Asset Management in a Shari'ah Context

[Music] alikum good afternoon everyone on behalf of adgm allow me to welcome you all in Abu Dhabi Finance week it's a great pleasure to be moderating this session today with our esteemed panelist if I may ask you please to give a brief introduction about yourselves and background and some of the company certainly so my name is ibal Khan I'm the founding CEO of fajer capital which is a private Equity infrastructure investment firm and our entire focus is on Asset Management Sharia compliant of course and to you Mr Muhammad cha I'm the CFO of our capita which is also alternative investment firm we invest in private equity and real estate mainly in the US and also in this region to Lum Luma Saka director for imia un principles of responsible investment uh PRI is uh has 5,300 signatories across the globe holding together 121 trillion uh in assets under management so our hope is to be able to promote uh responsible investment across the globe and uh we are trying to do more work in in this region um to help progress that thank you my name is khassan I'm the CEO of gfh equities which is a subsidiary of gfh and we focus on the in the alternative space it's a pleasure to have you all here as we know the industry has been has been seeing a significant growth and projected at and with a projection growth of nearly 4.9 us trillion dollar by 2025 today we will explore the market trends opport o unities and challenges with the esteemed panelist to begin let's dive in the evolution of the demand of the Sharia compliant products as we know the alternate the alternative investment space is particularly interesting as it offers varied opportunities for growth mammed I would turn this question to you can you start by giving an overview of our capita and how do you see the demand for Sharia compliant products evolving in the alternative investment space okay um our capita is actually one of the first alternative investment firm that was founded based on share principles in 1997 19 um and we've done um approximately 30 billion worth of transactions more than 100 different Investments and uh we were the first uh firm to do like a leverage buyout transaction in the US we work with our lawyers and we got the finance from Bank of America using like a sale and Lease back transaction which has become like a standard for the industry hisory were one of the first to do like a venture capital fund uh in the US also so we've been Pioneers in in those fields um what I'd say in terms of demand um um obviously when we started it was like a very net industry we the first to structure these products back in the 70s for sure so our clients were sort of more uh people in their 50 60s more mature uh investors but I think there's a recent survey by Lumbard aier which which is like a Swiss private bank and they're saying that uh more young people are more interested so like people who are like 18 to 40 more than 90% of of those people especially the high nworth individuals are investing in Sharia compliant products so we're we're seeing the trend that young people are coming into this industry interesting to you Mr akbal as Mr Muhammad mentioned there's definitely a trend how how do you believe the these Trends are currently shaping the uh the ecosystem of Islamic asset management and how can you see private Equity particularly contributing to this growth and development well you know the Islamic Finance industry is primarily a c2b business it was never a b2c business the consumers demanded the product and I think Islamic banks have done a fantastic job in democratizing financing M but now consumers are asking as Muhammad mentioned about democratizing in wealth and that can only be done through Asset Management alternate assets and if you look at the authenticity of Islamic finance and I've been involved in this in this industry for a long time the true authenticity of Islamic Finance lies in Asset Management in a contract called the mudaraba contract and it is there that the future of Islamic Finance lies because governments can allocate capital in different asset classes choose the best best asset managers for VC Forme for infrastructure private equity and that will create an ecosystem which will not only create wealth but fortify the whole Islamic economies interesting and to you mron from a g gfh perspective can you tell us more about the demand and whether there are specific areas your company is focusing on absolutely I mean I I guess the in gfh equity our investment mandate is to do direct Regional deals and globally we also have a mandate to look at opportunities as long as it's done with strategic and proven investors in different asset classes that we realize there's a demand for there's a huge demand for Sharia compliant products in the region and we do see that H but from our perspective again we are an active investor we look at uh sourcing transactions where we can always add value to them uh a very specific example is in the education space which is again a sector that's very well liked by Shar investors um example is our education platform brightest education which had an investment Mandate of acquiring and integrating a a independent K to2 schools spread across different geographies and curriculums and extract the value uh that you would out of a platform that integrates all these schools uh since our investment we've assembled the management team that was able to do that operationally and we focused on quality and elevating that the education quality within that platform uh again what is what is very interesting is that as we focus on quality within their portfolio we managed to reap the benefits successfully where why we eventually throughout the journey eventually exited the portfolio recently the results delighted us as it delivered in the promise for our investors and it passed the torch to another reputed Financial investor dedicated and focused on quality very interesting and with this Niche segment who would you cons who would you consider your competitors nowadays for gfh I mean most private Equity investors in the region do look at education I think it's a sector that is well-liked because of its defensive nature uh we see a lot of competitors but we also equally see them as people or parties that we can collaborate on so we're open-minded in that sense in collaborating with other private Equity players or investment institutions to do Club deals and work collectively in terms of uh adding value to all these portfolio companies of course so with competition of course comes risks and challenges and now that we've explored the growth Trends let's discuss the challenges and opportunities in a Sharia compliant managements with the today's volatile macroeconomic environment there are both hurdles and opportunities again to you Mr how do you perceive demand from Sharia compliant investors for various asset classes and specific products in the current market good question I mean in in in the current environment we actually see a lot of demand for dividend yielding products from our Sharia compliant investors uh demanding these the this this profile with with a low risk appetite and this is exactly The Sweet Spot of of gfh um we always look to analyze Global and Regional Trends to I identify opportunities that fit in that criteria um a recent example is an investment that we've done in the shipping sector although the shipping sector for most investors they're apprehensive towards it because of preconceived notions or past experiences we realize the demand Supply Dynamics for that sector are interesting enough for us to actually invest alongside one of the most uh successful fund managers globally in building a diversified portfolio of shipping vessels interestingly enough you know when you look at different shipping subsectors there is not a lot of correlation between them and hence the diversification so that has worked very well with us and it had a lot of demand from Shia compliant investors again other products or other sectors that these investors like are again Health Care education Logistics and data centers all of which we're pursuing and we are in the advanc stages uh in in terms of finalizing something within data centers another interesting Trend that we've seen with our investors is that we you know we we given our our our our our relatively big platform of products we always try to uh provide our investors uh liquid regular liquidity events whereby they can actually exit or decrease their exposure from one of our products to other products and that is something that we've seen appreciated quite a bit by our investor Community okay um Mr Muhammad as you mentioned you've recently launched the Venture Capital uh Asset Management can you speak more about the associated risk and how did uh our capita actually navigate through such landscape yeah we've um we've invested in a fintech portfolio about two years ago and we're in the process of investing in a like a more AI type um Investment Portfolio at the for us obviously share compliance is the most important thing that we assess so just to give you um an example we're investing in a company called sandbox I think some people might have heard about it it came out of Google and alphabet uh so that company we saw had um US military as a major customer for example or um big investment Banks like barlay so we had to assess exactly what they were doing so it turned out like for the US military they were provided an m alternative to the GPS system because like Israel for example jams GPS if if you're flying over their territory or Russia in Ukraine Etc which is very dangerous for an aircraft so we assessed that and we said yeah that's not that's not a Sharia compliant issue and this company does like Quantum data analysis uh so barlay is not involved in the lending or charging interest for example so that's how we we assess that that portfolio um to assess that that type of risk for that portfolio interesting um Mr akbal that we've heard about how uh our capita navigated through their challenges can we know what strategies from your experience uh do you have in place for the asset management industry to adapt and navigate through the volatile and uh volatility of such market so I think uh the first thing is that you have to invest in what you know yes and where you know and with whom you know and with whom you know becomes the most important thing you invest behind Founders and behind management the Islamic concept of musharaka partnership means that the asset manager has to partner with Management in the underlying business we have oil services business we have school businesses we've just deployed a billion dollars in healthcare these are very very technically very different businesses so you need to have partner parip with the management that's the first tool for reduction uh but also you invest into Focus countries I mean our entire focus is the GCC MH and you invest into good to better platforms we don't do turnaround because turnaround take a long time to turn if they turn but what we also don't do is startups but uh through this current fund which we have so these things help us to never navigate ourselves and manage the business risks inherent in investing into these spaces but also investing in defensible sectors education Healthcare Facilities Management data centers and you know semiconductors those kind of Investments so we can say that the Shar principle based Investments are ethically and socially responsible indeed indeed they are and and Sharia based principles guide us and navigate us towards what is called the value creation Paradigm every time you invest you ask yourself is value being created as defined in the Sharia is this and there is this quranic concept called yanas that which is good for mankind if it is good for mankind then 100% it will be Sharia compliant absolutely thank you uh to you Mrs Luma the subject matter expert in uh responsible investment how do you see any alignment or resemblance between ESG principles and Shar principles I mean this is the question that comes up on daily basis I guess uh look I think if we if we step back um there is some for a lot of people they see already the the alignment but they're confused by are they truly aligned in what way so the simplest thing when you think of we have the basic what we call the screening list the negative screening list the things that you should not invest in and when you look at those we are talking about things that are typically um good for when you avoid them they're good for society so you're avoiding alcohol you are avoiding arms uh embargo we're talking about um for example smoking there are a lot of issues that are typically avoided by by Sharia Investments now they are all socially related if you look at why they have been they have been introduced because how Islamic as a Islam as a religion looks at at social issues and the question becomes so how does that relate to ESG and is I I mean when you look at from a an investment policy perspective for example if you look at the definitions of investment policies on the the pris uh negative screening is an investment policy so you are already a responsible invest investor if you are Sharia compliant so why are we asking this question the question becomes in that today climate is the biggest loudest voice in the room and you're not directly able to relate the social issues that Islam is dealing with with that that is one one thing the other thing is that impact what Islamic Finance has done always is the negative screening but without being able to measure the kind of impact we're creating so we talk about the social issues but we have never sat down to measure how we're creating them and therefore the s in the ESG is sometimes confusing so I go back to saying the S is there in Sharia compliant uh products but we need to start looking at impact where you know now when we start looking at the new Investments and how they have to comply with environmental issues look at ESG screening rather than just Sharia screening then you we are moving into a new era if you like of Islamic finance and how do you think asset managers can help actually promote the commonalities between ESG and Sharia principles to to attract a wider investor base as I said I mean it's it's already there it's already there in terms of the basis of it but what is happening is that when you look at the product side what is actually we're investing in that's where we have more issues so again conceptually you should be able to take all the boxes but if you want to attract a bigger uh a bigger uh audience of investors these could be these are we've stepped now from Shar Sharia looking investors because they're already there looking for this type of investment so if you want to expand it then you have to start looking at as I said at impact at what is it what kind of impact investors are looking for from an ESG perspective but there's also the layer of the assets the the underlying Assets in all of these funds for example U and whether to what extent we they are going to be proh prohibitive or expanding the the sphere what do I mean if you are investing in let's say equities the equities from a Sharia perspective still in addition to the negative list you still have to comply with a number of other Sharia aspects like how much debt that company can have what type of debt it can have what kind of prohibited the percentage of prohibited um activities so that is an additional layer in theory it could limit their for the the universe of the assets you could invest in and therefore limit the type of investors who could come in having said that from what we're seeing and the you know discussion we're having and the two discussions before that you can see that there's already a significant amount of interest and demand in Islamic funds and I actually have a few numbers here that were very interesting um this year 2024 ESG Islamic funds grew 19% during the uh first half of this year reaching 9.5 billion in assets under management out and Performing overall Islamic funds so these are the combined um and the yeah they've U they achieved 90% but there's also the issue of of uh yield it has already been proven that there is more yield or more returns to be to be had and LSG who are not in the room this is their research that several Market Studies have shown that equities with higher ESG scores tend to produce Superior returns and so on so there's already a build for all of that and I'll stop here because I can go on forever certainly there's demand and there is market growth uh to finalize the session I just would like to hear from our asset managers given the the the interest in fintech and the demand in cryptocurrencies how do you personally View cryptocurrencies and Shar and Sharia investment starting with you mral well uh I'm not a big fan of the CRI because you can't quantify the the and you can't Define their impact there too much of a speculative element built in there but the underlying Technologies like blockchain and like other things can can certainly be used in building up a portfolio but where I see the big opportunity for Islamic Finance is in the payment processing space you sign that the banks are farming out their digital payment processing to wholly owned subsidiaries and they inviting Capital so that is a very big opportunity for investment for Islamic Finance as we move from analog economies to a digital economy today most of the GCC 30% of the uh transactions are done digitally 70% is still cash I think in 5 years time it will be the opposite 70% digital 30% cash so that's a big opportunity in my view so you believe in the technology itself but not the cryptocurrency not that's my view but I'm a very conservative investor and Mr Muhammad this morning you just shared the percentage you said 40% of the UAE residents actually use cryptocurrencies what is your opinion on that yeah I I I think um the B sale cryptocurrency is here to stay because people are accepting as a means of exchange and store of value whether we like it or not we have to adopt and get used to C like Bitcoin that are here to stay I think thank you Mr your view I I I'll probably tend to agree withal in in terms of I'm not a big fan of cryptocurrency it's a Edge sort as they say I I definitely appreciate the technology on which it's built and that's a breakthrough technology in terms of making sure that you replace intermediaries when you know you have to deal with you know across the internet and that you know given the trustworthy nature of that technology but in terms of the currency itself You know despite the recent jump in the currency of of of cryptos we've shied away from that segment due to its speculative nature nature and highrisk uh profile it could be very high returns but at the end of the day you're taking also very high risks in the process we'd rather focus on the digital banking that's an area that we are very keen to invest uh in but again not looking at early stages we're looking at you know profitable uh mature platforms Mrs Luma to finalize this session now that we've heard the sharp ipal ESG factors and cryptocurrencies convergence to create an ethical and Innovation investment opportunities do you think there's a rise can we combine these three Frameworks together do you think there's opportunity more or challenging a challenge more probably heard part of the answer here look I think in crypto spe in any Islamic product there are three levels if you like there is partly the negative screening there is structuring the product itself that it is Sharia compliant and then we have here when you add ethical and ESG nature then we are also talking about governance issues we are talking about pure ethical issues where the money the underlying comes from um crypto I have seen it approved by some Scholars um in in certain in certain uh circumstances but I think we're not there yet where we are all certainly clear on it so I don't know if the if the three Frameworks converge fully today there's some level but I think we have a long way to go to get comfortable on the ethical side thank you very much I think we're out of time I just want to thank you all for this enlightening discussion and the intersection of sharia principles ESG Vol uh ESG values and asset classes continue to evolve and we've barely scratched the surface thank you to our panelist and esteemed guest looking forward to continuing these conversations thank you very much oh [Music]