It may have been a little slow in arriving, but it was well worth the wait. For project sponsors and developers throughout the Islamic world a new source of finance has arrived. For investors, a new, flexible, Islamically structured path to participating in infrastructure developments has been cleared. On 15 January, the $1,500 million IDB (Islamic Development Bank) Infrastructure Fund was formally launched, having completed the first phase of its fund raising (MEED 21:12:01).
Leading the initiative has been IDB and Geneva-based Dar al-Maal al-Islami Trust (DMI), both of which have committed $200 million or more to the fund. Further weight, and political critical mass, has been added by the participation of the government of Brunei Darussalam, the Saudi pension fund and the State of Bahrain, each of which have committed $100 million or more to the vehicle.
'We have a very strong group of lead sponsors, and this was the aim for the first phase of fund raising,' says Mumtaz Khan, chief executive officer of Emerging Markets Partnership (Bahrain - EMP), the principal adviser to the fund. 'We will go to the state sector in other IDB member countries first and then to the private sector.' The second phase is expected to be completed by the summer and the private sector marketing by the end of the year. With $980 million already raised, and the private sector and a large number of governments still untapped, the chances are that the 10-year fund will exceed its $1,500 million target.
Despite heavy state and parastatal involvement, the IDB Infrastructure Fund is a private sector vehicle aiming to deliver private sector returns. 'We are aiming for capital appreciation of 18 per cent per annum net, on an IRR [internal rate of return] basis from the equity side of the fund,' says Michael Lee, EMP's managing director.
The fund is divided into two, legally separate tranches. The first is aiming to raise $1,000 million for equity investments and the second, the complementary finance facility (CFF), is targeting $500 million. The initial $980 million raised includes $780 million-worth of commitments to the equity tranche and $200 million to the CFF.
The equity tranche will be invested over the next four to five years in infrastructure projects in any of the 53 member countries of IDB. The main target sectors will probably be petrochemicals, power, water, telecommunications and transport. 'Our geographical spread will be determined by the availability of high-return projects and a secure legal environment, as can be found in, for example, the GCC, Brunei and Malaysia,' says Khan. 'We do have a number of parameters ensuring good diversification: no more than 20 per cent of the fund can be invested in any one country; no more than 10 per cent of the equity tranche can go in a single project; and we won't take more than a 40 per cent position in the equity of a single project.'
There will also be diversification in the point of entry into different projects. 'Initially we will be less constrained, but overall we want a blend of greenfield and brownfield projects, some privatisations and we will also take positions in listed companies,' says Khan. 'Our aim is to generate returns and this will dictate where, when and how we invest.' With this in mind the fund will be seeking a diversified risk profile with possibly some solid power projects with IRRs of 12-15 per cent forming the base, and telecommunications investments at the other end of the risk spectrum.
The CFF component brings an innovative dimension to the fund, offering an Islamically structured underwriting capability to support the equity investments made by the fund. With Shamil Bank of Bahrain, which has taken a 40 per cent stake in EMP, acting as adviser on the CFF component, the fund will have a lead arranging capacity.
'We will, on a best effort basis, aim to promote the use of Islamically structured finance in projects the fund takes equity positions in,' says Lee. 'The CFF will be able to promote Islamic finance, underwrite it and syndicate it.' Although not its primary objective, the CFF is likely to advance the cause of Islamic project finance. Since the landmark Islamic tranche in the 1996 financing of Kuwait's Equate Petrochemical Company, the development of the market has been limited to a handful of sporadic deals, such as on the Thuraya satellite and Shuweihat independent water and power project (IWPP) finance packages. Just as the IDB Infrastructure Fund will be offering project sponsors and developers an alternative equity-financing option, so the CFF could improve access to Islamic project finance.
With the fund's investment rules suggesting that the equity capital will be used to take, on average, 25 per cent equity stakes in about 30 projects, the multiplier effect is considerable. Assuming that the equity is invested in projects with a typical 75:25 debt:equity ratio, the $1,500 million fund could be encouraging and facilitating total ancillary equity and debt investment of about $14,500 million.
For this reason alone, the fund will be well received by IDB members. For project sponsors, there is a substantial new pool of cash looking for a profitable home.
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