Private Market Investing for Growth and Income

We spoke to individual investors on the reasons for investing. Their answers were very clear and split into two categories, with some exceptions who expect a mix of both:

1. Growth. They want the wealth they’ve created to be invested for the long term. It should grow to benefit them in retirement or to help their children and future generations.
2. Income. Whilst they wish their wealth to grow, they also have some more shorter-term commitments. They want some support for living expenses or additional income to supplement their current salary or other sources of income.

The Benefit of Higher Returns – And More

Their reasons for investing were clear. But importantly, they also want their money to work hard for them. They want to see a return on their investments ahead of what is normally achievable – both in terms of deposit accounts but also away from the inherent volatility readily witnessed in public markets.

Investing in private markets provides this opportunity. With returns historically outperforming public markets and structures more in line with Shariah values, private markets offer a better alternative.

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For investors focused on growth, the top-ranked private equity funds have at least doubled their investment value over historic periods. For those focused on income, they can now choose funds that target annual returns in excess of 6%, which is considered reasonable in the current economic environment.

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But private markets offer other benefits too.

They provide stronger control over performance, steady valuations, and low portfolio volatility for investors. Additionally, it gives Shariah-compliant investors more opportunities to diversify their wealth while lowering their overall risk.

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Challenges – and their solutions

Accessing the most popular and best performing growth and income investment funds is not easy. There are two reasons for this:

1. They are not necessarily Shariah-compliant.
2. They require significant investment to be accepted into the fund.

However, by using digital platforms managed by experienced experts these challenges could be overcome by:

1. Targeting the best funds and then working closely with the fund manager to adapt the fund's strategy for Shariah guidelines.
2. Pooling together resources from several investors, which makes access into such funds possible.

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Overcoming the issue of interest income

Given that making money from money is not allowed in Shariah-complaint investing, additional complications arise when investing in private income funds. Although, that’s not to say it isn’t possible. There are income managers who can deliver robust and safe returns with a Shariah-compliant approach.

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Fund Structures – What You Should Expect 

Private Equity growth funds that are Shariah-compliant invest in relatively mature private companies without utilizing debt. The better opportunities are managed by fund managers who have a strong historical performance.

Investing in private equity growth funds is a long-term commitment, typically 10 years or more and with the likelihood of no return before the 6th year. However, payments into the fund are made gradually, dependent on when the fund manager calls for each capital instalment. That said, with long-term commitments come expectations of higher returns.

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Private income funds, which are structured to provide income, can be open-ended funds. This allows new investments in the fund throughout its lifetime, and equally would enable you to exit should you wish to redeem your investment. As such, these funds provide more liquidity than private equity funds whilst delivering income periodically, but are also likely to offer a lower return than private equity funds, albeit still strong.

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Author

Saad Adada, CFA