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News & Events

Kellogg grad highlights global trends in private equity

Andrea Roe ’07 outlines investment dynamics, challenges for Middle East firms

By Aubrey Henretty

2/7/2008 - Supply and demand are not the only laws impacting investment decisions for some, including Bahrain-based private equity firm Arcapita.

Andrea Malik Roe '07, principal for investment firm Arcapita, spoke about trends in the Middle East's private equity industry.
Photo © Rich Foreman
“Back in the ’70s and ’80s, the Middle East was basically viewed as a dumping ground for private equity,” said Andrea Malik Roe ’07, a principal in Atlanta office of Arcapita, the investment arm of Arcapita Bank.

Roe, the latest guest of the Kellogg School’s Distinguished Private Equity Investor Speaker Series, spoke Feb. 6 in the Donald P. Jacobs Center. Her presentation, “Middle East Private Equity Goes Global,” focused on the difficulties private equity firms have traditionally faced in the Middle East and the ways some firms are beginning to overcome these hurdles.

The event was sponsored by Private Equity and Entrepreneurship at Kellogg, the Middle Eastern and Arabic Business Association, and the Heizer Center’s Institute for Private Equity and Venture Capital.

According to Roe, the string of bad funds offered up to Middle Eastern investors in the 1970s and 1980s led the investors to shy away from private equity funds and to demand more control over their portfolios. One reason Arcapita (which changed its name from Crescent Capital Investments in 2005) has been so successful — with more than $21 billion worth of completed transactions — is that its structure allows individual investors to dictate exactly where their money goes. “We are a bank,” she said. “We have our own cash lines, our own balance sheet.” Operating as a bank also relieves some of the pressure traditional firms feel to close deals quickly. “We can be a little more patient,” she said.

Another feature that distinguishes the firm from its regional predecessors, said Roe, is its careful adherence to Shariah — Islamic religious law — in each of its transactions. Because many investors in the region follow Shariah, Arcapita consults with a board of Islamic scholars before sealing any deal to make sure the companies the firm supports are Shariah compliant.

Some provisions are clear-cut, but others are not. Roe considered the prohibition against gambling: “If it’s a game of chance, you can’t do it. If it’s a game of skill, you can.” Knowing this, Roe once asked the scholars whether a carnival weight-guesser would be compliant. “Is that a game of chance?” she asked.

“Oh, no,” they told her. “That’s a game of skill.”

The gambling restriction may not place too many constraints on investment opportunities, but other Shariah rules do. Media companies are usually unacceptable because they may produce “suggestive” content, which, Roe noted, is nearly impossible to quantify. “Pork and alcohol usually rule out restaurants,” she added, but there are exceptions, and Arcapita has invested in a few, including Caribou Coffee and Church’s Chicken (known in the Middle East as “Texas Chicken” for cultural reasons).

More than the stipulations concerning diet, purity and entertainment, the Shariah position on moneylending has historically kept private equity at bay. “One of the main principles of Shariah is [that] you can’t lend money to make money,” said Roe, explaining with a flowchart how the profits the firm’s clients reap are not directly linked to the money they invest. Asked by a student whether this exercise was not simply a “shell game,” Roe emphasized that the firm’s cash flowchart was the result of many meetings with Shariah scholars and many rejected drafts.

Roe said Arcapita, founded in 1997 as First Islamic Bank, is looking into starting a co-investment fund in the United States. In January, the firm purchased Texas-based Bosque power generation facility, an 800-megawatt natural gas-fired plant, for $695 million, which represented its largest acquisition to date. Besides Bahrain and Atlanta, Arcapita has a branch in London.