GCC private credit – ‘The times they are a-changin’

Investors and regulators have been focused on the topic, including most recently the Financial Services Regulatory Authority (FSRA) of Abu Dhabi Global Market which in May 2023 confirmed it was improving the regime to further encourage private credit funds in the region, while a selection of private funds has been vocal about new investments in the GCC region of Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates (UAE).

The FSRA’s introduction of a private credit funds regime came hot on the heels of the Dubai International Financial Centre’s own private credit funds regime which went live on 1 June 2022. In 2022 Saudi Arabia also established a private credit fund regime, meaning three of the main markets in the GCC are now primed for investment.

The new, attractive regulatory landscape now makes it possible to establish and manage private credit funds in the UAE and Saudi Arabia, activities that were not possible prior to the reforms. These regimes are broadly similar and have the following common features:

• The financing vehicle (the fund) and the manager of the fund must be established in the jurisdiction of the applicable regime (e.g., a fund established under the ADGM regime must be established in and managed by a fund manager established in the ADGM).
• The fund must be closed ended and can only be marketed to professional clients and qualified investors.
• Financing arrangements cannot be entered into with individuals (financing of corporates only).
• Concentration limits, it is not possible to set up a fund which enters into a single financing arrangement.
• The fund may originate financing arrangement or acquire financing arrangements originated by third parties.

These developments, along with other economic considerations, have provided a surge in appetite for both investors and targets on a new stream of unique, flexible and creative funding solutions that have largely been absent from the Middle East markets.

Shelter from the storm?

It is no coincidence that the uptick in interest for Private Credit in the GCC is amidst huge global economic challenges. The financial storm caused by Covid-19 pandemic, lockdowns, wars and the eruption in both inflation and interest rates have a myriad of impacts. Private Credit funds are looking to broaden their investment portfolios, and the Middle East has remained a relatively stable economic region making it an attractive destination.

In addition, traditional financial institutions have come under more pressure in terms of margins and regulations, making lending criteria tighter. Finally, as a knock-on effect, some business entities that require credit flows are finding them harder to secure.

This is where Private Credit can step in. In its most basic form, Private Credit is financing provided by an entity other than a “bank” (i.e., an entity other than an institution licenced by a central bank to accept deposits).

The fact that Private Credit is not a traditional lender, means private credit firms can provide an alternative financial option to the conventional models, which often come with more innovative provisions, such as flexibility on interest rates and repayment schedules, competitive terms and access to wider Private Credit products and performance bonuses.

During the last 5-8 years we have seen some private credit activity in the GCC along these lines. Examples include, private credit funds without a place of business in the GCC providing financing to GCC borrowers (such funds typically being capitalised with GCC money), acquisition of non-performing loans (whether through sub-participation or an absolute assignment), peer to peer lending platforms (platforms that match lenders and borrowers), venture debt (regulators approving venture debt strategies along-side venture capital strategies on a case by case basis) and buy now pay later platforms.

Like a rolling stone

Unlike in Europe and the US, both of which have mature Private Credit markets, Private Credit in the GCC is in its infancy. There are two primary reasons for this.

Firstly, the general prohibition on anyone other than a “bank” providing financing (i.e., if you have a place of business in the GCC and you wanted to provide financing you needed a central bank licence). This would entail a great deal of paperwork and clearing regulatory hurdles.

Secondly, historically, providers of private credit have not established themselves in the GCC and European and US providers of private credit have not ventured into the GCC market. The wave of private credit that washed over Europe and the US after 2008 therefore did not find its way to the GCC.

But momentum continues to build. GCC is becoming a more transparent place to do business (e.g., new insolvency regimes in the UAE and Saudi Arabia) which attracts foreign investment. Crucially, Private Credit funds’ search for yield (investing in a fund that provides financing may provide better returns than investing in a fund which holds real estate assets (an asset class favoured by Middle East investors)) makes the GCC a prime location due to its cash liquidity and financial stability.

The GCC is already seeing funds taking the plunge.

The ADGM has seen the arrival of several venture debt funds. Such funds are providing financing to start ups, with founders preferring to take on debt rather than further diluting their equity stake. Providers of private credit established outside the GCC are entering the market, Fidera’s financing to Emirates Hospital Group and DK’s acquisition of the ADCB NPL portfolios are examples.

The expectation is that alternative investment funds established within and outside of the GCC will become more active in the GCC market, e.g., senior secured financing, mezzanine financing, receivables financing, acquisition of NPL portfolios, DIP financing and litigation funding.

As Bob Dylan once said, there is nothing so stable as change. The Private Credit sector is poised to transform the GCC investment markets – which both investors and borrowers will be anticipating will provide guaranteed success in a new era of finance.