Unicorn Launches Global Shari’ah Compliant Fund

Unicorn Investment Bank claims it has launched the first global private equity fund that is Shari’ah compliant, and it will be investing about one quarter of the $150 million fund in the U.S.

The fund is roughly half raised at this point, as Bahrain-based Unicorn has tapped LPs in the Gulf Cooperation Council (GCC) countries and southeast Asia, said Aamir Khan, a managing director at Unicorn and its global head of private equity.

Roughly $35 million of its total funding will end up in the U.S. where, depending on the sizes of the deals, Unicorn plans to make around four transactions. Unicorn, has already made one deal in the U.S., and currently owns an assisted living company.

Unicorn will be targeting lower middle-market companies with enterprise values of between $10 million and $20 million. To Unicorn’s knowledge, this is the first Shari’ah compliant private equity fund ever to be raised with a global focus, said Khan. A first close is targeted for the end of May.

Other firms that make Shari’ah compliant investments include Boston’s TransOcean Capital and Arcapita, formerly Crescent Capital. Arcapita, while not necessarily global in scope, does operate in both North America and Europe.

The big advantage Unicorn touts, though, is its truly international reach. Khan believes that many companies in the U.S. lower middle market, despite their size, have global aspirations. For example, the firm is currently working to buy a small leather goods maker that does business in Italy, the U.S. and Asia. The deal with Unicorn would also give the company access to GCC markets, which includes Saudi Arabia, Kuwait, Bahrain, Qatar and the United Arab Emirates.

“Shari’ah sounds like a mystery word, but it’s fair to the companies themselves,” said Khan. The fund, advised by two in-house Muslim scholars, does not invest in companies “destructive to society,” which includes those engaged in alcohol, defense and pornography. However, investors in the fund are not required to have amassed their commitments through Shari’ah compliant means.

On the leverage side, Shari’ah also requires that the firm is conservative with debt. “Shari’ah never wants a company to fail because of its capital structure,” said Khan, and therefore it leverages deals substantially lower than traditional LBO firms. “You don’t want to drive revenue purely from earning money on money. You should drive profits from participating in the economic development of society,” he said. Also, profits earned have to be split evenly among shareholders.

Investing for a moral cause isn’t always the quickest path to fat profits. For example, a few green/renewable energy funds have warned LPs recently that they are targeting lower return levels. Khan said, “It’s not that we don’t like to make as high of a return as we can, but it has to be done by following the right principles. It is our belief that you can not hoarde a commodity. If the demand for a commodity goes up, you cannot quadruple the price. There is some ethical practice to earning profits.”

Khan said he doesn’t have to go to his scholars on each deal, as they have already pre-approved seven various types of deal structures, so the firm simply has to stay within those pre-approved parameters.

In addition to the self-imposed Shari’ah compliance, Unicorn also has to deal with what are potentially restrictive cultural complications. The much-debated blocked sale of certain U.S. ports to Dubai Ports World this past winter served as a reminder that political tensions between Western countries and parts of the Islamic world can often get in the way of business.

Khan, who is a practicing Muslim, is not worried about such difficulties. “Once citizens understand there’s a difference between the 0.1% [of Muslims] who are terrorists and the 99.9% that are moderate human beings regardless of religion, it’s not an issue at all,” he said.

Khan added that Unicorn is upfront about its Islamic nature and for the most part has not encountered any difficulties. Whether there is a war in Iraq or not “there is always going to be that class of people that will never do business with you. But that will always exist, anywhere in the world,” Khan said.

Unicorn Investment Bank has five divisions, private equity, corporate finance, asset management, strategic M&A and insurance. —M.C.