The potential for sharia-compliant agri funds

There is huge demand for agriculture investments in the Middle East, but the $1.2 trillion Islamic finance market needs more suitable products in the sector, according to Saif Shawqi, assistant business developer at Shariyah Review Bureau.

Often, profitable investments are those which meet the most important requirements of the world; food, water and fuel, to name a few. Middle Eastern investors know this very well and exacerbated by the pursuit for higher profits, capital preservation and food security, investors in the oil-rich region have increasingly sought suitable agricultural investments.

There are a few on offer in the region. Sidra Capital, one of Saudi Arabia’s leading Islamic investment banks, hit the news when it opened up the largest Islamic-structured trade finance fund in the world. It specifically invests in agricultural commodities, energy and metals.

“The first tranche of the GCC (Gulf Cooperation Council) investors came with $50 million and we think there will be more and more of this to come through,” said Hani Baothman, chief executive of Sidra Capital, adding that the fund made an annual return of 9 percent last year.

“It is certainly a success story for us from both a financial and a social perspective. Not only does it offer lucrative and consistent returns to investors, but it also promotes socially responsible investment,” added Danial Mahfooz, manager at the firm. Commenting on the firm’s motivation to deal in agriculture commodities, Danial replied. “We realised that small-to-medium size companies fall outside of traditional banks’ balance sheets focus and end up under-serviced. We saw an opportunity to work closely with these businesses to deeply understand their needs and provide tailor-made funding accordingly.”

SEDCO Capital, another major private Islamic wealth management organisation in Saudi Arabia, has also positioned agriculture in its portfolio by launching a sharia-compliant agribusiness fund which has already raised $35 million of a $150 million overall target.

Typically a fund of funds investment firm, SEDCO is invested in Insight Investment’s Global Farmland Fund and AGF Latin America. Over its 20 year history it has made 60 agribusiness investments globally.

Another active investor in the region, and one of the most active agri investors globally, is Hassad Food, the wholly-owned subsidiary of Qatar’s sovereign wealth fund. The company has a mandate to run a profitable business as well as to contribute to Qatar’s food security programme.

Hamad Al Saad, advisor at Hassad Food, explains their journey. “We have invested in Australia, Pakistan and Oman. The performance has been very good and agriculture for us has been a success story. We have invested successfully in foreign soils and we are now reaping the benefits after seven years of start-ups.” He believes that agriculture presents tremendous opportunity in the future. His rationale: “Food is important all the time.”

There are numerous opportunities outside of the region and there are countries positioning themselves to attract capital Middle Eastern investors, such as Turkey.

With the hope of attracting capital from the Gulf region, Turkey has begun to position itself as a major halal food producer by abolishing taxes for investors from region; this was previously a major disincentive for Gulf nationals and organisations to invest in the country. Now that the doors are open for investment, two successful Middle East & North Africa (MENA) investment houses have decided to test the country’s waters.

And some leading investment firms such as Dubai’s Abraaj Capital have invested in the country’s agri sector. Abraaj bought an 80 percent stake in the Yorsan Group, Turkey’s fourth largest dairy producer, and Bahrain’s Investcorp owns a 25 percent holding in Namet, a Turkish meat producer.

Firms from further afield have also successfully attracted capital from family offices in the MENA region, including Aquila Capital, the German alternatives investment manager. “As more managers like ourselves deliver strong track records, we believe more capital will flow. This will mean that early investors will be well rewarded. Agriculture is in a similar place to where infrastructure was 15-20 years ago,” said Andrew Sliper, senior vicepresident.

London is a leading capita for agriculture investment funds including several listed equity funds focused on the sector, such as Brooks Macdonald Funds and First State Investments.

“For the past five and a half years since we launched the agricultural fund, we have witnessed the expansion of the agricultural sector with IPOs and capital raisings, we have seen both demand for food and production rise and interestingly also global trade has increased as many developing countries do not have the ability to increase their domestic production to meet demand. Our expectation for demand growth has materialised and has underpinned faster earnings growth of the sector,” said Skye Macpherson, portfolio manager at First State.

But more needs to be done to ensure these products are suitable for the vast majority of Middle Eastern investors because with the prominence of Islamic finance in the region, many institutional investors and high net worth individuals will only invest in a product if it is classified as sharia-compliant.

Our vision is to create a world where food is readily available at affordable cost by assisting, building and promoting food production initiatives through sharia-compliant and cost effective options. In the past 10 years, we have assisted agribusinesses such as Canada’s AGInvest Properties, SCS Farmland from UK and Treedom in Hong Kong in producing sharia-compliant investment products.

With the vast amount of liquidity available to tap and Islamic financial markets worth $1.2 trillion, more agriculture funds should consider exploring sharia compliance to supply a wealth of demand from the Middle East.