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Islamic private equity: what is new?

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  • Yousfi, Ouidad
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    Abstract

    The current paper analyzes similarities and differences between conventional and Islamic private equity (PE). Despite the financial subprime crisis and the lack of liquidities in financial markets, PE still play an important role in financing growing unlisted firms all over the world. However, conventional PE and Islamic PE display different features. First, Islamic PE funds have less investments opportunities and cannot diversify their projects across activities and sectors mainly because of the Shari’ah compliance criterion. For instance, the PE funds is composed of the managers team, the Shari’ah supervision board SSB and the supervision compliance officer SCO. Second, the choice of PE partnerships depends on the target’s performance, the Islamic scholars’ school and the religiosity degree of the country where they operate, and the SSB policy. Third, they bear varied and different risks from their conventional counterparts. As a consequence, Islamic PE financing is expensive and still not very competitive. Fourth, to overcome and mitigate risks, conventional PE funds can issue convertible securities and abandon prematurely bad quality projects. In contrast, Islamic PE funds are actively involved in the project only in specific cases and cannot exit prematurely the target but can sell gradually their stocks to cover their equity. Finally, financial modes vary according to the degree of involvement of the PE fund in the project and the pre-agreed arrangements between the entrepreneur and the PE fund.

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    File URL: http://mpra.ub.uni-muenchen.de/35952/
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    Bibliographic Info

    Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 35952.

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    Date of creation: 28 Dec 2011
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    Handle: RePEc:pra:mprapa:35952

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    Keywords: Islamic Private Equity; venture capital; PLS;

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    1. Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, vol. 3(4), pages 305-360, October.
    2. Aggarwal, Rajesh K & Yousef, Tarik, 2000. "Islamic Banks and Investment Financing," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 32(1), pages 93-120, February.
    3. Baele, L. & Farooq, M. & Ongena, S., 2010. "Of Religion and Redemption: Evidence from Default on Islamic Loans (Replaced by CentER DP 2012-014)," Discussion Paper 2010-136, Tilburg University, Center for Economic Research.
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