US fund managers can tap growing investor appetite in Malaysia and the Gulf Cooperation Council (GCC) nations if they can navigate structuring and cultural challenges, says Marc van Rijckevorsel.

The global Islamic finance market has been growing strongly, buoyed by a rising Muslim population seeking Shariah-compliant financial instruments and the industry's ethical credibility. It recorded a compound annual growth rate of 7.8 per cent between 2014 and 2019 and it is projected that Islamic finance assets will rise to $3.69 trillion by 2024, with growth driven by both Muslim and non-Muslim countries.

Through our office in Dubai, we see a growing number of US fund managers increasing their fundraising efforts in the region, including hiring locally to promote investor relations. The US is still seen as top of the bill for sophisticated, specialist fund managers and so is a favoured destination for capital rich investors from Malaysia and the GCC region, especially those from Saudi Arabia, Kuwait and the United Arab Emirates. These investors are seeking yield for big ticket items, including in the US.

These investors have limitations on the investments they can make in order to comply with Shariah principles, which not only rules out investing in things like alcohol and gambling, but also prohibits the receipt of interest payments. That means GCC investors tend to favor real assets in property and infrastructure.

Islamic finance structuring needs

Since these investors need to comply with Shariah principles, a manager can obviously opt to set up a Shariah-compliant fund structure to specifically attract investors that require this, and we have a dedicated Islamic finance team that services many of those types of funds.

However, it is not essential for US fund managers to go down that route. What we increasingly see is US fund managers attracting investors and then setting up a specific feeder structure tailored to enable the Shariah-compliant investor to invest into the fund. Approximately 80 per cent of the time these investments are structured that way, with the legal adviser designing a structure using SPVs in for example, Cayman or Jersey to facilitate investment into the main US or Cayman fund structure.

Typically, the servicing of these structures is outsourced to providers like Ocorian and their fees are paid by the investor, so it's not something that the US fund manager must bear the cost of.

How to navigate the Islamic finance market

The private capital environment continues to grow in popularity and large fund managers are tapping into new investor bases all the time. Most US fund managers see growing competition for capital and are looking to expand their investor bases into regions such as Malaysia and the GCC, a market that will continue to present compelling opportunities.

Although regulatory challenges are less of a hurdle for US managers looking to fundraise in the GCC than say, Europe, managers face different challenges in accessing capital in a market that has distinct cultural nuances and structuring requirements. In the GCC region, US fund managers will benefit from working with the right service providers, whether those are legal advisers, placement agents or fund administrators.

Supporting fund managers establish Shariah-compliant investment structures

Our specialist Islamic finance team operates globally and has a strong understanding of Shariah-compliant structures and can incorporate and service bespoke Islamic finance backed structuring solutions for a broad range of asset classes. Our clients have successfully launched a range of Shariah-compliant structures, acquiring assets across the UK, Europe and the US.

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