The Middle East is currently experiencing a surge in private credit investments, as investors explore a move away from traditional sources of financing and venture capital to seek out new opportunities for favourable returns. The increasing demand for alternative funding has given rise to an exciting new asset class: private credit. This rapidly growing market offers an array of benefits including lower-cost, flexible financing structures and higher risk-adjusted returns than those available through typical institutional finance options such as debt or equity markets. In this article, we explore the dynamics of private credit in the Middle East and how it is helping to fuel exceptional growth within the region’s startup ecosystem.
WHAT IS PRIVATE CREDIT?
Private credit refers to the lending of capital to non-public companies or individuals, typically in the form of debt. In recent years, private credit has been gaining traction in the Middle East as investors turn towards alternative sources of funding. While traditional forms of financing, such as bank loans and public debt markets, remain essential, private credit presents a compelling opportunity for investors seeking higher returns and more flexibility in their investment strategies. The growth of private credit is also driven by the region’s booming startup environment, in which small and medium-sized enterprises are often overlooked by larger lenders. As a result, private credit firms are helping to fill this gap, providing tailored solutions to support the region’s economic growth.
Benefits of Using Private Credit
With the ever-rising cost of business operations, startups and growth companies are constantly seeking alternative funding sources to fuel their growth. High-growth companies, unable to gain access to traditional bank finance, are now finding private credit to be an attractive and viable alternative that offers a range of benefits, including:
Unlike traditional funding sources, private credit offers more flexibility. Startups in need of funding can tailor the terms of the loan to fit their unique needs. This includes the interest rates and repayment schedules required. This flexibility allows companies to get the funding needed without sacrificing future growth potential.
Raising funds can be a crucial hurdle for startups. In times of urgency, private credit can be the ideal solution as it offers a quicker and more efficient funding process. The application process is less complicated, and funding is usually deployed within shorter timeframes. When a startup has a time-sensitive deadline or undergoes a high-growth phase, increasing speed can be immensely helpful to procure funding or ease working capital constraints.
3. Competitive Rates
The interest rates associated with private credit are usually competitive when compared to other funding sources. While the rates may vary depending on the lender, the rates tend to be lower than that of credit cards or merchant cash advances that many startups may be forced to use.
4. Relationship Building
Private credit lenders build long-lasting relationships with their clients. They take a keen interest in the companies they lend to, and startups benefit from having access to a great resource to gain advice from. This can help them to grow and expand not only their funding capacity but their contacts as well
Recent Success Stories
The Middle East has become a hub for private credit investment in recent years, with numerous success stories emerging from the region. Once such example is Tabby, a leading payments and shopping app, which in August 2022 secured $150 million in debt financing from existing investor, Partners for Growth (PFG), and Atalaya Capital Management.
Another recent example is NBK Capital Partners, a leading regional investment advisor, which announced in December 2022 the final close of the NBK Capital Partners Shari’ah Credit Opportunities Fund, L.P. The fund, which closed with circa $215 million of available capital, was supported by institutional investors from Saudi Arabia, UAE and the United States, including cornerstone commitments from the Public Investment Fund of Saudi Arabia and Abu Dhabi Catalyst Partners, an independent third-party investor backed by Mubadala Investment Company and Alpha Wave Global.
These examples highlight the potential for private credit investments in the Middle East and the opportunities that exist for savvy investors looking to capitalize on the region’s growth.
Challenges Associated with Private Credit
Private credit is a burgeoning sector that is already helping to drive economic growth in the MENA region. However, as with any emerging market, the legal framework is still evolving, making it difficult for investors to navigate the complex system. The nuanced interplay between on-shore and off-shore legal systems and different regulatory frameworks can often make it challenging to structure robust financing solutions, causing borrowers to face difficulties in securing economically viable financing terms. In addition, cultural norms around debt and lending can discourage individuals and businesses from seeking out credit options. This creates a vicious cycle, as borrowers who do secure loans often face high interest rates and restrictive terms, making it challenging to repay their debts.
Despite these challenges, there are efforts underway to improve access to private credit in the region, including the development of alternative lending models and increased government support for small businesses. As the financial landscape in the Middle East continues to evolve, it is essential for individuals and businesses to stay informed about their options and work towards building a more robust and equitable credit environment. If the legal challenges can be overcome, private credit has the potential to have a significant impact on the Middle Eastern economy, providing a crucial avenue for financing small and medium-sized enterprises.
This material is provided for general information only. It does not constitute legal or other professional advice. For more information, contact Jamie Tredgold at email@example.com.