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Private Equity and Venture Capital

Markets in need of diversification

The strong reliance of GCC investors on real estate, the sector being valued at some USD three trillion, is considered unsustainable by various sources. The obvious solution is diversification even if there is no abundance in choice of asset classes offering similar returns in today’s economic environment. This holds true in particular for Islamic financial institutions which must link their financial products to real assets. "The Islamic banking sector as a whole is highly exposed to the property sector, and as events in the advanced markets have recently reminded us, this sector can and does experience significant cycles of activity.", Rasheed Al Maraj, Governor of the Central Bank of Bahrain, said as early as July 2008. Other, rather classical, investments such as government bonds and commodities have either a very small return on investment, are highly speculative in nature or are subject to often underestimated inherent risks. Therefore, an investment strategy is needed which is balanced while still promising yield maximization. For example, the investment portfolio of Yale University managed by David Swensen, labeled the “new Buffet” by various media, shows an allocation to Private Equity of 22% out of its total value of USD 16 billion.

Technology investments in Europe: different asset class, different currency, different region

Private Equity and Venture Capital in small and mid-size technology companies as an asset class meets all aforementioned criteria. First and foremost, such companies find themselves in strong growth situations and with plenty of opportunities for optimizing their business processes – the combination of which leads to exceptional rates of return. Secondly, these investment structures allow for diversification in terms of regions, currencies and asset class, due to their low correlation with classic asset classes. Thirdly and finally, they are conceptually Sharia’a compliant due to their partnership-type setup and the low leverage, provided their underlying business model is not haram. A9C Capital offers professional investors access to this exciting class of investments with a focus on new and fast growing technology companies, mainly situated in Europe.

The potential return on investment is our focus in screening investment opportunities. Venture Capital investments are normally done in companies younger than three years that propose new technologies and new markets. Private Equity investments usually focus on mid-size companies looking to restructure or to accelerate their growth with new technologies, products or services. Investment opportunities can either be regarded as pure financial investments with a sole focus on financial return, or they can support a strategic buyer from the Gulf region in gaining access to new technologies. We only select investment opportunities that incorporate both features.

Due to the financial and economic downturn, the market situation for technology investments is particularly favorable. The multiples (EV/EBITDA ratio) for M&A transactions in Germany declined from 12.7 in Q3/07 to 6.4 on Q2/08 (source: Capital IQ, Duff & Phelps) while at the same time diversification is required more than ever.