The Scoop
Principal Asset Management, the Iowa-based firm that manages more than $590 billion, is planning to launch a Sharia-compliant US private credit fund aimed at Gulf family and institutional investors.
The firm is working on the fund — which it says will be one of the first of its kind — with a Saudi institution and aims to start fundraising later this year, Matt Darrah, Principal’s head of credit, told Semafor.
“It’s been very difficult for family offices, banks, some of the insurers, to get access to US private credit in the past because they have very strict Sharia requirements,” Darrah said. A key stumbling block is that charging interest is prohibited in some interpretations of Islamic law.
The fund will lend to “Main Street, everyday US businesses that are AI-proof, recession resilient, and generate heavy cash flows,” including early childhood education, plumbing, and automotive repair, Darrah said.
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The new vehicle comes as Gulf sovereign wealth funds pour into private credit, attracted by higher yields offered in private markets and undeterred by concerns about rising default rates that have prompted some investors to reduce their exposure.
Principal is aiming to tap a pool of capital in the region that is restricted to making Sharia-compliant investments. It will also target investors in other predominantly Muslim countries in Asia.
Islamic finance transactions are typically structured through profit-sharing agreements or asset-based financing, which both address the time value of money without charging interest. Exposure to industries like gambling and alcohol sales is also banned.
Principal’s new fund will ensure every transaction it is involved in is Sharia compliant, instead of applying a so-called “Sharia-wrapper” around the fund operations, which is widely viewed as a shortcut.
Despite concerns about the asset class, Darrah said the firm’s US private credit funds are performing well. “As a credit investor we’re always stress testing and thinking about the downside, but what I actually see in the portfolio is a lot of resiliency,” he said.