiveness • Industry analysis • Market intelligence • Contact management • Data gathering • Structured problem solving • Communication • Industry analysis • Company analysis • Financial analysis & modeling • Process management • Legal structuring • Organizational structuring • Financial structuring • Documentation • Process management • Organization & corporate governance • Process & operations • Management accounting • Legal structuring • Financial structuring • Documentation • Process management Sources: Start Consult Analysis

5. Potential for Private Equity value creation Levers Opportunity Low degree of intervention • Leverage management incentive systems and influence through board representation to create value in portfolio company • Across industries, owner-driven companies with strong but non-incentivised management Passive ownership • Acquire under-valued company to generate value through leverage as well as arbitrage between entry and exit multiples • Companies with potential strategic buyers • Industries with stable cash flows and heavy assets Financial engineering/leverage • Create arbitrage by divesting separate divisions of conglomerate to distinct strategic buyers and reducing the conglomerate discount • Expat-owned mid-sized conglomerates due to higher trader mentality and financial pressures Financial engineering/conglomerate break-up • Companies with under-utilized products and/or strong market position across industries • Improve market value through new strategic focus, re-branding and improving key operational levers Strategic re-positioning of single company • Acquire platform company and expand/diversify by acquiring similar companies through leveraged build-up • Most industries with private ownership fragmented • Focus on high potential company to serve as platform Consolidation through ‘bolt-on’ acquisitions High degree of intervention required Source: Abraaj Capital Analysis

6. Islamic Private Equity Shari’a Principles: The diagram below illustrates the Shari’a principles guiding investments: * 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

7. Islamic Finance & Private Equity Industry 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. 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. Source: www.failaka.com , Abraaj Research Database & Zawya

8. Islamic Banking Assets & Global Sukuk Total Global Islamic Banking Assets - (US$ billion) Islamic Banking Assets in GCC - (US$ billion) CAGR 18% CAGR 38% Global Sukuk Issuances - (US$ billion) Islamic Debt by Country (Feb 05-Feb 06) - (US$ million) CAGR 129% Source: Islamic Finance News Feb 2006, Mckinsey, E&Y

9. Private Equity is a natural fit for Islamic Investments Islamic PE Concept Natural Fit PE Concept Equity Investment Equity Investment Partnership- shared risk & reward Musharaka- shared risk & reward Alignment of Interests Alignment of Interests Long Term Value Long Term Value All Industries Shari’a Compliant Industries Favorable Unfavorable Source: Abraaj Capital Analysis

10. Islamic Private Equity Value Chain Investor Relations Deal Sourcing Screening & Selection Structuring & Execution Portfolio Management Exit Core Skills • Industry expertise and credibility • Networking • Communication & presentation • Trust building • Responsiveness • Industry analysis • Market intelligence • Contact management • Data gathering • Structured problem solving • Communication • Industry analysis • Company analysis • Financial analysis & modeling • Process management • Legal structuring • Organizational structuring • Financial structuring • Documentation • Process management • Organization & corporate governance • Process & operations • Management accounting • Legal structuring • Financial structuring • Documentation • Process management Adhering to Shari’a Principles Sources: Start Consult Analysis

11. The Fund Structure 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. • PE Firm • Limited Partner $$ Mgmt. Agreement Mgmt. Fees, Carried Interest • Partnership • (the Fund) - closed-end fund with a finite life Screening Due Diligence Post Acquisition Mgmt Exit Investments Source: Abraaj Capital Analysis

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 • Performance • Diversification • Higher long term returns • Price stability • Lucrative investment opportunities • Sharing risks & rewards Source: Abraaj Capital Analysis

13. Islamic Private Equity Issues Governed by Shari’a principles, the parameters set for Islamic Private Equity investors will cause: • Increase in research costs compared to conventional counterparts. Islamic PE Issues • 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. • 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. 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. Marketing challenges faced by Islamic Funds Perception • Perceived to be restricted to Muslims • Viewed as a complex form of conventional finance • Regarded as Emotional Behavior • Perceived to yield lower returns • Association with Terrorism Client Education & Spread of Awareness by Scholars Breadth of Products • The number of Islamic products and innovative Islamic structures is very limited compared to conventional products. Innovation • Islamic product providers charge premiums due to the added complexity of structures, added layers of screening, higher research costs and scarcity of products. Competitive Fee structures Fee Structure Distribution Channels • Direct marketing efforts are lacking and the industry is dependent on a pull strategy. Push Strategy Source: Abraaj Capital Analysis

15. Investment challenges faced by Islamic Funds Lack of Information • Research originated by Islamic product providers is very scarce and updated industry data is very difficult to find. In house research, research houses Training & focus on top talent recruitment Human Capital • There’s a limited pool of skilled talent in the industry due to limited education. Structures • Acquisition finance and mezzanine instruments are not available. Limited investment opportunities • The pool of available investments is limited by Shariáh screening requirements. Innovative structuring Control • Due to the requirements of ongoing Shariáh compliance monitoring, a majority stake is mandatory, further limiting investment opportunities. Source: Abraaj Capital Analysis

16. Regional Private Equity Opportunity.. Key Segment Opportunity Comments • 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 Family Groups Divestment • Groups could also partner with PE funds to benefit from their value creation discipline, corporate governance, compliance, etc Partnerships • Companies may sell their non-core business for strategic reasons such as concentration on core businesses or region Multinationals Corporate Refocus • Alternatively they may need to sell part of or all their business for financial reasons or to raise capital for organic and acquisitive growth Distressed Sale • Fragmented nature of industries and regulatory changes such as WTO and GATT are likely to fuel consolidation Small/Medium Enterprises (SMEs) Consolidation • Credible management looking for opportunities to own a stake in their business Management Buy-outs • A number of industries are affected by liberalization and lowering of entry and exit barriers which provide investment opportunity Sector Liberalization/ Privatization Sector Liberalization • 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 Privatization Source: Abraaj Capital Analysis

17. Main sectors that offer substantial value creation potential Sector Opportunities • High growth due to low historical penetration and lowered pricing • Availability of privatisation and acquisition targets with strong brands and significant market share Telecom • Directories businesses among the most successful business models worldwide • Regional market is underdeveloped and has potential for significant growth and value extraction Print Media • Financial Planning slated for high growth, driven by mature investor base and rapidly increasing demand for FP products. Exchange houses presenting another opportunity Financial Services • Large sector with approximately US$ 3 billion premium revenues in GCC alone, with growth rates over 5% per annum across the region Insurance • India, a major supplier of bulk drugs worldwide has various consolidation and pre-IPO opportunities. • Growth opportunities for small ME companies particularly in Jordan, UAE and Saudi Arabia Pharmaceuticals Power & Energy • Privatization of power assets and new IPP projects currently in progress in a number of countries including Jordan, Algeria, Oman and Pakistan Source: Abraaj Capital Analysis

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