COMPARISON OF THE ISSUANCE PROCESS FOR SUKUK, IPO, AND PRIVATE EQUITY.
Introduction
Investors seek for private equity (PE) funds more than they seek for unit trust and sukuk as it can help them generate higher returns than those available in public equity markets. The definition of private equity (PE) is, the investment of cash into a private firm with the potential for exponential growth, allowing the investor to profit financially from the company's later sale. As a result, it is illiquid and often kept over a medium- to long-term horizon. Investors also give knowledge and advice to help the company maximize its growth potential to produce value. Individual or isolated private company acquisitions in this manner are referred to as private deals. Therefore, the comparison of the issuance process for Sukuk, IPO, and Private Equity are explain as follows: -
Issuance Process:
1) Sukuk
Investors seek for private equity (PE) funds more than they seek for unit trust and sukuk as it can help them generate higher returns than those available in public equity markets. The definition of private equity (PE) is, the investment of cash into a private firm with the potential for exponential growth, allowing the investor to profit financially from the company's later sale. As a result, it is illiquid and often kept over a medium- to long-term horizon. Investors also give knowledge and advice to help the company maximize its growth potential to produce value. Individual or isolated private company acquisitions in this manner are referred to as private deals. Therefore, the comparison of the issuance process for Sukuk, IPO, and Private Equity are explain as follows: -
Issuance Process:
1) Sukuk
There are three conditions that must be met for a Sukuk to be considered Sharia-compliant. In the beginning, the certificates must represent ownership of tangible assets, usufructs, or services from revenue-generating firms. Second, payments to investors are made from after-tax profits, and third, the value repaid at maturity should be based on the current market price of the underlying asset, rather than the amount originally invested.
Fundamentally the parties in Sukuk issuance are the firm (the obligor or originator), the Special Purpose Vehicle (SPV), and the investors that buy the Sukuk. Essentially, when the investors invest in Sukuk, their money is put into the assets of a project or investment in order to generate profit. The investors receive a margin of that profit based on a pre-agreed ratio. When investors buy Sukuk and become Sukuk holders, they receive a certificate from the issuer to evidence ownership and are entitled to receive periodic profit payments on the principal amount invested. Upon maturity, the Sukuk holder will get back the principal amount of investment. As with most Islamic financial instruments, there are different methods of issuance in Sukuk. For instance, the periodic profit payments may come in the form of mudharabah (profit-sharing), musharakah (profit-loss sharing), murabahah (cost-plus sale), al-wakalah (investing through an investment agent), and ijarah (leasing).
Next, Sukuk also has benefits compared to bonds. The following are some of the Sukuk advantages: Sukuk is a tradable capital market asset that offers fixed or variable rates of return over a medium to long term. International rating organizations review and rate it, which investors use as a guideline when evaluating the risk or return parameters of a Sukuk offering. During the investment period, it has regular periodic income streams, easy and efficient settlement, and the possibility of capital appreciation of the Sukuk. Finally, Sukuks are liquid securities that can be traded on the secondary market.
In Sukuk, there are basic requirements of a Sukuk issuance, as mentioned before. Here the main parties involved in the whole process include:
(a) the Originator, which is the company wishing to raise
and needs funds.
(b) the Issuer of the Sukuk, which will be an existing or a newly incorporated special purpose vehicle and a bankruptcy-remote entity, separate from the originator, which issues the Sukuk certificate.
(c) the Lead Arranger/Manager, which is the party arranging/managing the whole Sukuk process.
(d) the Trustee is an appointed party to represent and oversee the rights of the Sukuk holders from the beginning of the arrangement of Sukuk issuance until the full redemption of the Sukuk by the SPV.
(e) the Sukuk holders, who are the investors who invest in the project, and who hold the Sukuk certificates as evidence of their investment in the Sukuk.
(b) the Issuer of the Sukuk, which will be an existing or a newly incorporated special purpose vehicle and a bankruptcy-remote entity, separate from the originator, which issues the Sukuk certificate.
(c) the Lead Arranger/Manager, which is the party arranging/managing the whole Sukuk process.
(d) the Trustee is an appointed party to represent and oversee the rights of the Sukuk holders from the beginning of the arrangement of Sukuk issuance until the full redemption of the Sukuk by the SPV.
(e) the Sukuk holders, who are the investors who invest in the project, and who hold the Sukuk certificates as evidence of their investment in the Sukuk.
Meanwhile, there are also third parties involved in the process, such as the Shari’ah advisor to verify the Shari’ah compliance of the while Sukuk structure, the legal solicitors who draft the legal documentation for the Sukuk, and also the accountants and auditors for preparing and verifying the financial statements involved in the Sukuk. With respect to the necessary steps for the issuance of a Sukuk, the following steps will be involved:
(1) Preparing a detailed feasibility study stating clear objectives to be achieved from the proposed Shari'ah compliant business and setting up of general framework and organizational structure to support the issuance process.
(2) Working out
an appropriate Shari'ah structure to achieve the set objectives in compliance
with Shari'ah.
(3) Arranging the
lead manager to underwrite the Sukuk issue.
(4) Arranging
legal documentation around the agreed Shari'ah structure (both from the
Issuer's as well as the arranger's perspective)
(5) Setting up
the SPV to represent the investors (Sukuk holders).
(6) Obtaining
approval from the Securities Commission.
(7) Putting the
Sukuk into circulation
An initial public offering is when a private firm sells
shares of stock to the general public for the first time (IPO). In essence, an
IPO signifies the shift of a company's ownership from private to public
ownership. As a result, the process of IPO is also referred to as "going
public." Companies that are just getting started or those that have been
in business for decades can choose to go public through an IPO. Companies
usually go public to raise funds to pay off debts, support expansion projects,
increase their public profile, or allow firm insiders to diversify their
holdings or create liquidity by selling all or a portion of their private
shares as part of the IPO.
It is a way of raising equity capital, where shares of a
company are issued for the first time when the company is going public. After
the IPO, when shares are traded freely in the open market, money passes between
different investors. There are many purposes for which businesses issue shares.
For example, an IPO gives the company the ability to raise funds; it gives a
better position to secure business models; and investors feel safer dealing
with public listed companies, as an IPO is an indication of the company’s
strength.
The benefits of an IPO include the ability to raise a big
sum of money for the company's growth, talent acquisition, marketing, and
product and service expansion. An IPO also increases the company's public
exposure and improves its corporate image, reputation, visibility, and
credibility. Aside from the benefits to the firm's name, an IPO provides
financial advantages in future stock or asset acquisitions, as sellers are more
inclined to take actively traded public company stocks than illiquid private
company stocks. It also has the potential to generate a lot of money for the
founders and pre-IPO stockholders. Meanwhile, the downsides of an IPO include
expenses to the company, constraints on company strategy, and public disclosure
requirements. It incurs capital and human resource costs in order to complete
an IPO, which has an impact on the company's cost structure in order to
maintain its status as a public company. As control dissipates across a large
number of stockholders, there is an effective reduction in management
flexibility.
There are many parties involved in an IPO, during the whole
issuance process, which also include:
(a) The
Company, an initial public offering is all about the company. The IPO
process will be highly influenced by the company's senior management.
(b) Investment Banks, the IPO process is overseen by a consortium of investment banks known as underwriters. The underwriters are in charge of preparing the offering documentation, performing due research on the firm and its management team (to ensure there are no skeletons in the closet), creating investor marketing materials, and selling the company's stock in the initial public offering.
(c) SEC, the Securities and Exchange Commission (SEC), oversees the initial public offering (IPO) process. Before the IPO may take place, the SEC must review, comment on, and approve the filings.
(d) Attorneys, attorneys for the company prepare the various documents and oversee the SEC filings.
(e) Accountants, the financial statements, and financial disclosures in the offering documents are prepared by the company's accountants.
(f) Stock Exchange, a stock exchange, is required to list the company's shares (NYSE or NASDAQ). After the initial public offering (IPO), the company's stock will be traded on this exchange.
(g) Pre-IPO Investors, the company's pre-IPO investors assisted the company in growing from a start-up to an IPO-ready company. The founders, friends and family, angel investors, venture capital funds, private equity funds, and strategic investors are examples of these investors. Many of these investors will want to sell their shares at the IPO or as soon as the IPO lockup restrictions expire.
(h) IPO Investors, these are mostly institutional investors who acquire the company's stock in the IPO, such as mutual funds. Some shares are available to regular investors, but institutional investors own most of the stock.
(b) Investment Banks, the IPO process is overseen by a consortium of investment banks known as underwriters. The underwriters are in charge of preparing the offering documentation, performing due research on the firm and its management team (to ensure there are no skeletons in the closet), creating investor marketing materials, and selling the company's stock in the initial public offering.
(c) SEC, the Securities and Exchange Commission (SEC), oversees the initial public offering (IPO) process. Before the IPO may take place, the SEC must review, comment on, and approve the filings.
(d) Attorneys, attorneys for the company prepare the various documents and oversee the SEC filings.
(e) Accountants, the financial statements, and financial disclosures in the offering documents are prepared by the company's accountants.
(f) Stock Exchange, a stock exchange, is required to list the company's shares (NYSE or NASDAQ). After the initial public offering (IPO), the company's stock will be traded on this exchange.
(g) Pre-IPO Investors, the company's pre-IPO investors assisted the company in growing from a start-up to an IPO-ready company. The founders, friends and family, angel investors, venture capital funds, private equity funds, and strategic investors are examples of these investors. Many of these investors will want to sell their shares at the IPO or as soon as the IPO lockup restrictions expire.
(h) IPO Investors, these are mostly institutional investors who acquire the company's stock in the IPO, such as mutual funds. Some shares are available to regular investors, but institutional investors own most of the stock.
Next, the issuance process of Initial Public Offering (IPO):
(1)
IPO Preparation
The earliest stages toward an IPO take place a long time before the actual process begins, frequently two or more years before the IPO. To begin, organizations aiming to go public must assemble a management team capable of leading a public company, including a seasoned Chief Executive Officer and Chief Financial Officer. Furthermore, the organization must have suitable accounting and financial controls and processes in place that are working properly. In addition, the company must have an investor relations team in place to communicate with the market after the IPO. Prior to becoming public, the company must have audited financial data for several years. Furthermore, the issuing firm must select an investment bank to advise it on its IPO and provide underwriting services. The investment bank is chosen based on the following factors:
o Reputation
o Research quality Expertise in the industry
o Distribution. If the investment bank may provide the issued securities to more institutional or individual investors.
o Prior relationship with the investment bank.
(2) Underwriter Selection
The next phase is to choose a group of investment banks, known as underwriters, to oversee the IPO once the firm believes it has the management team, processes and controls, and other elements in place for the IPO. Underwriting is the procedure through which an investment bank (the underwriter) serves as a broker between the issuing firm and the general public in order to assist the issuing company in selling its initial set of shares. This type of interview is referred to as a "bake-off" in the business. The company will conduct interviews with various investment banks to determine which one will lead the IPO, and which will be part of the underwriting group. The company and the lead underwriter will choose the other investment banks that will be part of the underwriting group once the main underwriter has been chosen. Being chosen as the lead underwriter on an initial public offering (IPO) is a significant deal (both financially and in terms of status), and investment banks compete ferociously for these mandates.
(3) The Kick-off Meeting
Following the selection of the underwriting group, a "kickoff meeting" or "organizational meeting" is held. The company's senior executives, underwriters, and lawyers are all present at this meeting. The IPO process, the timing for the process, roles and responsibilities, and legal and accounting issues will all be discussed at the conference.
(4) Drafting Sessions and Filing the Registration Statement
Following the kickoff meeting, a series of meetings are held to develop the IPO materials, also known as the "S-1 registration statement," the "S-1," or the "registration statement," which will be filed with the SEC. Once filed, registration statements for most huge companies become public documents that can be found on the SEC's EDGAR website. However, certain smaller businesses can file their registration statement with the SEC confidentially (as a result of the Jumpstart Our Business Startups Act of 2012).
(5) SEC Review, Road Show Prep, Exchange Applications
The SEC examines the documents and makes recommendations. The registration statement is revised and filed with the SEC when the company receives the SEC's comments. Until the SEC is convinced, the process is repeated. The company prepares for its road show, which is a series of marketing meetings with institutional investors who may acquire shares in the IPO, while the SEC reviews the documents. Creating a road show PowerPoint presentation, a video presentation (which is offered online to institutional and high net worth individual investors), an underwriter sales force IPO summary (which is used by the underwriters' sales forces to generate interest in the company's stock once it is trading on an exchange) and practicing the presentations with the company's management are all part of the road show preparation. The corporation will also decide whether the company's shares will trade on the NYSE or the Nasdaq after the IPO. To list on a certain exchange, specific requirements must be met, such as revenues, assets, and so on. To get its shares listed on the exchange, the company submits an application to the exchange.
(6) The Road Show
The company will go on a road show once the SEC has submitted its comments, the company's registration statements are complete (other than price information), the investment banks have finished their due diligence, and the internal committee approvals have been received. The lead investment bank travels the company's executives across the country (and a few international cities) to meet with institutional investors in order to create interest for the IPO. During this phase, the capital markets group of the main investment bank will contact institutional investors following their meetings to gauge their interest in purchasing the company's stock in the IPO. The capital markets group will keep track of possible investors, including how many shares they are willing to buy in the IPO and at what price per share. The capital markets group creates an "order book" as a result of this procedure, and the investment bank and the company can use this information to determine how many shares to issue and at what price.
(7) Pricing the IPO
The effective date is determined once the SEC approves the IPO. The issuing firm and the underwriter decide on the offer price (the price at which the shares will be sold by the issuing company) and the specific number of shares to be offered the day before the effective date. The offer price is significant because it is the price at which the issuing business raises funds for its own purposes. The following elements have an impact on the selling price:
o The roadshows' success or failure (as recorded in the order books)
o The company's objective
o The state of the free market
IPOs are frequently underpriced to ensure that the issue is fully subscribed/oversubscribed by the general public, even if this means that the issuing firm does not receive the full value of its shares.
If an IPO is underpriced, the IPO's investors expect the price of the shares to climb on the offer day. It raises interest in the subject. Underpricing also compensates investors for the risk they are taking by investing in the IPO. A "good IPO" is defined as an offering that is two to three times oversubscribed.
(8) Stabilization
Following the issue's initial public offering, the underwriter is responsible for providing analyst recommendations, after-market stabilization, and the creation of a market for the stock issued. In the event of order imbalances, the underwriter performs after-market stabilization by purchasing shares at or below the offering price. Stabilization efforts can only be carried out for a limited time, but during that time, the underwriter has the flexibility to trade and affect the issuer's price because price manipulation regulations are suspended.
(9) Transition to Market Competition
Once the "quiet period" imposed by the SEC expires, the final stage of the IPO process, the transition to market competition, begins 25 days after the initial public offering. Investors migrate from relying on statutory disclosures and prospectuses to depending on market forces for information about their shares during this time. After the 25-day period has passed, underwriters can submit estimates for the issuing company's earnings and valuation. As a result, after the issue is made, the underwriter takes on the responsibilities of advisor and evaluator.
The earliest stages toward an IPO take place a long time before the actual process begins, frequently two or more years before the IPO. To begin, organizations aiming to go public must assemble a management team capable of leading a public company, including a seasoned Chief Executive Officer and Chief Financial Officer. Furthermore, the organization must have suitable accounting and financial controls and processes in place that are working properly. In addition, the company must have an investor relations team in place to communicate with the market after the IPO. Prior to becoming public, the company must have audited financial data for several years. Furthermore, the issuing firm must select an investment bank to advise it on its IPO and provide underwriting services. The investment bank is chosen based on the following factors:
o Reputation
o Research quality Expertise in the industry
o Distribution. If the investment bank may provide the issued securities to more institutional or individual investors.
o Prior relationship with the investment bank.
(2) Underwriter Selection
The next phase is to choose a group of investment banks, known as underwriters, to oversee the IPO once the firm believes it has the management team, processes and controls, and other elements in place for the IPO. Underwriting is the procedure through which an investment bank (the underwriter) serves as a broker between the issuing firm and the general public in order to assist the issuing company in selling its initial set of shares. This type of interview is referred to as a "bake-off" in the business. The company will conduct interviews with various investment banks to determine which one will lead the IPO, and which will be part of the underwriting group. The company and the lead underwriter will choose the other investment banks that will be part of the underwriting group once the main underwriter has been chosen. Being chosen as the lead underwriter on an initial public offering (IPO) is a significant deal (both financially and in terms of status), and investment banks compete ferociously for these mandates.
(3) The Kick-off Meeting
Following the selection of the underwriting group, a "kickoff meeting" or "organizational meeting" is held. The company's senior executives, underwriters, and lawyers are all present at this meeting. The IPO process, the timing for the process, roles and responsibilities, and legal and accounting issues will all be discussed at the conference.
(4) Drafting Sessions and Filing the Registration Statement
Following the kickoff meeting, a series of meetings are held to develop the IPO materials, also known as the "S-1 registration statement," the "S-1," or the "registration statement," which will be filed with the SEC. Once filed, registration statements for most huge companies become public documents that can be found on the SEC's EDGAR website. However, certain smaller businesses can file their registration statement with the SEC confidentially (as a result of the Jumpstart Our Business Startups Act of 2012).
(5) SEC Review, Road Show Prep, Exchange Applications
The SEC examines the documents and makes recommendations. The registration statement is revised and filed with the SEC when the company receives the SEC's comments. Until the SEC is convinced, the process is repeated. The company prepares for its road show, which is a series of marketing meetings with institutional investors who may acquire shares in the IPO, while the SEC reviews the documents. Creating a road show PowerPoint presentation, a video presentation (which is offered online to institutional and high net worth individual investors), an underwriter sales force IPO summary (which is used by the underwriters' sales forces to generate interest in the company's stock once it is trading on an exchange) and practicing the presentations with the company's management are all part of the road show preparation. The corporation will also decide whether the company's shares will trade on the NYSE or the Nasdaq after the IPO. To list on a certain exchange, specific requirements must be met, such as revenues, assets, and so on. To get its shares listed on the exchange, the company submits an application to the exchange.
(6) The Road Show
The company will go on a road show once the SEC has submitted its comments, the company's registration statements are complete (other than price information), the investment banks have finished their due diligence, and the internal committee approvals have been received. The lead investment bank travels the company's executives across the country (and a few international cities) to meet with institutional investors in order to create interest for the IPO. During this phase, the capital markets group of the main investment bank will contact institutional investors following their meetings to gauge their interest in purchasing the company's stock in the IPO. The capital markets group will keep track of possible investors, including how many shares they are willing to buy in the IPO and at what price per share. The capital markets group creates an "order book" as a result of this procedure, and the investment bank and the company can use this information to determine how many shares to issue and at what price.
(7) Pricing the IPO
The effective date is determined once the SEC approves the IPO. The issuing firm and the underwriter decide on the offer price (the price at which the shares will be sold by the issuing company) and the specific number of shares to be offered the day before the effective date. The offer price is significant because it is the price at which the issuing business raises funds for its own purposes. The following elements have an impact on the selling price:
o The roadshows' success or failure (as recorded in the order books)
o The company's objective
o The state of the free market
IPOs are frequently underpriced to ensure that the issue is fully subscribed/oversubscribed by the general public, even if this means that the issuing firm does not receive the full value of its shares.
If an IPO is underpriced, the IPO's investors expect the price of the shares to climb on the offer day. It raises interest in the subject. Underpricing also compensates investors for the risk they are taking by investing in the IPO. A "good IPO" is defined as an offering that is two to three times oversubscribed.
(8) Stabilization
Following the issue's initial public offering, the underwriter is responsible for providing analyst recommendations, after-market stabilization, and the creation of a market for the stock issued. In the event of order imbalances, the underwriter performs after-market stabilization by purchasing shares at or below the offering price. Stabilization efforts can only be carried out for a limited time, but during that time, the underwriter has the flexibility to trade and affect the issuer's price because price manipulation regulations are suspended.
(9) Transition to Market Competition
Once the "quiet period" imposed by the SEC expires, the final stage of the IPO process, the transition to market competition, begins 25 days after the initial public offering. Investors migrate from relying on statutory disclosures and prospectuses to depending on market forces for information about their shares during this time. After the 25-day period has passed, underwriters can submit estimates for the issuing company's earnings and valuation. As a result, after the issue is made, the underwriter takes on the responsibilities of advisor and evaluator.
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3) Private Equity
According to Sheikh Taqi Usmani, Islamic Private Equity (IPE) funds are financed by high-net-worth individuals or business families, corporations, and institutional investors. They diversify their portfolios and raise capital in exchange for high returns. There are savings of hundreds of millions of Muslims who still refuse to deposit their savings in conventional banks, and these incredible huge savings have been captured in the last years by IPE funds. Such IPE funds provide financing to a larger range of investments than would be accessible to a single investor. In addition, these investors have lower risks when they are operating as an IPE fund. In contrast with conventional PE funds, IPE funds invest in companies making a halal profit.
Before starting the investment process, it's crucial to understand the three parties involved in private equity investment and their roles:
(a) Individual investors / Limited Partners (LP)
Individual investors are also called retail investors. These people invest in private equity firms with the expectation of a return on their investment. These individuals are limited partners once a firm has invested its capital. Limited partners can include pension funds, institutional investors, and high-net-worth individuals.
(b) Private equity
firms / General Partners (GP)
Also known as general partners, these individuals pool the funds of limited partners and make strategic decisions on how to invest them. Private equity strategies can be divided into three categories: First, an investment in an early-stage startup is known as venture capital. Second, buyouts, in which a mature firm is purchased outright for internal improvement. Lastly, Growth equity is an investment in a middle-stage company's growth. Private equity firms can focus on one of these strategies or invest in all three. Private equity investments have extended time horizons, often no less than ten years, because the return on investment depends on the business's performance.
(c) Companies receiving the investment
Companies invest capital in the expectation of making a profit. Returns are paid to the firm's managers and split among limited partners based on how much money they originally contributed after a set period of time.
There is the process of issuance in Private Equity:
(1) Private Equity firm fundraising
Limited partners (LPs) are the investors, and the PE company will operate as the general partner. For an Islamic PE fund investing in a PE firm, the best way to invest in a PE firm is through a combination of musharakah and wakalah, in which the fund forms an informal partnership with the firm and hires the firm as its agent to invest its capital in various activities. In most cases, LPs merely offer capital and aren't involved in picking which businesses to invest in. The GPs decide that. However, if the LPs are dissatisfied with the GP's performance, they may decide not to invest in the PE fund again.
(2) Deal generation
Any PE firm needs to be able to make many deals to stay in business. The most successful firms have access to networks that let them choose who they want to invest in first. This is because businesses and companies looking for funding prefer to work with firms that have a history of creating value and successfully launching and selling investments. Smaller businesses may need to use online marketing tools, ask potential clients to send proposals, or even make cold calls.
(3) Initial screening
An initial screening would give the PE firm an assessment of the type of ' fit ' that the proposal might have. The primary focus at this stage would be the business plan and the overall industry outlook, particularly regarding global, regional, and domestic potential for growth. At this stage, Shari'ah sectoral and financial screening must also be conducted to ensure suitability.
(4) Due Diligence
Due diligence is a process that involves checking facts and information about a certain subject by doing an investigation, review, or audit. The financial evaluation is the most important thing to think about in buy-out, growth, development, and turn-around activities. Valuation comes at the end of due diligence after all the other checks on the proposal have been passed. For a company with a track record, having historical data is helpful. Using a price-earnings ratio or the company's book value to figure out how much the company is worth. For a business without a track record, the discounted cash flow (DCF) method would need to be used to make projections. In Islamic PE, a notional "profit" rate might be used if the DCF method is used. If not, any other method that works can be used to figure out how much an enterprise is worth.
(5) Structuring
Once a proposal has been approved for investment, it is necessary to negotiate and structure the deal with the investee. Conventional PE may use outright equity, preferred stock, debt, or convertible debt-to-equity instruments. It has been suggested that for VC or buy-out capital, the PE firm-investee partnership may take either the musharakah and mudarabah structure with an understanding that the partnership will be terminated or exited when the company is sold. From the Islamic perspective, the structure of mushärakah and mudarabah can be utilized.
(6) Post Investment monitoring
Post-investment monitoring is an extension of investigation due diligence services. Its focus at this stage is to drive the business plan for the company.
(7) Exit
Even though this is the last step in the process of investing, the strategy will usually include an exit plan for each acquisition. The private equity fund will then look for buyers for their investments, and PE firms buy businesses with the goal of selling them for more than what they put into them. A typical timeframe of an exit ranges between five and seven years. Several forms of exit can occur for an investee company: initial public offering (IPO ), mergers and acquisitions ( M & A ) with another company, and private acquisition.
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Comparison the issuance process for Sukuk, IPO, and Private Equity.
Conclusion
To conclude, all three, which is Sukuk, IPO, and Private Equity are different from each other in every way, but in this study, we explain more about the comparison among them according to their issuance process. As for Sukuk, the first step to do is to set up the general framework and organizational structure to support the issuance process. Then, the process of working out an appropriate Shari'ah structure, arranging the lead manager to underwrite the Sukuk issue as well as arranging the legal documentation around the agreed Shari'ah structure from both the Issuer's and the arranger's perspective, setting up the SPV to represent the investors. And lastly, putting the Sukuk into circulation.
Therefore, for Initial Public Offering (IPO), the purposes for which businesses issue this share, are because it gives the company the ability to raise funds, gives a better position to secure business models, and making investors feel safer dealing with public listed companies, as IPO is an indication of the company’s strength. The issuance process for IPO starts with the IPO preparation, underwriter selection, the kick-off meeting, drafting sessions and filling the registration statement, SEC review, road show prep, exchange applications, the road show, pricing the IPO, stabilization, and ends with the process of transitioning to market competition.
At last, for Private Equity (PE), the purpose of it is to give the investor an opportunity to realize huge returns upon the sale of the company later. Thus, the issuance process for Private Equity goes by the Private Equity firm fundraising, deal generation, initial screening, due diligence, structuring, post investment monitoring, and lastly, the exit.
Reference.
Also known as general partners, these individuals pool the funds of limited partners and make strategic decisions on how to invest them. Private equity strategies can be divided into three categories: First, an investment in an early-stage startup is known as venture capital. Second, buyouts, in which a mature firm is purchased outright for internal improvement. Lastly, Growth equity is an investment in a middle-stage company's growth. Private equity firms can focus on one of these strategies or invest in all three. Private equity investments have extended time horizons, often no less than ten years, because the return on investment depends on the business's performance.
(c) Companies receiving the investment
Companies invest capital in the expectation of making a profit. Returns are paid to the firm's managers and split among limited partners based on how much money they originally contributed after a set period of time.
There is the process of issuance in Private Equity:
(1) Private Equity firm fundraising
Limited partners (LPs) are the investors, and the PE company will operate as the general partner. For an Islamic PE fund investing in a PE firm, the best way to invest in a PE firm is through a combination of musharakah and wakalah, in which the fund forms an informal partnership with the firm and hires the firm as its agent to invest its capital in various activities. In most cases, LPs merely offer capital and aren't involved in picking which businesses to invest in. The GPs decide that. However, if the LPs are dissatisfied with the GP's performance, they may decide not to invest in the PE fund again.
(2) Deal generation
Any PE firm needs to be able to make many deals to stay in business. The most successful firms have access to networks that let them choose who they want to invest in first. This is because businesses and companies looking for funding prefer to work with firms that have a history of creating value and successfully launching and selling investments. Smaller businesses may need to use online marketing tools, ask potential clients to send proposals, or even make cold calls.
(3) Initial screening
An initial screening would give the PE firm an assessment of the type of ' fit ' that the proposal might have. The primary focus at this stage would be the business plan and the overall industry outlook, particularly regarding global, regional, and domestic potential for growth. At this stage, Shari'ah sectoral and financial screening must also be conducted to ensure suitability.
(4) Due Diligence
Due diligence is a process that involves checking facts and information about a certain subject by doing an investigation, review, or audit. The financial evaluation is the most important thing to think about in buy-out, growth, development, and turn-around activities. Valuation comes at the end of due diligence after all the other checks on the proposal have been passed. For a company with a track record, having historical data is helpful. Using a price-earnings ratio or the company's book value to figure out how much the company is worth. For a business without a track record, the discounted cash flow (DCF) method would need to be used to make projections. In Islamic PE, a notional "profit" rate might be used if the DCF method is used. If not, any other method that works can be used to figure out how much an enterprise is worth.
(5) Structuring
Once a proposal has been approved for investment, it is necessary to negotiate and structure the deal with the investee. Conventional PE may use outright equity, preferred stock, debt, or convertible debt-to-equity instruments. It has been suggested that for VC or buy-out capital, the PE firm-investee partnership may take either the musharakah and mudarabah structure with an understanding that the partnership will be terminated or exited when the company is sold. From the Islamic perspective, the structure of mushärakah and mudarabah can be utilized.
(6) Post Investment monitoring
Post-investment monitoring is an extension of investigation due diligence services. Its focus at this stage is to drive the business plan for the company.
(7) Exit
Even though this is the last step in the process of investing, the strategy will usually include an exit plan for each acquisition. The private equity fund will then look for buyers for their investments, and PE firms buy businesses with the goal of selling them for more than what they put into them. A typical timeframe of an exit ranges between five and seven years. Several forms of exit can occur for an investee company: initial public offering (IPO ), mergers and acquisitions ( M & A ) with another company, and private acquisition.
Comparison the issuance process for Sukuk, IPO, and Private Equity.
|
|
Sukuk |
IPO |
Private Equity |
|
Definition |
Certificates of equal value
representing undivided shares in the ownership of tangible assets, usufructs,
and services or (in the ownership of) the assets of particular projects or
special investment activities. |
When
a private firm sells shares of stock to the general public for the first time
(IPO). In essence, an IPO signifies the shift of a company's ownership from
private to public ownership. |
Investment of funds into a private
company with the potential for exponential growth, giving the investor an opportunity
to realize huge returns upon the sale of the company later. |
|
Main parties |
●
The Originator ●
Special Purpose Vehicle (SPV) /
trustee ●
The lead arranger ●
The Sukuk holders
|
● The
Company ● Investment
Banks ● SEC ● Attorneys ● Accountants ● Stock
Exchange ● Pre-IPO
Investors ● IPO
Investors |
●
Limited Partners (investor) ●
General Partners (Private Equity
Firms) ●
Companies receiving the investment |
|
Investors |
Individual and companies who are
eligible to invest. They are from Islamic and conventional investors. |
Any adult who is capable of
entering into a legal contract can meet the eligibility requirements to
participate in a company's initial public offering (IPO). |
Financed by high-net-worth
individuals or business families, corporations, and institutional investors. |
|
Agents |
Special Purpose Vehicle (SPV)- as
the agent of issuing different kinds of Islamic securities or Sukuk. |
The majority of companies use the
services of an IPO transfer agent. The company must file Form S-1, F-1, or
1-A with the Securities & Exchange Commission (SEC), and then list
previously sold shares for resale and/or raise capital through an underwriter
along with their listing on a formal exchange like Nasdaq or NYSE. |
General Partners (GP) or Private
Equity Firms - pool the funds of limited partners and make strategic
decisions on how to invest them. |
|
Trading platform |
Issued and traded either on the exchange (Bursa
Malaysia) or over-the-counter (OTC) via appointed banks. |
Companies must meet the standards
of the exchange (Bursa Malaysia) and the Securities and Exchange Commission
(SEC) to hold an IPO. |
The capital is not listed on a public exchange. For
example, private equity firms are The Blackstone Group Inc, Kohlberg
Kravis Roberts & Co, and CVC Capital Partners. |
|
Return and Risk |
Receives a share of profit from
the underlying asset and sukuk holders accepts a share of any loss incurred. |
The share price will climb as the
company prospers, and investors will profit. The stock markets, on the other
hand, pose a risk. If the company fails, then they may lose their money. |
The risk profile of private equity investment is higher
than that of other asset classes, but the returns have the potential to be
notably higher. |
|
Advantages |
●
Sukuk is a tradable capital market
asset that offers fixed or variable rates of return over a medium to long
term. ●
International rating organizations
review and rate it, which investors use as a guideline when evaluating the
risk or return parameters of a Sukuk offering. ●
Sukuks are liquid securities that
can be traded on the secondary market. |
●
The ability to raise a big sum of
money for the company's growth. ●
Talent acquisition, marketing, and
product and service expansion. ●
Increases the company's public exposure
and improves its corporate image, reputation, visibility, and credibility. |
●
Higher return ●
Private concentrated ownership ●
Combination of equity and debt ●
The universe of potential company investments for
private equity is huge |
|
Issuance Process |
|
|
|
Conclusion
To conclude, all three, which is Sukuk, IPO, and Private Equity are different from each other in every way, but in this study, we explain more about the comparison among them according to their issuance process. As for Sukuk, the first step to do is to set up the general framework and organizational structure to support the issuance process. Then, the process of working out an appropriate Shari'ah structure, arranging the lead manager to underwrite the Sukuk issue as well as arranging the legal documentation around the agreed Shari'ah structure from both the Issuer's and the arranger's perspective, setting up the SPV to represent the investors. And lastly, putting the Sukuk into circulation.
Therefore, for Initial Public Offering (IPO), the purposes for which businesses issue this share, are because it gives the company the ability to raise funds, gives a better position to secure business models, and making investors feel safer dealing with public listed companies, as IPO is an indication of the company’s strength. The issuance process for IPO starts with the IPO preparation, underwriter selection, the kick-off meeting, drafting sessions and filling the registration statement, SEC review, road show prep, exchange applications, the road show, pricing the IPO, stabilization, and ends with the process of transitioning to market competition.
At last, for Private Equity (PE), the purpose of it is to give the investor an opportunity to realize huge returns upon the sale of the company later. Thus, the issuance process for Private Equity goes by the Private Equity firm fundraising, deal generation, initial screening, due diligence, structuring, post investment monitoring, and lastly, the exit.
Reference.
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