Charlene Liu Mohammed Aman Negar Mokhtarnia Ahmed Nasir

Private Equity - Introduction is a source of investment capital from high net worth individuals and institutions for the purpose of investing and acquiring equity ownership in companies. Partners at private-equity firms raise and manage funds to yield favorable returns for their shareholder clients, typically with an investment horizon between 4 and 7 years Can be broadly defined to include different forms of investment Leveraged Buyout- the purchase using equity from investors and significant amount of debt Growth Capital- minority equity investment for expansion and restructure operations Mezzanine Capital – investment in subordinate debt or preferred stocks Venture Capital –equity investment in less matured and non-public company to fund a lunch or early development There are two critical functions within private-equity firms: Deal origination/transaction execution Creating, maintaining and developing relationship with M&A intermediaries, investment banks and similar transaction professionals to secure high-quality deal flow Assessing management, the industry, historical financials and forecasts, and conducting valuation analyses Portfolio oversight Walk management through best practices in strategic planning and financial management

Private equity - Sharia-compliant investment Islamic Capital Market: Size of pool of available Islamic capital estimated at US$1.5 Trillion ( as of 2012). Islamic investors conduct their commercial activities in accordance with the body of Sharia Law, which prohibits Interest Uncertainty Speculation Unjust enrichment/unfair exploitation Unethical purpose Have to adopt the Sharia-compliant investment policy No investment in haram industries No investment in interest-bearing instrument such as convertible debt security No investment in financial products such as options or futures No investment in companies which do not meet specific parameters in relation to debt to equity ratios, interest income and accounts receivable

Private Equity - Moral Hazard The moral hazard that investors are worried about in this case is that the entrepreneurs would take sub-optimal decisions after the transaction takes place. Information & Expertise Entrepreneurs have in-depth knowledge of operations and do the reporting Entrepreneurs are acting as agents on behalf of investors Various moral hazards: Inflating costs by paying themselves higher salaries or using company perks Taking out-of-pattern riskier decisions Under-reporting profits or exerting less efforts to under-value the company

Sharia Compliant Alternatives: Internal Audit Have a provision in contract allowing for examination of internal accounts by a third party assessor + Can force founders into compliance Can create a hostile & unpleasant relationship between parties Can disrupt operation of the startup

Sharia Compliant Alternatives: Ongoing Participation Keep multiple seats on the BOD or assign key management roles + Increase the spirit of collaboration + Infuse expertise into the startup Create other agency issues with the new agents Can create confusion in terms of internal hierarchy and boundaries of responsibility Founders may feel that they have lost control

Sharia Compliant Alternatives: Phased Investing The private equity firm makes a commitment to buy a % of the company once a predefined metric is reached + Increases incentive for co-founders to maintain performance Founders may reach out to other investor May not align with the timeline of the investors

Proposed Solution Setup a Musharakah structure Seat on the board – Monitoring & Guidance Incentive plan – Staged profit incentives Penalties in case of misuse Revision of books by 3rd party auditor Contract stipulates introduction of new management to work with the entrepreneurs Small IT company – want to maintain the incentives Monitoring is important as the entrepreneurs may not have the necessary knowledge to achieve the most efficient outcome An incentive plan must be put in place

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