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Structuring Shariah Compliant Funds (continued..)
managing their first fund (or at least their first Shariah
compliant fund). This trend may, however, reverse
and follow Western markets where the number of
fund managers is decreasing as they merge with
one another or leave the fund management sector
altogether.
While investors prefer fund managers and general
partners with proven track records, the number of
new players has provided investors wishing to invest
in a Shariah compliant manner with a plethora of
options as Shariah compliant funds now invest in
most asset classes.
Traditionally, real estate has been the major asset
class for investors in the GCC, but there is a growing
interest in diversifying portfolio assets outside of
real estate.
In the past, investors in Shariah compliant funds
have had limited rights and often fund managers
would not even consider negotiating side letters.
The refusal to negotiate side letters stems from:
• the tenet being marketed that all investors are
treated equally
• fund managers previously having the dominant
negotiating position
• investors wishing to invest on a Shariah compliant
basis previously having few alternative options
Now, however, investors have more negotiating
leverage as funds desperately need their capital,
especially new entrants into the market who cannot
fall back on their proven track record to provide
comfort to the investors.
Additionally, with the increased number of new
players, investors have a number of alternatives if a
fund manager refuses to acquiesce to its demands.
Also, it is becoming increasingly common for
investors to demand in side letters that the fund
manager waive or reduce certain fees.
While negotiations between the investors and fund
managers are still less common compared to Western
conventional funds, investors are increasingly taking
advantage of their improved bargaining positions.
Conclusion
While the popularity of Shariah compliant funds has
grown in recent years in many parts of the world, they
are still viewed as a niche practice for raising capital.
However, given the success of many of these funds
and the struggles of fund managers to raise money
in the West or Asia, fund managers are increasingly
exploring creating Shariah compliant funds to improve
their chances of accessing liquidity in the GCC.
Fund managers wishing to form a Shariah compliant
fund need to consider all aspects of forming a Shariah
compliant fund, including:
• the process of appointing the Shariah board
• local law restrictions and tax consequences
depending on the domicile and ownership of the
fund
• considering acquisition structures that
contemplate how a Shariah compliant financing
will be structured in the jurisdiction of the
potential target companies or real estate
While some fund managers view legal services as an
afterthought to be utilized once the fund is formed,
an experienced law firm can play an active role by
recommending experienced and respected members
for the Shariah board.
Also, it can develop a structure for the fund and
future acquisitions and financings that are tax
efficient and take advantage of the relevant laws in
the jurisdiction for future investments of the Shariah
compliant fund.
Nabil A Issa is a partner and James Stull is an
associate at King and Spalding. Refer to Nabil’s
profile on page 38.
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