The European subsidiary of Bahraini Islamic bank Al Salam, which last week bought prime real estate in London's financial centre, will focus on private equity rather than property, its CEO said. Mohammed Paracha told Reuters Al Salam Europe is shopping around for Continental European mid-cap private equity deals in Spain, Portugal and France.
-- Focusing on mid-cap French, Iberian private equity
-- Aims at private equity deals in $50m-$70m range
-- Seeking returns of 20-25pc a year
It has also considered Italy and nearly sealed a deal in the UK, which fell through, he said, declining to elaborate. London-based Al Salam Europe was set up in January, in line with the Islamic bank's expansion plans. Western countries with Muslim populations are seen as a key growth area for the Islamic finance industry, whose assets are estimated at up to $1 trillion.
Al Salam acquired London Milton Gate office tower from UBS Triton Fund in a deal worth more than $220 million. That deal reflects the relatively weak sterling as well as low property valuations, Paracha said, adding it does not represent the core of the bank's European activities.
"The purpose of us being here primarily is private equity and it is reflected in our deal team, we have recruited expects with background at 3i, Bridgepoint," Paracha said.
"Real estate is something we cannot ignore because GCC (Gulf Co-operation Council) investors do like it, so we will look at real estate," he said. Real estate and private equity are seen as the mainstream finance asset classes lending themselves best to the principles of Islam, which encourages a split of risk and rewards between investors and entrepreneurs as well as the use of tangible assets. Both real estate and private equity deals will be considered by the Western Europe private equity unit of six, whose members Paracha declined to name.
Depending on markets' development, the executive could recruit a further team, either dedicated to the European emerging markets or the United States. Paracha said this decision will be made in November, when the bank's annual strategy is reviewed.
Paracha, a former lawyer with firm Norton Rose, said Al Salam was eyeing a number of private equity deals across different Islamic compliant sectors. These sectors included aviation - especially logistics and cargo handling - renewable energy and some niche services in the shipping sector. Islam forbids involvement in sectors such as alcohol, gambling and pornography. It also forbids speculation. "We have been inundated because our selling point is we can write a cheque and not rely on leverage," Paracha said.
At the end of the first quarter, the bank had assets of just over 600 million Bahraini dinar ($1.59 billion). "When you have a balance sheet of $1.5 billion and you are only going in the mid-market writing an equity cheque of $50 to 70 million you can do quite a lot of deals," he said. The bank is interested in deals yielding annualised returns of 20 percent to 25 percent.
Private equity firms traditionally target returns of about 20 percent a year, but have seen those targets hit by the credit crisis and falling company valuations.
"There are many opportunities in the market, but for us it is about doing a few but very good deals," Paracha said. Paracha said Middle East investors are potentially interested in Europe, but they are beginning to require dividends, as a reward for their commitment. "People will put their money in if we can demonstrate we can deliver dividends. Previously investors were happy to lock their money for two or three years. Now this is no longer the case in the Middle East," he said. Al Salam Bank-Bahrain was listed on the Bahrain Stock Exchange in 2006 and on the Dubai Financial Market in 2008.
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