Our Investment Process
When sourcing investments, we receive numerous investment referrals from our extensive network. These sources include proprietary relationships, direct approaches from partners/sellers, referrals from specialist intermediaries, dialogue with investment banks and follow-on transactions within the portfolio.
Our key investment criteria in assessing prospective investments include:
- The investment’s compliance with our ethics and Shari’ah principles
- The alignment with our investors’ preferences and needs
- The ability to generate the targeted returns over the investment holding period
- The ability to achieve a desirable capital structure including obtaining sufficient financing from external financiers
- The compatibility of the investment with our portfolio (i.e. diversified in terms of sector and geography, relevant to our expertise and track record)
Investment Process Flow
FINDING, EVALUATING AND CLOSING
- Test industry structure, competitive position
- Assure solid market competitive due diligence
- Evaluate management team
- Identify potential candidates for senior management needs as necessary
EARLY OWNERSHIP 100-day plan
- Define / review initial strategy and specific action plans
- Conduct early workshop to assimilate company into Arcapita and gain consensus around goals and expectations
- Use 100 days to refine / confirm plans Develop incentive compensation plans tied to desired results.
PRIMARY VALUE CREATION PERIOD
Review key processes
- Review performance against financial and operating metrics regularly with executive leadership
- Identify staff and monitor key projects
- Build capabilities within companies to improve key processes
- Assess / strengthen company leadership teams
- Agree to annual management objectives and compensation plans
- Share best practices from across portfolio
- Optimize earnings and overall financial performance
- Assist in identifying exit options and strategies
- Document and apply lessons learned from previous exits (e.g. IPOs, divestitures) in preparing for future exits
After the initial screening to determine which opportunities meet our investment criteria, the investment teams conduct in-depth due diligence on the most promising opportunities. During the due diligence stage, the investment team conducts extensive research on multiple aspects of the potential investment; these include but are not limited to, market opportunity, partner background and capabilities, and investment fundamentals. This process draws on expertise from our internal investment teams, senior management and a network of third-party experts and advisors.
Representative Due Diligence Criteria
In the early stages of the investment process, each new investment proposition is presented to the Market Sounding Group. The Market Sounding Group takes an active role during the investment sourcing process to facilitate convergence between our investment products and prevailing investor sentiment. During the review, the relevant investment team discusses the opportunity with our Investors Relationship Management team and other members of senior management, thus allowing us to formulate a preliminary understanding on how a potential investment product would be perceived by our investor base. If the proposed investment gains the Market Sounding Group’s approval, the investment team continues to pursue the opportunity before presenting it to our Investment Committee and Executive Committee for approval. Concurrently with the Market Sounding Group’s approval, the investment is reviewed by our Shari’ah Supervisory Board, which ensures the investment is compliant with our ethics and Shari’ah principles. Subsequent to Investment Committee and Executive Committee approval and depending on the size of the investment, transactions are approved by the Board of Director’s Executive Investment Committee. We submit binding bids on investment opportunities only after Investment Committee, Executive Committee and Executive Investment Committee approval.
Internal Investment Screening Framework
Investment teams originate investments via:
- Investment banks / other advisors
- Direct approach to partners / sellers
- Referrals from finders
- Personal contacts
- Public information
- Based on investment criteria
Investment teams study prospective investments:
- Study, discard or pursue the remaining investments that are not rejected
- Conduct preliminary due diligence
Market Sounding Group:
- For investments that match Arcapita’s strategy, the MSG will provide insight on investor appetite
- If MSG approves, the investment team starts engaging advisors for due diligence
Due diligence will always be conducted with the help of specialists:
– Financial Advisors
– Legal firms
- Valuation based on approved market methodologies
- Detailed report produced for management approval if diligence is successful
IC, EC, and EIC DECISION
- IC and EC evaluate the merits and risks of the investment, as well as the overall fit within Arcapita’s portfolio
- EIC, a sub-committee of the Board of Directors, discusses only those investments that the IC and EC approve
Once a transaction has been approved and completed, it passes into the portfolio, where its performance is closely monitored against the investment thesis. The portfolio management team function plays an important role in ensuring that investments achieve their full potential. A cross-functional team of portfolio management and investment professionals works with management of the company to plan business strategy and how to implement it. During the holding period, this portfolio management function helps the portfolio companies with clarifying strategic and operational matters such as recruitment of senior management, developing the supply chain and infrastructure as well as introducing additional financial and reporting disciplines.
The portfolio management team monitors a range of monthly key performance indicators (KPIs) against the deal’s original investment thesis, and assesses the management’s performance. The team maintains close contact with company management teams through quarterly board meetings.
The firm aims to exit most investments within three to seven years. However, if an attractive opportunity for exit occurs, we will support an earlier exit. Similarly, we may extend the holding period to avoid exiting at an inopportune time or to otherwise enhance investor value. Exit may be by way of trade sale, initial public offering or recapitalization depending on which route offers the greatest return.