Honoring Shari'ah

Financiers with a mission:  Buschmann, left, Ogburn, and Crosland. Photo: Kay Hinton

Crescent was founded in 1997 by First Islamic Investment Bank, based in Bahrain. Most of the bank's 100 shareholders and 600-plus investors are Muslim. But most are not the oil-rich royal families one might expect. Instead, they are business owners hailing from Kuwait, Bahrain, Qatar, Saudi Arabia, United Arab Emirates, and Oman, with combined assets of more than $500 billion. "Our largest shareholder is the General Motors dealer in Saudi Arabia," explains Scott Buschmann '98, an associate with the firm.

Crescent targets mid-size American companies it can purchase for $50 million to $300 million. In April, it signed an agreement to acquire Loehmann's Holdings Inc., the women's apparel retailer, for $177 million. Not counting the Loehmann's deal, in seven years Crescent has bought controlling interest in eleven companies, including Caribou Coffee; Cirrus Industries, the second-largest maker of single-engine planes in the world (one plane behind Cessna last year); and Watermark Inc., maker of Dagger and Perception kayaks and Yakima multi-sport racks. So far, the firm has invested $650 million in equity and executed transactions totaling $1.1 billion. The company has a London office and also a large real-estate division.

All of the businesses Crescent buys and sells have one thing in common: They are in accordance with the ancient Islamic code called Shari'ah [sha-REE-ah]. Among other things, Shari'ah makes off-limits any ventures involving alcohol, pork, gambling, or media companies with sexually explicit programming. Put in an American context, investing according to Shari'ah is similar in concept to the Green Fund, which only puts money in environmentally conscious companies, Ogburn says. At Crescent, a supervisory board of experts on Islamic law gives advice on acquisitions and monitors acquired companies to make sure their activities continue to adhere to Shari'ah precepts.

In practice, Shari'ah still leaves open about 85 percent of American businesses, says David Crosland '81, who, along with Ogburn, is an executive officer at Crescent. "The restrictions with respect to the industries we can invest in have not materially impacted our business," Crosland says. "Those are probably industries I'm not interested in investing in anyway."

Companies in the gambling business, for example, may have liability issues that disqualify them as good investments, irrespective of their ability to square with Shari'ah. There are also the occasional instances where the Shari'ah litmus test, itself, makes a company undesirable from a financial standpoint. In one example, after looking closely at a private prison-management company, Crescent had to pass. If the company had followed Shari'ah code in its operations, it "would have had to treat the prisoners too well to make any money," Crosland says.

Crosland had the opportunity to launch Crescent in 1997 through a connection with Atif Abdulmalik, CEO of the First Islamic Bank. Though they didn't know each other at the time, both men had worked at investing Middle Eastern money for Investcorp, a buyout firm that had pioneered the practice of securing capital from merchant families in the Middle East. "Atif had the vision of servicing a particularly Islamic market place," says Crosland. "He felt there was a vacuum there." After Investcorp balked at a Shari'ah-centered business, Abdulmalik tracked down Crosland and enlisted his help to establish a brand-new company.

The company grew fast in the first three years on a skeletal staff. Looking around for help, Crosland remembered Ogburn, an executive at the investment banking and brokerage firm Robinson Humphrey who had helped Crescent put the deal together for its second acquisition, Computer Generation Inc., for $177 million in May 1999. That company sold for $250 million a mere eighteen months later.

In March 2001, Crosland and Abdulmalik lured Ogburn from SunTrust Robinson Humphrey, where he had spent fifteen years working his way up to co-head of the investment-banking division. In turn, Ogburn brought over young RH analyst Buschmann a few months later. (The shared Duke connection among the three men isn't primary, says Buschmann, but "it creates a fun atmosphere during the basketball season.")

When Crosland and Ogburn were studying at Duke in the late 1970s, the private-equity business was still in its infancy. Crosland, an economics major, left Duke to work in the energy division of Manufacturers Hanover Trust Company, the country's fourth-largest commercial bank at the time. He later worked for Herbert and Bunker Hunt, the two brothers who were to become infamous for their efforts to corner the world's silver market, before going on to earn a degree at Harvard business school. He then joined Morgan Stanley's mergers and acquisitions department, where he learned the skills he took to Investcorp and, eventually, to Crescent.

Meanwhile, Ogburn, who had studied management science at Duke (a major that was abolished when the graduate business school, now the Fuqua School, became accredited), went directly to law school at Vanderbilt University and then worked for an Atlanta law firm for five years before moving into investing.

The attacks of 9/11 threatened to tear apart connections between the U.S. and the Middle East, but Crescent held firm. Abdulmalik, who had been educated in Texas, flew immediately to America "to reassure his portfolio companies that he was as shocked as they were at what had happened," Ogburn recalls. "He said he felt his religion had been hijacked."

So far, the war in Iraq has not had a tremendous detrimental effect on the financial side of the business, Ogburn says. "Significant investors in the Middle East want to diversify their investments into other geographies. They are going to start with the largest and safest economy in the world, and that's the United States." But the invasion damaged something else, observes Ogburn. "Our friends and partners over there are really big admirers of what America stands for in the world. They were a little bit saddened that America, which has the image of a moral leader, may have given up some of that reputation by pressing ahead with this war."

Since coming to Crescent, Ogburn says, he is more attuned to prejudice on the part of Americans and ignorance of what Middle Easterners are all about. "I understand it's born out of a lack of exposure and a lack of knowledge." But the instances where it actually interferes with business are few, he says. For his part, Crosland says he "really expected more in the way of bigotry and prejudice. Somewhat to my surprise, it's been very rare."

Though the company has done its share of expanding cultural horizons, at base, Crescent is a profit-making enterprise in an important investment niche. Private companies that need large capital to grow may decide to seek out a firm like Crescent rather than make an initial public offering of stock, especially during a bear market. Sometimes a company's initial investors (venture capitalists among them) need to liquidate their investment, and a buyout by a private-equity firm like Crescent provides that opportunity.

"We're not operations people," says Buschmann. When Crescent purchases a company, it usually keeps the management team in place. That's why most private-equity companies are considered "pussy cats" in comparison to firms that specialize in unfriendly takeovers, according to one industry observer.

But among private-equity firms, Crescent is one of a kind. Shari'ah, sacred Islamic law codified in the eighth and ninth centuries, forbids charging or paying interest for loans. So, instead of paying interest for borrowed money, Crescent will often agree to take out a lease on a lender's assets, such as equipment, software, or real estate. The result is identical to a term loan, Crosland says. "We had to create the wheel, but we're now in the same position as any other private-equity lender to pursue acquisitions and finance them."

The amount of money being moved boggles the mind. In December 2003, Crescent sold a division of one of its companies, Medifax-EDI Inc., to a publicly traded company, WebMD Corporation, for $280 million--more than twice what Crescent paid for the entire company in June 2001. Once a second, smaller division of the company is sold later this year, Middle Eastern investors are expected to gain net returns of more than 50 percent a year. And, if the merger with Loehmann's goes through this summer, as expected, Crescent will have positioned itself as a player in the acquisition of public, as well as private, companies.

But it's building young, innovative businesses that Crosland says he finds truly rewarding. He points to the company's purchase of Cirrus; the airplane manufacturing company's success is a classic American story of two brothers who created a new product in a barn in the Midwest. The company's planes are equipped with a parachute that can float a damaged craft safely to the ground. Crosland expects that Cirrus will generate $200 million in revenue this year.

Given the current climate of terrorism in the world, American companies could be suspicious of Crescent's Middle Eastern connections--but usually are not. "Smart business people in the U.S. get over that," says Ogburn. "They do their fact-checking about who we are, and then they make a rational business decision."

That's much the same way that Ogburn decides where to take his family on vacation.

Larson '93 is a freelance writer based in Maggie Valley, North Carolina.