Introduction and philosophy
The Fair Finance Fund Europe – for which Parmenion Ethical acts as main advisor – invests directly in European small- and mid-sized private companies that adhere to our double ethical screen. Investments will range in size from Euro 100,000 to Euro 5 million.
The fund manager/general partner will follow an activist approach and focus on firms in industries or situations in which the general partner believes he and his team can add value over and above the financial contribution. Parmenion Group company Nicanor assists us by i) running an additional financial screen based on ‘Nico’, their bankruptcy prediction tool and ii) by presenting us with valuation analyses based on their proprietary ‘fair valuation’ approach in which multiple valuation methodologies are combined into one ‘fair value estimate’.
The specific goal of the Fair Finance Fund Europe is to accommodate not only the general public but also the Muslim community in the Netherlands and in the E.U. The Fund is especially geared towards taking equity participations, profit sharing and leasing contracts with SME businesses. We will refrain from investment in standard fixed income / interest-bearing securities since they are incompatible with our double ethical filters (see also below our explanation under ‘Background’).
Obviously, the Fund should make a sufficient and equitable return on the monies invested bearing in mind that from a general point of view investing in SME companies is usually regarded as a high risk private equity / venture capital investment. This requires a relatively high annualized return on investment of approximately 20%.
Note: although the Fund will expect and demand a dividend when portfolio companies are profitable, we do not charge interest and neither do we expect an annual remuneration in years in which net results are below zero. The Fund advisor does therefore expect to derive the bulk of his income from price appreciation of his investment during the holding period (5-7 years on average).
The Fund advisor believes that the required rate of return is a fair, feasible and satisfactory one based on the prospects of the portfolio companies. Maximisation of profit at the expense of the entrepreneur, community or longer-term strategic feasibility of the firm can and will not be the goal of the Fund.
The Fund will draw its inspiration from both the Catholic and Muslim traditions that are unanimous in rejecting the calculation of interest whilst upholding the necessity of respecting timeless ethical values and principles.
Within the context of the Parmenion Ethical Fund-of-Funds concept, the Fair Finance Fund Europe will adhere to i) the Principles for Responsible Investment as set forth by the United Nations (UN-PRI) and ii) the Shariah.
Stability and long term support are not upheld by speculation and maximisation of short-term profit. Equality between lenders and borrowers and/or investors and investees is a precious element in any democratic society. Risk sharing is the modern answer to the inequality between creditors and debtors arising from most types of conventional debt. We aim to support and nurture SME businesses in the Netherlands and elsewhere in Europe by participating in the company’s equity, and/or by entering into some form of partnership and/or lease contract. The Fund would welcome any form of co-operation with other investors on the basis of co-financing or otherwise.
From their beginning, both the Catholic and the Muslim traditions have been unanimous in rejecting interest-based finance. The Muslim tradition has been successful in observing in practice this fundamental ethical principle and we now witness a successful and growing circuit of Islamic Finance worldwide and not just in the Muslim hemisphere alone. In Europe, the market for Islamic Finance is rapidly growing and it is attracting both Muslim and non-Muslim clients. After the calamities that conventional finance suffered from in the Global Financial Crisis (2008/09), the conservative approach of Islamic Finance gained traction with non-Muslim sustainable investors. Recent Encyclical letters of both Pope Benedict XVI and Pope Francis stress the importance of equality between borrowers and lenders and investors and investees, with as add-on the importance of sticking to ethical principles that would mitigate the workings and effects of greed, short-term profit taking and speculation. It is our vision to blend both traditions together whilst upholding the fundamental principle of interest-free finance.
As indicated in the Introduction above, the Fund will allocate amounts between Euro 100k and 5 million to individual participations. Selected entrepreneurs should be based in Europe and derive at least 50% of their revenues from European markets.
Our investment approach consists of a three-step process.
- Phase 1 is a model-based screen in which the fund managers (supported by our sub-advisor Nicanor) apply a set of filters. Through these filters we avoid participation in companies with too high a potential bankruptcy risk and/or questionable philosophy (as far as alignment with our sustainable approach is concerned) and/or excess sensitivity to negative qualitative and financial factors picked up by our screens.
- This leaves us with a short list of firms that are invited for the formal due diligence procedure (Phase 2). The formal due diligence will take on average 3-5 months, after which we will invest in those applicants that pass also this filter phase.
- In phase 3 – with the Fund as active investor and partner – we will assist the firm not just with our financial support but also make our expertise, knowledge and network available to the management team.
The Fund is a so-called closed-end RAIF (Luxembourg-based and –regulated) in which we expect to put our investors’ money at work for a period of 7 years. Taking into account the high risk level and illiquidity of private equity and venture capital investments, the Fund is only suitable for well-informed investors investing a minimum of Euro 125k after a client profile check has indicated that this type of investments is good for you taking into account your investor and risk profile. The fund aims for a net internal rate of return (IRR) of at least 20% annualized.
No matter how thorough our due diligence and checks and balances, just like any ethical investor we will be faced with situations in which some of our investee companies do not comply with all ethical guidelines. Not just will Fund management take active steps to correct this situation, but we will also ensure that proper ‘purification’ of income is established. Through Parmenion Group’s own charity Triple F Foundation (focus on education and knowledge transfer) and several other initiatives purification will be guaranteed.
If you want to know more about the Fund, either because you are a qualifying investor or because you are an entrepreneur who wants to team up with us, feel free to contact us.