MANAMA: Islamic private equity firms face a reality check in the wake of the financial crises, delegates at the Islamic Financial Services Board summit were told.
"Liquidity and credit surge during the past decade saw mushrooming of investment firms across emerging markets pursuing private equity business," said Ernst & Young director and head of Islamic Financial services Ashar Nazim.
"Sharia-compliant investments specially remained in strong demand as investors sought to diversify risk and seek higher-risk adjusted returns.
"Unfortunately the boom era tempted a large majority of the private equity firms to focus on quick returns, through expensive acquisitions and with the objective of realising gains through vanilla listing on stock markets.
"Throughout this period, we saw very few success stories of incremental value generated through operational enhancements."
The same was true for conventional and Islamic private equity businesses, he said.
"With access to capital becoming more difficult, and valuations nose-diving across public markets, private equity firms are challenged to demonstrate real value they bring to the investing companies," he said.
"While the private equity model rates are much higher on the authenticity paradigm of Sharia-compliant financial system, its successful execution by mainstream players is yet to be seen.
"It all boils down to having specialist expertise, you cannot be a generalist anymore. Effective convergence of financial services and industry expertise will differentiate successful firms from others.
"Many of our clients are going back to the drawing board, to redefine and build a sustainable operating model".
"Empirical evidence suggests that investor appetite for alternative investment may be returning, and in GCC and Far East specially, Sharia compliance still remains a desirable feature for many of the mainstream investors," he said.
"However, track record of private equity firms is the top deciding factor for most investors. Hence refocusing on creating value through operational excellence will be very important in the post crises era."