Sourcing Private Equity deals in the Islamic Economy

The Islamic Economy has only recently been defined, with total Muslim spend estimated at $1.8 trillion across food and lifestyle sectors. With no significant Islamic brands existing on a global scale, and with significant fragmentation across the key pillars, there is significant M&A opportunity in the Islamic Economy space, with private equity firms playing a key role in helping companies grow.

For PE firms seeking to invest, a significant challenge is that many companies are small and privately held, with limited publicly-available information. Given this challenge, how should PE firms go about sourcing deals in the Islamic Economy?

*Note: Primary deals involve acquiring independent companies, or creating new companies through carving out divisions of larger companies. Secondary deals involve acquiring companies currently owned by other private equity or investment firms.

WHERE ARE THE MOST ATTRACTIVE OPPORTUNITIES FOR M&A?

Across all pillars of the global Islamic Economy, there are deal opportunities for Private Equity firms, in particular within halal food, fashion and travel. Underlying an investment are strong fundamentals: across the Muslim world, these demographic-dependent, consumer-driven sectors are experiencing high demand from increasing populations and growth in discretionary spending due to a rapidly emerging middle class.

However, despite some notable success stories, M&A activity has been relatively low to date. Within food, although Muslim spend on food and beverage was 17 percent of total global spend, only 70 deals were identified that related to meat, either in OIC countries, or designated as halal, valued at $2.1 billion between 2012 and 2015, compared to over 500 food-related deals in 2014 alone, valued at over $100 billion (Zephyr, Zawya, DinarStandard analysis).

TOTAL FOOD M&A VOLUME (2014) VS. HALAL FOOD M&A VOLUME (2012-15)

Source: Zephyr, Racounteur, Zawya, DinarStandard analysis

Opportunities exist to consolidate smaller players and create global Islamic brands. Several key M&A opportunities include:

Developing brands across sectors – There are limited brands on a global scale. Emerging brands include Saffron Road and Al-Islami Foods in the halal food sector, as well as Modanisa and Sefamerve in the modest fashion sector.

Scaling suppliers of halal food – The opportunities exist to create larger suppliers in halal exporting countries, in particular Brazil, Australia, India, France and the U.S., which are the five largest exporters of meat and live animals to OIC countries.

To capitalize on the Islamic Economy, firms need to incorporate the opportunity into their investment thesis and create a targeted focus. While larger firms, such as Blackstone, will have a broad sector focus, smaller private equity firms look at specific sectors, such as Roark capital, which is focussed on food retail, and Riverside, focused on business services. It is important to determine whether the firm will be sector-focussed, or will seek to provide a broader coverage of the Islamic Economy.  

IDENTIFYING ATTRACTIVE TARGETS

Identifying opportunities requires targeted outreach to businesses across multiple sectors, and marketing the investment opportunity. A combination of using intermediaries and directly reaching out to businesses will be required.

Brokers are good potential intermediaries to source Islamic Economy deals, identifying companies seeking investment.

Business brokers cover the small end of the business market. They sell companies that are too small – with commissions too low – to attract investment banks.

Brokers are often crucial links in the chain connecting buyers, sources of capital, and potential sellers, covering the broad spectrum of sectors. The International Business Brokers Association, for instance, is a global directory and network of business brokers, claiming on its website to have the “world’s largest inventory of current business for sale ads”, and seeks to connect its network through international conferences.

Investment banks are a critical intermediary but they tend to focus on broader sectors and larger deals, and may not be as helpful in identifying SMEs in the Islamic Economy.  Here, PE deals happen when investment banks run competitive auctions where investors can connect with and purchase potential target companies.

However, given the relatively new concept of the Islamic Economy, there are a limited number of investment banks focussed on this area, although Shariah-compliant banks, such as Gatehouse (UK-based) or larger international banks with Shariah-compliant offerings, such as HSBC, are positioned to target the Islamic Economy as the pillars converge.

Sourcing deal opportunities directly will be crucial. To identify Islamic opportunities, several potential approaches are required.

It is important to seek out key stakeholders in the Islamic Economy, who have strong visibility on individual companies. Halal certifiers are a key resource, in particular in the halal food and related cosmetics and pharma pillars.

When asked about his opinion of leveraging certifiers lists to identify targets at the Global Islamic Economy Summit 2015 in Dubai, Mohamad Abou El Gheit, Managing Director of Pioneer Holdings (Egypt) said, “The certifiers are a good source [of deals], especially in Western countries, such as Germany, and would have access to key information on the companies on their list.”

Networking is critical to success. With increasing interest in the Islamic Economy globally, there are key events and conferences bringing together multiple sectors of the Islamic Economy, creating the opportunity to create networks and identify deal opportunities. For instance, GIES, which had over 2,000 attendees and facilitated valuable discussion and debate across all pillars of the Islamic Economy.

CHALLENGES AND CONSIDERATIONS

Once potential businesses are found, a key step is making an initial approach and offer for the business. This will be explored further in coming articles on SalaamGateway.com.

However, there are a number of key considerations when screening potential deals:

Focus on the fundamentals – not all businesses will succeed or scale. Businesses that are more likely to scale are those that focus on a broader market, not just exclusively Muslims. In the GIES panel discussion of investment opportunities in the Food and Travel sectors, Aamir Rehman, Director of Fajr Capital commented, “It’s important that the business can scale through focusing on the right values and appealing to a broader market”.
It is important to look at the scale, history and background of the company even before starting due diligence.   

Not all businesses want to sell. According to Rushdi Siddiqui, Founder and CEO of Zilzar, “Many sellers, as family-owned businesses, may not want to sell because [they] do not want scrutiny.” (Interviewed for Salaam Gateway’s monthly report on “Halal Food M&A opportunities”, published in October 2015.)

Some businesses rely heavily on the founders to succeed. According to Rizwan Khalid, who was interviewed for the “Global M&A Activity and Potential in the Halal Food Sector” (Thomson Reuters in collaboration with DinarStandard), “[emerging] brands are heavily reliant on the founder for contacts and brand reputation so acquisition may dissolve much of that goodwill.”   

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