What skill sets do you need for a successful Islamic Economy investments team?

There is a significant role for private equity to help drive the creation of global halal brands. As the Islamic Economy gains traction and increasing interest from private equity firms, how can they best position themselves to invest and which skill sets do they need to help create tomorrow’s leaders in the $1.8 trillion global Islamic Economy?

OVERALL EMPLOYMENT IN PRIVATE EQUITY

Firms in aggregate employed 145,000 people in 2015 across the private equity and private debt industries.

In terms of the mix of employment skill sets, there are typically three or more front office investment and fundraising staff for every financial reporting professional, according to Ernst & Young’s 2015 Global Private Equity Survey of over 100 Limited Partner Funds and 80 Private Equity Investors globally.

The overall drivers of employment across the industry are fundamentally positive.

First and foremost, the total assets under management have increased steadily across all classes of private capital – with 15 years of consecutive growth in assets under management from just over $600 billion to over $4 trillion between 2000 and 2014, despite the recession between 2008 and 2010.

Secondly, the number of active private equity firms have increased from 2,000 in 2000 to over 7,400 in 2015. The growth rate has been accelerating recently, with over 600 new active firms added in 2015 alone, and with close to 60 percent of firms globally adding to headcount. 

IMPORTANCE OF SECTOR FOCUS

Data shows that a solid sector strategy drives higher investment returns

Prior to the financial crisis, when leveraged debt was readily accessible, it was easier for private equity firms to take a more passive role in how a portfolio company was run. Following the financial crisis, and against the backdrop of intense competition for deals, the ability to drive higher returns has become increasingly important.

North America accounts for 57 percent of private equity deals in 2015, according to Preqin, and the U.S. represents a key region for deal activity.

A study of the U.S. buyout market by Cambridge Associates, published in 2014, found that sector specialists investing between 2001 and 2010 returned on aggregate 2.2 times Multiple on Invested Capital (MOIC) and a 23.2 percent gross internal rate of return (IRR), compared to investments made by generalists that returned 1.9 times MOIC and 17.5 percent gross IRR.

Bain, a leading advisor to the private equity industry, highlighted in a report this year that having the right sector focus is one of the key determinants of a firm’s investment “sweet spot,” which also includes geography and investment themes (whether the investment is to turn around an underperforming company, or to identify high-growth companies).

The “sweet spot” helps communicate a firm’s unique value proposition to external investors, as well as focusing the deal sourcing, due diligence and value creation efforts.

Bain found that for 44 European deals, 45 percent that were within a firm’s “sweet spot” yielded more than two times the original investment, versus 25 percent of opportunistic deals.

A solid investment team must be complemented by seasoned sector-specific experience

While deal origination and the deal process itself remains a core function of private equity firms, the ability to understand the industry and help realize value from an investment increasingly relies on executives with industry experience.

“More people are coming in [to private equity] with more strategy and operational backgrounds. And there is a trend towards senior advisors,” said Aamir A. Rehman, a private equity executive and author of the book "Gulf Capital and Islamic Finance."  

“That senior advisor role is not as much of a deal maker but someone who comes in and gives feedback. You can drop in a senior advisor as an interim CEO and CFO,” he explained.

Chris Seneta of U.S.-based BRV Venture Fund also underlined the importance of the sector-specific skill set. “Gladstone (a private equity firm that invests around $2 billion) did that – you will have a deal origination team who will go out and find the deals and get the deal executed. But there is a call once you own the company to help to run it better. It will be someone from the industry – a CEO, CFO or a COO.”

ISLAMIC ECONOMY FOCUS

There is a significant role for private equity to help drive the creation of global halal brands and firms are beginning to take note. Good recent examples include the acquisition of Saudi-based fast-food chain Kudu by Abraaj Capital for over $200 million in 2015 and an investment by ESO and Kingsley Capital in UK-based halal meat supplier Janan for over $25 million.

As dedicated investment teams emerge to invest in Islamic Economy propositions, it will be critical to supplement experienced deal makers with industry professionals that have deep sector experience, as well as individuals that have an astute understanding of Muslim consumers.

 “The Islamic Economy is very diverse and opportunities exist across the investment spectrum including venture capital and private equity,” said Rehman.

“The skill sets you would need on an investment team is a function of the strategy you plan to pursue and the sector you invest in … By way of example, for halal food you will need people who come from the food and beverage industry and you will also need people who understand Muslim consumers – so they may be from other sectors – such as public policy or media.”

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