By Debtwire Author

Asset managers and hedge funds have been paying close attention to the emerging private credit market in the Middle East, attracted by the prospect of juicy returns, according to market participants polled by Debtwire.

As the asset class scales new heights, news broke earlier this month that Caisse de Dépôt et Placement du Québec, a pension fund manager, financed its stake in a Dubai port with a USD 900m injection of private credit.

“There is currently unprecedented activity in the Middle East’s private credit market – both from companies needing capital and from allocators,” said Rashid Siddiqi, partner at Ruya Partners, a private credit fund in Abu Dhabi. “It’s certainly a growing market.”

The global explosion in private credit deals started in the US, before filtering over to Europe, where it was led by France and Germany, according to Victoria Mesquita, partner at Addleshaw Goddard. Now, the Middle East is catching up, she said.

The appeal is principally being driven by the pull of lucrative returns, typically ranging from 12% to 15%, said one buysider. The interest in the asset class is further amplified by the scarcity of new high-yield and distressed debt opportunities in the region, added the buysider.

Private credit deals are often structured so that there is an upside component if the issuer performs well, such as with a warrant, which can take total returns up to the high teens if the company performs well, said a second buysider.

In addition, debt issuers themselves are also being drawn to private credit due to the funding gap in the current market, particularly for new issuances falling within the USD 25m to USD 50m range, said one lawyer.

“There’s a funding gap that private debt can address, in particular in respect of leveraged acquisition financings, which are typically not covered by the commercial banks unless the deal is about AED 500m (USD 136m) upwards and it can be referred to the banks’ investment banking teams,” Mesquita of Addleshaw Goddard said. “That leaves many of the SME mergers and acquisitions without debt financing.”

There are several noteworthy examples of how private credit is filling the gap. Moove Africa, an African mobility company, raised a USD 30m five-year private credit loan with a 12% coupon in November, with a strong interest from Middle Eastern investors. Additionally, Pure Harvest, a farming company in the UAE, raised USD 50m through private placement of a 15% three-year sukuk with an 8% coupon in March 2021.

STARZPLAY, a subscription streaming service, also raised USD 25m in February 2021 from Ruya Partners.

“We provided USD 25m in growth capital to [STARZPLAY] at a critical junction, when it did not want to dilute its shareholders through another round of equity funding,” said Siddiqi of Ruya Partners.

As more issuers take advantage of the growing private credit market, regulators have been rushing to keep pace. Earlier this month the Financial Services Regulatory Authority (FSRA) of the Abu Dhabi Global Market (ADGM) issued a regulatory framework for private credit funds, enabling ADGM funds and their fund managers to originate and invest in private credit.

“That kind of infrastructure is only implemented when there is demand for the product,” said Sajid Siddique, chief executive officer of Advice Re Capital. “As the UAE continues to expand its offerings in the capital and equity markets, we will see a much wider platform of credit available through different channels, one of those being private debt.”

As a result of this growing interest in the market, the number of private credit funds investing into the Middle East is certainly growing, said Mesquita.

“[In] the Middle East, 10 years ago we only had a handful of local debt funds active in the region, primarily doing mezzanine-type financing,” she said. “We now see a lot more activity in private credit, not only from locally managed debt funds (old and new), but also with players from London, Hong Kong and the US coming into the region.”

There are now a number of well-known firms involved in private credit located in the GCC, including Ruya Partners, Investbridge Capital, Shuaa Capital and Franklin Templeton.

Sovereign wealth funds (SWFs) have been turning up the dial on their private credit investments too. The Abu Dhabi Investment Authority (ADIA) is reported by local media to be increasing its exposure to private credit, and in 2021 GCC SWFs invested USD 850bn in private credit assets.

Charting their own path
Amidst the successful conclusion of several prominent restructurings, such as NMC Health and Emirates REIT, distressed and high-yield investors in the Middle East are actively exploring fresh avenues to generate returns, said the first buysider.

With this in mind, certain investors are venturing into distressed opportunities within the secondary market. Many have engaged in long-standing single-name situations or acquired entire non-performing loan (NPL) portfolios from banks, strategically aiming for asset recovery through litigation finance.

Private credit offers an attractive alternative for those wanting to generate big returns, without necessarily getting involved in long, messy, and drawn-out bankruptcies in the Middle East, said the second buysider.

There can be a difficulty for asset managers trying to raise money from allocators and investors in the pursuit of private credit in the region though, cautioned the first buysider.

“Funds want to do more private credit, but it is difficult,” he continued. “Raising money from investors to do esoteric private investments in the Middle East is difficult. A lot of these investors are comfortable with private lending in the US and Europe, but it’s difficult convincing them to back you in the Middle East.”

“Once you mention private debt, you need investment committees and consultants – it steps up in the complexity,” the first buysider noted. “You essentially need to carve the deal out yourself, and it becomes more complicated.”

The increasing difficulty in getting investors to allocate capital to private credit funds in the Middle East is in part due to the rising returns in developed markets (DM), said the first buysider.

“Two years ago, you’d get 7-8% IRR in developed markets and 15%+ in emerging markets (EM),” the second buysider agreed. “Now, in developed markets you’re getting 12%. The pick-up in return for EM is not necessarily that high for the increased risk – putting some investors off.”

But comparing such headline returns between two different regions is not necessarily suitable, cautioned Siddiqi of Ruya Partners.

“Returns are not shrinking in EM, however it is indeed more common for private credit investments in DM to be priced with floating rate structures, and therefore the change in base rates, as has been the case more recently, will naturally deliver higher returns,” Siddiqi said.

“Another factor that is common practice, albeit works in the opposite direction when base rates are climbing, is the fact that most private credit funds in DM utilise fund-level leverage to accrete returns to their investors,” he continued.

“While EM-based private credit investments are typically priced at fixed rates and generally don’t benefit from fund-level leverage, they are quite often coupled with upside sharing mechanisms, like warrants, and are able to deliver superior overall returns, particularly in growth situations,” he added.

Despite talk of relative returns between regions and markets, private credit is still attractive and the number of new funds that want to enter the market is significant, said the second buysider.

Real estate
Real estate is one of the sectors that market participants say could be transformed by the development of private credit in the region.

“UAE banks are very strong and they can lend widely,” said Siddique of Advice Re Capital. He added however that the growing call for the implementation of stronger banking regulations in the region, which could impact metrics like risk-weighted assets, could in turn result in tighter lending standards.

“It is likely that in the future we will see banks being more picky with where they lend, which is where private credit can step in,” he said.

Siddique noted that many banks already face various regulations that allow them to only lend up to a certain amount of their deposits to the real estate industry — limits that are fast being approached.

“Banks can sometimes get nervous and start withdrawing some of that liquidity, particularly to developers, which is where private capital, through a regulated fund or vehicle out of ADGM or DIFC, can be of use,” he said.

Whether it is providing flexibility to real estate developers, plugging a funding gap or providing higher returns to asset managers, one thing is for sure: the market for private credit in the Middle East is gathering steam, and many are enthusiastic about its potential.

Whether the region will be truly able to catch up with the US in the size and scale of its private credit market will depend on whether it can convince investors of its value, and if regulators can continue to keep pace.

Published: 25 January 2020

By: Hassan Hosseini

Phd in Finance
Investment&Finance Advisor for Real Estate

Asset finance is a type of business funding that enables you to access an asset for your business by paying for it in instalments – or leasing it – over a set period of time. You name it, there's probably an asset finance product for it; from vehicles and machinery to kitchen equipment, office furniture, IT equipment, and more.

It’s important not to confuse asset finance with asset refinance. While the former lets you buy or rent an asset without the large upfront capital expenditure, asset refinance enables you to release the cash value of an asset you own. In other words, the asset is transferred to the lender as collateral in return for a business loan.

Types of asset finance
As a business owner, you might decide to use asset finance if you can’t afford to buy business critical equipment upfront. You may also use it if you would rather make smaller payments over an agreed period than a large upfront expenditure. As with many types of business finance, fees and interest payments apply.

Here are the five main types of asset finance:

1. Hire Purchase
If you want to own the equipment or machinery when you come to the end of the term, hire purchase could be the asset finance type for you. Once you’ve met the repayments the asset is yours to keep.

It’s likely that the asset will be a positive item on your balance sheet from the start of the term, but bear in mind that the finance provider will own it until you’ve paid it off.

You’re responsible for maintaining the asset and you can’t sell it until the term has ended, or – if the finance agreement allows – you’ve settled the contract early.

2. Hire purchase with Balloon Payment (Business Contract Purchase)
There is a type of hire purchase where the monthly payments are reduced so they only cover the interest on the loan. The final (or ‘balloon’) payment is used to repay the loan. Although the monthly repayments are lower, the total cost is higher.

3. Finance Lease
If you opt for a finance lease the finance provider will purchase the asset and rent it to you. You’ll make monthly repayments until you’ve covered the cost of the asset (plus the interest). You’ll also be responsible for insurance and maintenance.

You’ve got three options at the end of the term:

Carry on renting the asset

Return the asset

Sell the asset on behalf of the finance provider

4. Operating Lease
If you need an asset for a specific period of time, an operating lease might be the most suitable form of asset finance to explore. You can take out an operating lease on equipment for a set duration – and even upgrade to a newer model within the rental period, depending on the agreement.

Unlike a finance lease, the finance provider is responsible for the asset’s maintenance throughout the finance agreement.

5. Contract Hire
Do you rely on fleets? Contract hire is used for leasing vehicles. Acquiring and maintaining fleets can be very time-consuming; with contract hire, the provider sources and maintains the vehicles. You make payments over a set lease term.

Asset finance advantages and disadvantages
Asset finance can make it easier for you to access high value items that you otherwise wouldn’t be able to pay for. It’s also a way to avoid locking your capital away in a big purchase (that could depreciate down the line).

Asset finance makes it easier to raise funds than with a traditional business loan.

By allowing you to avoid large and burdensome upfront payments and (depending on the type you choose) ownership costs like maintenance, you can achieve better cash flow in your business. However, as with any type of finance, there are advantages and potential disadvantages to consider before making a decision.

If you don’t adhere to the agreement you’ve made with the lender, they could repossess the equipment or machinery, leaving you unable to meet customer demand.

Asset finance potential advantages
Small or no upfront costs

Faster access to business assets

The value of the asset is spread over the term

The asset acts as collateral for the finance

Maintenance is often – but not always – handled by the provider

Maintain control over working capital

Freed up capital can be used to fund other business activities

Fixed interest rates and monthly repayments aid cash flow management

Access to new and efficient assets can give you a competitive edge

Asset finance potential disadvantages
You may never own the asset

The asset will be repossessed if you don’t meet the repayments

The minimum term is usually one year or more

You may be liable for damage

There could be a limit on the usage, e.g. mileage for vehicles

Applying for asset finance
Asset finance gives your business a cash injection to buy assets without putting cash flow at risk. At Funding Options, we provide SMEs access to the most extensive range of business finance on the market, including a variety of asset finance options.

We can match you with the best asset finance solutions for your needs. We’ll guide you through the application process and make sure you get the best deal. Whether you’re looking for asset backed finance to ease cash flow or a lease option to hire equipment for your growing business, start your funding journey with us today.

Published: 30 October 2019