US, Middle East investors keen on distressed assets

By Habhajan Singh
A Malaysian Shariah advisory body is advising a number of fund managers from the United States and the Middle East who are keen on managing distressed assets in a manner compliant with Shariah — another new innovation being injected into the fast growing field of Islamic finance.
These funds managers, believed to have an estimated average fund size of US$500 million (RM1.83 billion), are keen to pick up distressed assets, following the economic downturn, to form funds that will be used to tap Islamic investors.
"We've been approached to structure products to enable the fund managers to launch their funds. "They want to structure Islamic funds for distressed assets," said Amanie Business Solutions Sdn Bhd CEO Dr Mohd Daud Bakar.
Managing distressed assets via a mechanism in line with Shariah law is one of the latest developments in Islamic finance. In recent years, Islamic finance has caught the attention of global investors and has expanded into providing sophisticated financial products like private equity, project finance, origination and issuance of sukuk, as well as fund, asset and wealth management products.
"Due to the global crisis, we now have many distressed assets. Hence, this is a 'timely' product. Its not a product of all seasons," said Mohd Daud, who also chairs the Shariah Advisory Council of Bank Negara Malaysia (BNM).
These funds are new because of the time frame, and the Islamic finance fraternity has never had the chance to manage distressed funds, Mohd Daud said on the sidelines of the one-day seminar
"Potentials and opportunties in Islamic asset management post-2008 global financial crisis", organised by Amanie in Kuala Lumpur yesterday.
"The target market for the funds are Shariah-compliant investors. Hence, you have to ensure that the assets that go into the fund are Shariah compliant. We have to avoid hotels and some warehouses," he said.
"We have to screen the assets for them, put in the right structures and help advise cash management of the fund.
"The bottomline is, the money will go into assets that are perceived to be undervalued, in hopes that they will go up in value," Mohd Daud said.
He added that no local fund manager has approached them for the Islamic method to handle distressed assets.
"Once structured, I believe this product can be applied in Malaysia as well if investors are keen and well versed with properties," he said.
Fund managers are already on the prowl for such assets. On Feb 17, Reuters reported that US private equity manager Lone Star Funds, which forged deeper into distressed real estate as the credit crunch took hold in 2008, was raising another US$20 billion for troubled assets.
Half of the new cash will be earmarked for commercial real estate, including commercial mortgage-backed securities while the other portion will be invested in financial institutions and other distressed assets, including residential mortgages and corporate debt.
Yesterday, Amanie also launched its stock screening solutions targeted at the Islamic investment and financial community.

(This story appeared in The Malaysian Reserve on Feb 19, 2009. The Malaysian Reserve is a daily business/finance newspaper published out of Kuala Lumpur, with a sectoral page on Islamic finance on Mondays, edited by Habhajan Singh)