The Islamic private equity market is expected to profit from distressed sellers dumping assets cheaply and from a rise in mergers and acquisitions, an executive at a sharia investment firm said on Tuesday.
Most Islamic private equity deals would be focused on the Middle East and North Africa, especially the Gulf, Rasameel Structured Finance said.
"Private equity is one of the purest forms of Islamic finance because Islamic finance emphasizes risk-sharing and participative sort of activity," Issam al-Tawari, managing director of Kuwait-based Rasameel, said in a telephone interview.
"The upside potential will be huge, especially in emerging markets, because the markets have been so oversold and prices have been so depressed."
The $1 trillion Islamic finance industry has been expanding by 15-20 percent a year but sharia-compliant private equity deals have only played a small role.
Practitioners have blamed this on a scarcity of potential Islamic target portfolio companies and a lack of public market exit options, with most capital markets in Islamic banking centers seen as not being deep and liquid enough.
Industry estimates put global private equity funds under management at more than $2 trillion at the end of 2008 but figures for Islamic private equity are hard to come by.
Islamic mergers and acquisitions are expected to accelerate in coming years, especially in the financial industry, with small banks seen coming together to form bigger units.
A slump in real estate and energy prices has also taken a toll on the profitability of some companies in the Gulf, a center for Islamic banking.
Al-Tawari said the biggest hurdles to the growth of Islamic private equity include varying criteria for investments and a lack of information for investors.
"The criteria for investment from a sharia point of view may differ from one bank to another although the general principles are the same."
"For example, the list of approved stocks to invest in the Kuwait stock market may be different from one bank to another by say around four or five and that's depending on the criteria used to screen and filter those stocks."