1. Charlene Liu Mohammed Aman Negar Mokhtarnia Ahmed Nasir

2. 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

3. 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

4. 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

5. 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

6. 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

7. 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

8. 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

9. Thank You