Navigating Shariah PE earning potential into AI-focused startups

The allure of the broader AI market, teeming with innovative startups, is a challenge for high-net-worth clients seeking lucrative returns – as navigating the high risk factors involved can be tricky, especially when structuring PE investments to comply with Shariah principles.

“Can an AI portfolio made up of little-known-but-promising startups, backed by PE, deliver outsized returns to Shariah investors?” posed Ahmed Ali, portfolio manager at the Invesense AI Focus Fund.

In an interview with IFN Investor, he felt this prospect would be possible but cautioned that such a venture would require a "huge amount of money" – likely billions – to achieve the necessary diversification.

"There are so many interesting ideas out there," Ahmed acknowledged, but cautioned against the high risk of singular or highly concentrated holdings in startups for most private investors. "They're not suitable for someone with US$20 million to US$30 million available.”

The challenge lies in the nature of these private equity investments. Unlike publicly-traded stocks, which offer daily liquidity and the ability to diversify across 60-plus names with a relatively small investment, private startups often demand substantial minimum commitments and lack immediate liquidity.

Despite these hurdles, Ahmed recognized the transformative potential of these nascent companies. The Invesense portfolio manager believes that the "next big thing" in AI might very well emerge from this private ecosystem. 

The current AI landscape, Ahmed noted, is still in its "early stage," with technologies like ChatGPT and Google's Gemini showcasing immense, yet still developing, capabilities. The integration of AI into everyday business tools, such as Gemini into Google's Office Suite, represents a significant shift that could drive future growth.

The AI Focus Fund's current strategy, while focused on public markets, is designed to capture the broader impact of AI. Its portfolio is not limited to just IT companies; it also includes exposure to industrials (robotics) and pharmaceuticals, recognizing AI's horizontal influence across various sectors.

This diversified approach, coupled with a momentum-driven screening process, aims to capitalize on market trends and identify companies that are enabling AI innovation, whether directly or indirectly.

On the Invesense fund’s current focus on publicly traded mega-cap and large-cap companies – primarily by investing in tech behemoths like Nvidia, Meta, Apple, Alphabet and Broadcom – Ahmed explained they are chosen for their significant market capitalization and proven revenue growth, even if their valuations appear steep.

"We're selling the companies that are intact, that are revenue-based, revenue-growing. Although their valuations are expensive, their valuations are justified with big revenues, big growth."

Looking ahead five to 10 years, Ahmed anticipates a "great age of adjustment" rather than disruption, where AI will significantly boost productivity across all sectors. It will be a future where individuals become "way more productive" as AI automates basic tasks, allowing them to focus on higher-value activities.

This shift, Ahmed believes, will make people more competitive and enable new businesses to emerge with significantly reduced operational overhead – especially once it is possible to have dedicated 'shadow’ AI-focused funds for private startups.