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Middle East sees rise in venture debt as funders flock to unbanked mid-market

The Middle East is seeing a boom in venture debt, as well as other forms of private credit, as investors go after a growing set of “unbanked” issuers.

In particular, start-ups and ambitious tech companies in the Middle East are increasingly starting to use venture debt as a means to grow, said one private credit investor.

Some USD 757m was raised as venture debt in the Middle East last year, an all-time high, up from USD 209m in 2022 and USD 165m in 2021, according to a report by MAGNiTT released last week.

Last year was dominated by three main issuers in the venture debt space, with Tamara raising USD 150m and USD 250m with receivables-backed facilities and Tabby raising a USD 700m asset-backed credit line, per press reports; and One Moto Technologies LTD raising USD 150m from a UK-based investor.

As the asset class grows in popularity, investors are beginning to take note.

Shorooq Partners, a tech investor which participated in the most recent Tamara deal, announced the launch of their second venture debt fund last month, with USD 100m to invest in the needs of tech companies in the Middle East. Meanwhile, Jada, a subsidiary of Saudi Arabia’s Public Investment Fund (PIF), made its first foray into venture debt in March with a SAR 1bn (USD 266m) investment in private creditor manager Partners for Growth, per press reports.

In addition, Nuwa Capital and Ajeej Capital launched their own venture debt fund, as reported last June. Amwal Capital Partners launched its fixed income business in January, which will have a focus on private credit.

SHUAA Capital was also set to launch its own venture debt fund, before it pulled the plug amidst an ongoing restructuring, sources told this news service.

Sensing an opportunity, Dubai’s stock exchange also announced a new platform last month for investors to access private investments in the UAE.

“The Middle East is looking to grow its start-up scene, especially in the UAE and Saudi Arabia, so this type of financing suits the growth objectives of this region,” one UAE-based private credit investor said.

Bayzat, a UAE-based HR start up, as well Ocean Harvest and Pure Harvest, both farming and agriculture start-ups in the UAE, have been eyeing alternate private credit, as reported by this newswire over the past twelve months.

Venture debt is a type of debt financing obtained by start-ups. Unlike with traditional loans, if repayment is not made, venture debt shifts into equity for the lender in the start-up, according to the report by MAGNiTT.

There are three types of venture debt, according to the report: growth capital, used to facilitate expansion, accounts receivable financing, used to allow entrepreneurs to leverage their receivables as security for a loan, and equipment financing, used specifically for the purchase of equipment.

Tabby and Tamara are two companies which were able to use securitisation techniques for receivables-based financing.

The securitisation of receivables is a tremendous opportunity for the region, said Debashis Dey, partner at White & Case.

“There are many companies that don’t have many tangible assets, but they do have a lot of cash flow. This is where securitisation comes in, because it can be very useful,” said Dey.

Certain legal changes could make the securitisation of receivables more commonplace in the region though.

“I don’t know what is on the cards with respect to new legislation, but it would certainly help,” Dey said. “For example, in the EU many civil law countries have a ‘true sale’ law. This simplifies things in terms of how an SPV [special purpose vehicle] works and isolates the bankruptcy of the seller of the assets from the SPV.”

In the UAE and Saudi though, the civil transactions law and the factoring law are mainly used, which often adds a layer of legal complexity when trying to structure such a deal, said Dey.

“Without a similar set of laws [compared to the EU] it is more complex and longer in terms of how we structure and draft using the civil transactions law or the factoring law. It’s possible, [but] it just becomes more complicated,” added Dey.

What is private credit? 

Despite private credit being increasingly used as a buzzword in the coffee shops of Dubai’s bustling financial district, there is much debate as to what it means.

According to the report by MAGNiTT, “private credit, or direct lending, is defined as loans directly originated to corporate borrowers without broad syndication.”

Others took a somewhat broader view.

“We often say that private credit is a spectrum because it covers the majority of the market and offers many forms of products and solutions. Everyone often assumes that it is just direct lending, but it’s more than that,” said William Watson, partner at White & Case.

Private credit providers in the Middle East are active in several areas including distressed financing, asset realisation, acquisition financing and lending, added Watson.

Indeed, it is not just healthy and exciting start-ups that are seeking alternate forms of capital. The Investment Dar, a Kuwait-based Islamic finance organisation that has been in a restructuring since 2009, is set to receive debtor-in-possession (DIP) financing, this newswire reported last month.

Several prominent funds are in talks with TID for the new financing, including Fidera Group and SC Lowy.

Why now?

The use of alternate forms of capital, especially with private credit, is growing because of an increasingly large ‘unbanked’ segment of the economy, said one capital markets lawyer.

“The banks here are very good at lending to smaller companies, and very large companies. But there is a middle market, looking to raise between USD 20 – 200m in debt, that struggles to raise cash. This is where private credit is a game changer,” said the lawyer.

The market is increasingly seeing deals of such magnitude plug the gap.

Keypar, a UAE-based prop-tech company, announced that it raised USD 30m in a Shariah-compliant sukuk financing from Franklin Templeton last month. In addition, special situation investment manager Sancta Capital provided USD 43m in senior secured debt to Rental Solutions & Services in November.

“Previously, you would mainly only see GREs and property developers issuing debt. Now, there has been a proliferation of unbanked corporates in all kinds of new sectors. The traditional market of IPOs, bond and sukuk aren’t the most efficient solutions for many unbanked clients,” said Dey.

The rise in private credit in the Middle East has also been due to regulatory change, said Watson.

“There have been significant legislative and regulatory changes in the UAE and Saudi Arabia in recent years, including around the respective insolvency and security regimes, in addition to regulations aimed at promoting the establishment of funds in the DIFC and ADGM,” said Watson.

Indeed, many western investors have been establishing a base in the Middle East recently, with 102 asset managers being listed as operating in Abu Dhabi’s financial free-zone last year.

Land of milk and honey

Flights headed for Abu Dhabi are packed out with international private credit financiers looking to raise money, Bloomberg reported last month.

But there is a growing sense of disquiet amongst sovereign wealth funds in the region that money is being raised, only to then be deployed back into the EU and US, said a second private credit investor.

“These sovereign wealth funds are increasingly wanting investors to deploy capital in the local markets, to develop their own economy,” said a second private credit investor.

But there are still relatively few deals for private credit investors to get involved in regionally, said the second private credit investor.

This is not just a problem in the Middle East though, it is also a global one. Too many private credit managers are sitting on so-called dry powder, or money that has not yet been deployed, Bloomberg reported last month.

Global private credit investors will start turning their attention to deals in the Middle East once deals increase in size and frequency, and also once the leveraged-acquisition and M&A market picks up in the region, said a second capital markets lawyer.

Property Finder‘s USD 90m debt raise from Francisco Partners last month to buy back shares from BECO Capital shows how private credit will stand to boom if the M&A and leveraged acquisition market takes off.

Despite much talk about the region’s sovereign wealth funds being flush with cash, they don’t simply write a blank cheque to anyone looking to dip their toe into the field, said the first private credit investor.

“The sovereign wealth funds want people with hands-on experience of the market locally, with skin in the game. It’s a tough sell if you’ve specialised in bond and sukuk issuance for twenty years, only to then say that you want to raise money for a private credit fund,” said the second private credit investor.

The surge in venture debt and private credit signals a transformative shift in how the start-up and mid-market accesses capital. As traditional banking channels prove increasingly inadequate for the burgeoning middle market, innovative financing solutions like venture debt are stepping in to fill the gap.

As the market matures and deal flow increases, the Middle East is poised to become a significant player on the global private credit stage, offering lucrative opportunities for investors and fostering a vibrant entrepreneurial ecosystem.