For British asset manager Ethos Invest, raising £1 billion ($1.37bn) to create the world’s largest Sharia-compliant, FinTech-focused private equity fund is more about creating momentum in the sector than being the biggest of its kind.
The Ethos Financial Services & Technologies Fund aims to target small and medium-sized firms in the financial services and tech sectors across the globe, including in the UK, Europe, the Middle East, Asia and North America.
But the partners behind the concept say they are not on a mission to be the largest fund but instead want to be a catalyst for further capital investment into what in the past has been an underserved market.
“Yes, everybody likes to be the first, the biggest etc., but at the end of the day, it doesn't really matter. We need to do good things,” Quintan Wiktorowicz, a partner at Ethos Invest, told The National.
“Having that significant a size is a signal to the market that this is a space that's of importance, that is a growth opportunity for investors and a space we want to encourage more companies to go into.”
Mr Wiktorowicz said he hopes the fund does not remain the largest for long because it will mean it has succeeded in having that “catalysing influence” with more players operating in the space.
The $2.4 trillion Sharia-compliant finance industry, which bans interest payments and pure monetary speculation, is expected to register growth of 10 to 12 per cent this year and next, according to S&P Global Ratings.
The industry grew by 10.6 per cent last year on the back of higher-than-expected sukuk issuance, the rating agency said, with growth of 17.3 per cent in 2019.
Partners at Ethos Invest say they have observed an increasing appetite for Islamic finance during the pandemic as the world grappled with the economic hit from Covid-19.
“We started looking at the capital raising exercise almost 18 months ago, just before Covid and throughout the Covid era we have seen how people changed their views on where to invest and how to bring the capital,” said Abdullah Medallah from law firm Abdullah Medallah & Co, who acted as legal counsel for the new fund.
Mr Wiktorowicz said there is appetite to accelerate growth in Islamic FinTech in particular, with a stronger appreciation in the West for the role it has to play in general.
“The UK is probably one of the top five places for Islamic finance, generally speaking, but the United States and Europe are starting to catch up as well. So, the investment pool is really a global pool that we're looking at,” he said.
Mr Wiktorowicz said the pandemic has contributed to the rise of conscious consumerism, with ESG (environmental, social and corporate governance) funds also growing in popularity as well as impact investing as consumers consider more ethical ways to park their capital.
“Obviously, there hasn't been this level of activity in the Islamic finance sector with this kind of focus and angle” which makes the fund different, he said, “but ultimately the fund sees itself as part of the wider ESG movement”.
Based in Jersey, renowned for its expertise in sharia structuring, the fund has Vistra as the fund administrator, and is overseen by a team of experienced investment professionals.
Ethos Invest plans to close the first round of the capital raise within four months at an undisclosed level, with the entire fund set to close in 12 months.
While the fund already has a pipeline of companies that align with the principles of Islamic finance that it wants to invest into, it did not disclose who the companies are.
However, it said it is interested in firms between $50 million and $200m in size in areas such as banking, asset management, payments and life sciences that use technology including Blockchain, robotics, Artificial Intelligence and cyber security.
While the focus will be on direct investments Mr Wiktorowicz said it also plans co-investments with other fund managers and even capital injections into other funds as well.
Despite the wide investment remit and geographical scope, FinTech and financial inclusion in particular are a key focus as it is an area many of the partners have already been active in.
Financial inclusion is an issue for the billion-plus Muslims across the world, said Mr Wiktorowicz, who do not have easy access to financial products and services that comport with their religious needs.
It is even an issue in the UK, he said - “a focus area” for the fund – because consumers cannot access products as simple as Sharia-compliant mortgages or business loans that “don’t involve any kind of debt”, said Mr Wiktorowicz.
While more Sharia compliant products and services are emerging in the UK, the Middle East and in South-East Asia, Mr Wiktorowicz said only about 350 companies fit that Islamic FinTech framework
“Almost all of them are early stage companies; very few have made it to Series A and been able to expand and that is largely due to a lack of access to capital,” said Mr Wiktorowicz, whose past career also includes managing three ethically focused technology firms in the Islamic economy and serving in two senior White House positions.
The second challenge for the global Islamic economy, he said, is that many high-quality companies often only serve “a niche consumer market”.
“So it may just be Muslims in, say, Malaysia, or it may be regional. Very rarely are these targeting global customers,” he said.
Companies that offer cross-border transactions are particularly attractive, said Mr Medallah.
“We would prefer a company that will work in more than one jurisdiction and will be actually opening other states for us,” he said.
“If you take a transaction, let's say in the UK or in the US, but then we have the ability to take that into, North Africa or Far East Asia, that would be something of a special preference was.”
Adding inclusion to that investment, however, will be key.
Financial technology that helps people manage their income, expenses, weather financial shocks and plan for a healthy financial future is urgently needed in the Mena region, which has the largest number of unbanked globally, according to a June 2020 report from Village Capital, which urges regulators and investors to support start-ups.
Less than one in five adults in region hold bank accounts, which causes issues accessing financial services while electronic payments are still nascent and 85 per cent of all transactions are still cash based.
Mr Wiktorowicz said a Sharia compliant digital bank would be a good example of the types of companies Ethos Invest would be interested in because it not only provides “more financial products and services for Muslim communities that might not have access”, but the digital nature of it makes that access even easier for people.
“Very often, it will reduce the transaction costs that are involved and so people are charged less fees,” he said.
As well as helping companies in Muslim markets with ethical products and services access the broader global market, the fund also plans to help Western firms go the other way, Mr Wiktorowicz said.
“A lot of mainstream companies are already operating in a way that is consistent with Sharia principles, they just don't think of it that way,” he said.
“They may not even recognise it, or be cognisant of it and they could effectively enter into Muslim marketplaces if they understood how to enter these markets and, how they might be able to frame these kinds of things.”
Mr Wiktorowicz said the expertise behind Ethos Invest could help company’s “figure out” how to bridge that gap between Islamic and conventional finance.
“How can you take what you're already doing, which comports with Sharia compliance principles and make them appealing to Muslim customers,” he said.
“And then the other way, how you can take a Sharia-compliant company’s products and services but frame them in a way that people understand that it already aligns with their value system.”
With a 10-year life span for the fund, the company aims to deploy all the capital within three to four years, with confidence its capital raise will go to plan because of its simple structure.
Ethos will work with BMO Global Asset Management's private equity team as investment advisers for the fund.
Meanwhile Saudi Arabian investor the Al Inma Investment Company will act as partner in the Kingdom and across the Middle East to help attract investment alongside Bank of Montreal, a global leader in the ESG space.
These partnerships have been key in the capital raising exercise, said Mr Medallah, because investors “love” the simple structure of the fund.
“It’s how Jersey plus the capital markets in Saudi Arabia have regulated this fund, and how the contractual relationship has been done through this through the partners who are engaged,” he said.
“The uniqueness of the fund is that it bridges the gap for private equity funds between the UK and other Islamic countries such as Saudi Arabia.”