The National Investor's (TNI) private equity arm and Kipco Asset Management Company (Kamco) plan to set up a $150 million Islamic fund, in a sign that private equity activity in the Gulf region is picking up.

The Sharia-compliant fund is expected to be launched within three months and will make six to seven investments with an average equity of $25 million each in mid-sized, family-owned firms, according to a report in our sister newspaper Gulf Daily News.

'The market opportunity really lies in family businesses in the region who may have entered into too many disparate business lines and now feel they need to pick and choose and are looking into divestitures,' The National Investor private equity director Yahya Jalil said.

'That creates opportunities for us,' he said.

The fund targets companies that have fallen upon financial difficulties or that are in need of operational restructuring, Jalil said.

Private equity activity in the Middle East, like elsewhere globally, has fallen sharply since the beginning of the financial crisis, as it became more difficult for firms to obtain debt financing from the banking sector.

But analysts expect the sector to recover as credit markets are gradually opening up again and governments across the region have pledged to invest billions in healthcare, infrastructure and transport sectors.

TNI and Kamco will each contribute $15 million to the fund, while the remaining $120 million will come from third party investors. The target return for the investments is 30 per cent.

The reason for setting up a Sharia-compliant fund is that 'an Islamic structure can bring them (these companies) back into more modest debt ratios that are sustainable over the long run,' Jalil said.

Sharia-compliant financial products adhere to Muslim principles which prohibit paying out interest and involvement in sectors such as alcohol, gambling and pork.

'The use of Islamic financing to supplement the equity tickets we write can potentially increase the investment firepower by 30 to 40 per cent,' Jalil said.

'We will have the mandate to either take a minority stake, or where appropriate, a controlling stake in such mid-market companies,' he said.