Sovereign Wealth Funds Uplift Muslim World with Fajr Capital
Backed by sovereign funds, Islamic private equity firm Fajr Capital invests for financial and social returns in Muslim countries.
Iqbal Khan has a mission. Raised Muslim in Aligarh, India, his faith wasn’t shaken at age 5 when tensions with the Hindu majority erupted in a violent riot and his mother dressed him in his finest clothes to give him a better shot at adoption if he were orphaned that day. Nor did he grow bitter after the mob torched the family home. Instead Khan took up arms against what he saw as the true culprit: income inequality that drives young men to kill and call it God’s work.
In 2009 Khan founded Fajr Capital, a private equity shop built on Islamic principles that aims to make a buck while making a difference in the Muslim world. “To fight the extremism, we must broaden and deepen the educated Muslim middle class,” the 59-year-old tells Institutional Investor in a telephone interview from his office in Dubai. “We need to make sure that there are people who are well-educated, live in societies that have good infrastructure that connects them to the rest of the world, and that we have young people who can look forward to getting married and owning homes and businesses without compromising their faith.”
Fajr — Arabic for “dawn,” to symbolize hope — has a modest $700 million in capital, but its founding shareholders have much deeper pockets. Three sovereign wealth funds — the $111 billion Abu Dhabi Investment Council, Brunei Investment Agency, the sovereign fund of the oil-rich Southeast Asian sultanate, and Malaysia’s $35 billion Khazanah Nasional — joined forces with Mohammed Alsubeaei & Sons Investments Co. (MASIC),the family office of a prominent Saudi banker, to create and nurture the young firm. “Fajr is a union of institutions that have high credibility and share the same values,” says Ihsan Bafakih, CEO of MASIC.
According to a 2015 report published by Spain’s ESADE business school, the 36 sovereign wealth funds based in Muslim countries account for 46 percent of the estimated $7 trillion in global sovereign wealth assets. Roughly three quarters of those funds intend to ramp up allocations to Islamic finance, which complies with shari’a bans on things like levying interest, making unsecured loans and investing in goods or services related to alcohol, the report found.
Typically, those sovereigns have taken stakes in Islamic banks, which account for some 80 percent of the industry’s $2 trillion in assets. But ADIC, BIA, Khazanah and MASIC envisioned a platform that would bridge the gap between the Islamic finance hubs in the Middle East and Southeast Asia, which are very distinct markets with few direct links. “We wanted people to look at Fajr as a partner of choice in the region,” says MASIC’s Bafakih.
Fajr, which targets a return of over 20 percent, partnered with the Bruneian government in 2011 to clinch its first investment: taking ownership of about 30 percent in Bank Islam Brunei Darussalam. In 2012 Fajr snapped up stakes in Dubai-based fund manager MENA Infrastructure and U.K.-based renewable power company Tamar Energy.
Khan’s 30-strong team has since exhausted nearly all of its committed capital — though it can still access funds from shareholders — with five deals, as well as follow-on investments, with a taste for demographic-driven growth sectors like education, food and manufacturing. “Fajr is an up and coming firm in the region,” says Hani Ramadan, head of private equity for the $2.7 billion Abu Dhabi asset manager Waha Capital. Waha joined a Fajr-led consortium that bought Dubai-based oilfield service provider National Petroleum Services for over $500 million in 2014. “They went on a buying spree in the last couple years, but we’ll see how they do exiting those investments.”
So far, so good. The $300 million MENA Infrastructure Fund, which also counts Waha and HSBC Group as sponsors, serves as Fajr’s platform for tapping the region’s high-growth transportation, power and water sectors. Fajr bought in at a discount in 2012, when founding sponsor Dubai International Capital, the investment arm of sovereign wealth fund Dubai Holding, was strapped for cash and forced to sell. The fund scored double-digit returns, beating expectations, when it sold Egypt’s Alexandria International Container Terminals in February and the United Power Co. in Oman in March.
With two investments left — another power company in Oman and one in Saudi Arabia — MENA Infrastructure is working to raise $500 million for a second fund, which will target a 15 percent internal rate of return. Fajr will be the sole sponsor. MENA Infrastructure CEO Jeronimo Roura estimates that Khan has sourced 80 percent of the prospective investors — namely pensions and sovereign wealth funds in the six-nation Gulf Cooperation Council and in Southeast Asia. “Iqbal and Fajr Capital have a network of connections that is unparalleled,” says Roura. “I don’t know anyone who has the same level of access across so many government entities.”
As the founding CEO of HSBC’s Islamic branch, HSBC Amanah, from 1998 – 2006, Khan made powerful friends, including Khazanah CEO Azman Mokhtar. In 2008, with the financial crisis in full swing, Azman wanted to put some muscle behind Islamic finance and connect the Middle East with his country of Malaysia.
He and Khan drew up some blueprints with the help of Dr. Amin Abdullah, then head of the Brunei Investment Agency, and Abdulaziz Alsubeaei, a director at MASIC. The Abu Dhabi Investment Council was quick to join, and the founding shareholders launched Fajr Capital in 2009. “Tan Sri Azman Mokhtar was one of the leading advocates of connecting the Middle East together with East Asia and bringing authenticity and integrity to the Islamic finance proposition by focusing on principal investments and asset management in the real economy,” says Khan. Khazanah bought a 25 percent stake for $150 million.
Malaysia’s sovereign investors have come under the microscope because of a scandal surrounding the state development fund 1Malaysia Development Berhad (1MDB) and its ties to the Gulf. The fund, set up by Prime Minister Najib Razak, owed $3.5 billion to an Abu Dhabi state fund, International Petroleum Investment Co., but IPIC announced last month that it had never received payment from 1MDB.
Market participants insist there’s no politics at play in Fajr Capital. “What Fajr Capital brings to the table is institutional talent,” says Amit Pandey, a Singapore-based credit analyst for Standard & Poor’s Ratings Services.
Pandey covers Bank Islam Brunei Darussalam, the largest financial institution in the smallest country on Borneo, and has been following Fajr since Brunei enlisted Khan’s team in 2011 to build the regional champion (with a 55 percent domestic market share and $5.7 billion in assets) into a global contender. The Brunei Ministry of Finance and the sultan’s charitable foundation, the bank’s other shareholders, gave Fajr its stake in BIBD and management responsibilities for about $200 million. Since taking control, Fajr has improved the bank’s product suite, service quality, risk management and logo, says Pandey. In November BIBD reported a 40.5 percent increase in 2014 net profit after zakat (alms-giving in accordance with the Koran) and taxation for the bank and a 17.9 percent increase for the wider group, which includes brokerage services, takaful (shari’a-compliant insurance) and other activities. The bank plans to open an office in Dubai to focus on corporate finance in the GCC. “We intend to become a trade corridor from the Middle East to here,” says Mubashar Khokhar, a managing director at Fajr and BIBD’s managing director since January.
In 2014, Fajr Capital grabbed headlines, leading a deal with private equity juggernaut Blackstone Group and $11 billion sovereign wealth fund Bahrain Mumtalakat Holding Co. to invest over $300 million in GEMS Education, a Dubai-based company that operates 84 K-12 schools in 14 countries. The company is primed for growth as rising domestic and expatriate populations and a burgeoning middle class drive higher enrollment rates in the Middle East, Africa and Asia, its core markets. “It ticks all the boxes from a variety of perspectives,” says Mumtalakat’s chief investment officer, Zulfe Ali.
The deal was Blackstone’s first investment in the Middle East, and the firm felt comfortable in Fajr’s hands. “After forging the deal together, they act as our local partner, spending a lot of time with the company and working with us on our investment,” says Andrea Valeri, a London-based senior managing director in Blackstone’s $10 billion tactical opportunities group.
GEMS had plenty of suitors to choose from, but founder Sunny Varkey and his family-owned business wanted a partner with values and, most importantly, patience. “Education is social infrastructure and, like any infrastructure, requires you to have a long-term mindset to truly be successful, both commercially and educationally, but also to have an impact,” says group executive director Dino Varkey.
Fajr and Mumtalakat offered patient capital while Blackstone knew a thing or two about preparing family businesses for the auction block. In 2014 the gang recruited Sir Michael Peat, former principal private secretary to Prince Charles, to chair the board of directors, and in 2015 they poached the headmaster of the renowned English boarding school Eton College, Tony Little, to become chief education officer.
The capital injection was earmarked for the Middle East, North Africa and Asia segment of the business, and through Fajr and Mumtalakat, the company has unbeatable access to those markets. In the past year, GEMS has scouted locations in Malaysia, Brunei and Bahrain. For Khan, it’s all part of making the world a better place. “My father said the purpose of education was to free us of our prejudices and help us do good in society,” he says.
Khan attributes much of his early successes to a sort of karmic return on good deeds. Apart from making impactful investments, Fajr Capital established a charity with contributions from management, shareholders and profits that aims to promote human capital and economic development in the Muslim world and support research on Islamic finance. “We want to democratize philanthropy and migrate some of the best practices and ideas from the West to the East and vice versa,” says Noman Tahir, Fajr Capital’s head of business development and communications, who oversees the Fajr Capital Foundation.
The foundation recently partnered with MyBnk to train four BIBD staff members in the British charity’s curriculum for educating young people about personal finance and entrepreneurship. They have opened three pilot schools in Brunei with 300 students and aim to roll the programs out to all of the country’s schoolchildren. “When we give back we become richer in a way which is more satisfying than dollars and cents,” says Khan. “There’s a blessing that comes beyond measure.” •
Follow Jess Delaney on Twitter at @jdelaney_NYC.