How The Growth of The Islamic Economy Focused Venture Capital Will Eventually Outpaced Islamic Economy Focused Private Equity!

The Islamic Economy has been on the rise over the past decade. According to the State of The Global Economy Report 2020 by Dinar Standard, Muslims spent USD 2.2 trillion in 2018 across food, pharmaceutical as well as lifestyle sectors that are impacted by Islamic faith-inspired ethical consumption needs. This reflects an amazing growth of 5.2% year on year growth with the value expected to reach USD 3.2 trillion by 2024 a cumulative annual growth rate (CAGR) of 6.2%.

In fact, Islamic assets alone were valued at USD 2.5 trillion. This is driven by the increasing Muslim consumer demand for dedicated products and services that adhere to their faith that gave rise to the global sub-sectors of Halal across the various sectors including food, pharmaceuticals, cosmetics, Islamic Finance, Muslim friendly travel, etc.

One key contributor towards this development is the increasing size of investment in this sector. Over the past year, it was estimated that a total value of USD 1.2 billion was invested globally in companies that are focused on the growth of the Islamic Economy by both private equities as well as venture capital. This represents 400% of overall comparable transactions across the various sector of the Islamic Economy. This value represents an overall value of M&A with 54% of investment in halal products followed by 42% in Islamic Finance based companies.

Deals and Fund-raising During Pandemic Times

Global fund-raising saw a decline from 2019 all-time record of USD 1.09 trillion globally to USD 989 billion. Top it up with USD 83 Billion raised for SPACs, it still remains the second-highest fundraising in history. Note various asset classes saw a decline including real estate but the venture still saw an increase as LP sees the venture as a haven in the storm. According to Private Equity International’s December 2020 LP Perspectives Study, around 80% of LPs are confident private equity and venture funds will continue to perform in 2021, and close to 40% say they are under-allocated to the asset class.

Covid-19 has significantly impacted the performance of all sectors including investment and fundraising, with Islamic Economy related investment and fund-raising included. Most deals in the Islamic Economy including Brunei Investment Agency (BIA) acquisition of ?Fajr Capital’s 29 percent stake in Bank Islam Brunei Darussalam (BIBD), the sultanate’s largest financial institution. On the contrary, top venture deals include a USD 25 mil investment in Wahed led by Saudi Aramco Entrepreneurship Ventures, the oil conglomerate's venture capital arm. The tech-savvy startups also announced later the same year, that it will acquire Niyah Ltd, a British company that runs a digital banking app designed for the Muslim community.

The Emergence of ESG

The emergence of environmental, social, and governance (ESG) as an alternative posed a threat towards Islamic Funds since ESG are Syariah compliance in principle. The rise and popularity of ESG investing present both a unique chance for investors, asset managers, and institutional investors to divert into traditional funds that are Syariah compliant in nature at the same time reducing overall allocation for Islamic Private Equity. Further diversion of funds into ESG is expected over the next few years especially since ESG limits risk exposure at the same time. Based on a study published by Mckinsey, a strong ESG proposition correlates with higher equity returns, from both a tilt and momentum perspective. Better performance in ESG also corresponds with a reduction in downside risk, as evidenced, among other ways, by lower loan and credit default swap spreads and higher credit ratings, hence the preference amongst investors.

Private equity investments in 2018/19 totaled USD160 million, representing less than 0.1% of global private equity investments in 2018 based on a report by Dinar Standard.

Rise of Islamic Economic Focus Country's Policies

Over the last decade, there has been a rise in a robust Islamic finance infrastructure facilitating the growth of Islamic Economy focused VCs countries such as Malaysia, the GCC region in particular Dubai, Indonesia, etc. Malaysia introduced the Guidelines and Best Practices on Islamic Venture Capital in 2008 and has put a huge emphasis on Islamic VCs.

Several tax incentives were introduced to further encourage the growth of Islamic VCs, including a 5 years tax exemption for VCs that invests in start-up, early-stage financing, or seed investment. Any special purpose vehicle (SPV) which was set up for Islamic Financing is also tax exempted.

Rising Demand Gave Rise To Islamic Economy Focused Startup

The global Muslim population is expected to rapidly grow from 1.7 billion in 2014 to 2.2 billion by 2030 ?representing a 29.4% growth based on a report by Pew Research Centre. This value is twice as fast compared to the global average growth rate.

On top of the growing population, Muslims globally are becoming more affluent with total OIC GDP projected to grow at a 6.2% compound annual growth rate (CAGR) by 2023, compared to the projected global growth of 5.8% CAGR, with GDP per capita growing at 4.3% CAGR.

Demand for practical digital Islamic Finance solutions is growing over the years which is a catalyst for the growth of the ecosystem of digital Islamic solutions ranging from halal food, cosmetics, lifestyles, etc. This growth is expected to continue to grow over the next few years as 15 out of the top 50 countries ranked based on smartphone penetration are OIC countries.

This gave rise to Islamic Economy focused startups, the likes of USHUB, a Los Angeles-based startup, and the first Muslim-focused streaming platform, TheNoor.co, A Malaysian-based startup focusing on Islamic lifestyle, Umma, Indonesian based lifestyle app, Muslimpro which was acquired by two private equity firms, Singapore’s CMIA and Malaysia’s Affin Hwang and Tripfez focusing on the global rise of Muslim travel.

Growth of Islamic VCs

The exponential growth of the global Muslim population is a positive indicator and catalyst for the rise in startups addressing this growing need which would, in turn, drive the growth of Islamic VC. In addition regions such as Southeast Asia and Southeast Asia potentially offers a significant number of untapped market areas for Islamic VC, especially in the area of food, healthcare, etc. Saudi Arabia, Dubai, and Malaysia among others are in the race to provide Islamic seed capital and growth-stage funding, distributed via VCs and accelerators. Saudi Arabia is looking to create one of the largest pools of Islamic seed capital (US$800 million) by allocating funds from its sovereign funds. In Dubai, The Mohammed bin Rashid Innovation Fund and 11 start-up incubators will be dispensing up to US$250 million in 2021. Malaysia is also in the race with many national funds, the likes of Permodalan Nasional Berhad, Khazanah, and pension fund Kumpulan Wang Amanah Pekerja (KWAP, starting to allocate funds into Islamic alternative asset classes including VCs. Among the top VCs in this space includes BECO, Gobi Partners, and SFC Capital.

Conclusion

Islamic economy investments represented less than 0.1% of global investments in the broader consumer and financial service categories. In 2018, global investments reached USD 3.7 trillion representing 11% growth year-on-year with global M&A representing more than USD 3 trillion across more than 20 thousand deals. In sectors aligned to the Islamic economy, USD 596.2 billion was invested despite the overall Muslim consumer spending representing 12% of total global spend. This opens up room for growth for both VCs as well as PEs alike.

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*Faeez is an entrepreneur, board member, advisor as well as mentor specializing in Islamic Finance and investments, corporate structure, and digital transformation. Faeez was named 30 under 30 by Forbes magazine in 2016, 40 Under 40 by Prestige, Top 10 Young Entrepreneur Rising by Top 10, People To Watch 2016 by TTG as well as the Most Innovative Young Leaders Award 2016 by UCSI.?