legal guide09.indd - Islamic Finance News
legal guide09.indd - Islamic Finance News
legal guide09.indd - Islamic Finance News
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Structuring Shariah Compliant Funds (continued..)<br />
managing their first fund (or at least their first Shariah<br />
compliant fund). This trend may, however, reverse<br />
and follow Western markets where the number of<br />
fund managers is decreasing as they merge with<br />
one another or leave the fund management sector<br />
altogether.<br />
While investors prefer fund managers and general<br />
partners with proven track records, the number of<br />
new players has provided investors wishing to invest<br />
in a Shariah compliant manner with a plethora of<br />
options as Shariah compliant funds now invest in<br />
most asset classes.<br />
Traditionally, real estate has been the major asset<br />
class for investors in the GCC, but there is a growing<br />
interest in diversifying portfolio assets outside of<br />
real estate.<br />
In the past, investors in Shariah compliant funds<br />
have had limited rights and often fund managers<br />
would not even consider negotiating side letters.<br />
The refusal to negotiate side letters stems from:<br />
• the tenet being marketed that all investors are<br />
treated equally<br />
• fund managers previously having the dominant<br />
negotiating position<br />
• investors wishing to invest on a Shariah compliant<br />
basis previously having few alternative options<br />
Now, however, investors have more negotiating<br />
leverage as funds desperately need their capital,<br />
especially new entrants into the market who cannot<br />
fall back on their proven track record to provide<br />
comfort to the investors.<br />
Additionally, with the increased number of new<br />
players, investors have a number of alternatives if a<br />
fund manager refuses to acquiesce to its demands.<br />
Also, it is becoming increasingly common for<br />
investors to demand in side letters that the fund<br />
manager waive or reduce certain fees.<br />
While negotiations between the investors and fund<br />
managers are still less common compared to Western<br />
conventional funds, investors are increasingly taking<br />
advantage of their improved bargaining positions.<br />
Conclusion<br />
While the popularity of Shariah compliant funds has<br />
grown in recent years in many parts of the world, they<br />
are still viewed as a niche practice for raising capital.<br />
However, given the success of many of these funds<br />
and the struggles of fund managers to raise money<br />
in the West or Asia, fund managers are increasingly<br />
exploring creating Shariah compliant funds to improve<br />
their chances of accessing liquidity in the GCC.<br />
Fund managers wishing to form a Shariah compliant<br />
fund need to consider all aspects of forming a Shariah<br />
compliant fund, including:<br />
• the process of appointing the Shariah board<br />
• local law restrictions and tax consequences<br />
depending on the domicile and ownership of the<br />
fund<br />
• considering acquisition structures that<br />
contemplate how a Shariah compliant financing<br />
will be structured in the jurisdiction of the<br />
potential target companies or real estate<br />
While some fund managers view <strong>legal</strong> services as an<br />
afterthought to be utilized once the fund is formed,<br />
an experienced law firm can play an active role by<br />
recommending experienced and respected members<br />
for the Shariah board.<br />
Also, it can develop a structure for the fund and<br />
future acquisitions and financings that are tax<br />
efficient and take advantage of the relevant laws in<br />
the jurisdiction for future investments of the Shariah<br />
compliant fund.<br />
Nabil A Issa is a partner and James Stull is an<br />
associate at King and Spalding. Refer to Nabil’s<br />
profile on page 38.<br />
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