Abstract
The industry of private equity and leveraged buyout has been, since its beginnings, subject to several chapters of bubbles and busts, the majority of whom are initiated under similar circumstances (excess of liquidity, junk debt and mimetic behavior).The Islamic finance is a financial system that complies with the rules of the Sharia Law, and which naturally allows the achievements of purposes of Sharia, such as protection of property and capital, fair wealth distribution, reduction of uncertainty and speculation, to name a few.From this perspective, this paper discusses the capacity of Islamic finance to help prevent some factors that trigger financial crises in the leveraged buyout market and to accomplish the intended purposes through this asset class.In the first part of this paper, the authors try to break down some of these common factors that trigger or catalyze the economic booms of the leverage buyout industry, and propose a framework to visualize their effects through an agent-based Simulation program. The second part of the paper describes how Islamic economic principles constitute brakes to some distortions and excesses in the market, in such a way that the probability of occurrence of a boom decreases drastically. Finally, these Islamic features are added up to the simulation to provide a comprehensive benchmark.
Highlights
The private equity has been, for decades, a misunderstood asset class
The overuse of debt was being spotlighted by many economists in the last century, as one of the main factors that cause economic booms and busts
The 2009 mortgage sub-prime crisis is nothing but a powerful example of how again, the misuse of debt has led to a housing bubble in the United States
Summary
The private equity has been, for decades, a misunderstood asset class. Today, thanks to several factors, it has an aura that exceeded that of major asset classes, especially the leverage buyout (LBO), which accounts for more than 40% of the private equity raised funds (Preqin, 2017). In the most important markets, monetary policy is favorable, economic growth is accelerating, most economic indicators are moving in the right indicators, and credit is plentiful and relatively cheap It is a flourishing market which is gaining more and more confidence, many economists claim that it is time to be prudent to avoid a high exposure to the private equity asset, as the risks of being caught in an under-performing vintage have been growing for the past few years. Since the emergence of Islamic finance in the modern era, at the beginning of the 20th century, many economists suspected the sustainability of such a model, often mentioning complexity, expensiveness or even worse describing it as a “fragile” way of bypassing Sharia precepts This hasty appraisal will vanish very rapidly, as economic disasters affected the vast majority of world financial places, pushing investors to look for alternative economic models. This had led many economists to have a deep understanding of the Islamic finance and assimilate its underlying purposes: protecting property and capital, reducing economic disparity and avoiding economic booms and busts, to name a few
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