PHOTO
Private credit has been receiving greater attention in the UAE as managers view it as key for the start-up ecosystem and for areas requiring innovation, such as Net Zero goals, and they look to replicate the growth seen in the US, Europe and Asia.
The asset class is said to be in “a new era” globally, with a market worth $2 trillion in 2023 in the US alone and an addressable market of $30 trillion, according to McKinsey research, and PwC has estimated that the GCC and Egypt’s combined market could grow to $20 billion in the next six years.
UAE-based private credit managers are embracing clarity from regulators and the sovereigns are onboard, with Abu Dhabi’s Mubadala and Abu Dhabi Investment Authority (ADIA) having collectively invested $10 billion in the space by the end of 2023.
Abu Dhabi’s Financial Services Regulatory Authority (FSRA) introduced private credit fund rules in 2023 for Abu Dhabi Global Market (ADGM) funds and fund managers, following the introduction of the Dubai Financial Service Authority (DFSA)’s Credit Fund regime in 2021.
Executive regulation around UAE bankruptcy law introduced in May 2024 also made a huge difference to the private credit space, adding structure for and details on enforceability and security, said Natasha Hannoun, a partner at Dubai-based Tenami Capital.
The rise of tech entrepreneurs in the region means there is greater need for private credit, Hannoun said, as such entities struggle to attract interest from banks.
Tenami has made four private credit investments in nine months totalling $14 million, in Dubai’s Yougotagift, UAE employment marketplace Ogram and Saudi Arabia’s Golden Scent, with another to be announced.
A private credit investment may not yield a 10X return as private equity investment possibly would, but some investors are drawn to a structure in which they receive regular distributions instead of years later, she said, adding that private credit investors do not have the same concerns around valuations being too high as in venture capital.
Overseas players
Seviora Group, an asset manager under the Singapore sovereign Temasek, formed a partnership with Abu Dhabi’s Mubadala Capital last year and registered an office in the ADGM.
Christopher Smith, Head of Sales and Distribution, Seviora Capital, said: “It’s not just SMEs; larger infrastructure projects tied to initiatives like the UAE’s Net by 2050 strategy require additional, more flexible capital.”
He added that real estate, particularly development financing or asset refinancing, is a classic area.
Smith said private credit spreads in the US and Europe have been tightening, while in Seviora’s APAC home region, they were higher than the JP Morgan Asia Credit Index High Yield (JACI HY) by 200–500 bps, based on Seviora’s observations.
However, as private credit looks to replicate US, European and Asian growth in the MENA region, notes of caution have begun to sound, with the UK’s FT positing it as the source of the next financial crisis.
The newspaper cited concerns from academics, a former US Securities Exchange Commission (SEC) official, as well as the IMF that there are systemic risks, including lack of transparency, and that returns will be diluted by huge inflows into alternative assets. Weaker underwriting and covenants due to increased competition and credit losses are also concerns.
Fawad Tariq-Khan, a partner at Exnite, a private investment firm launched in 2024 and operating in the UAE and Ireland, has also made private credit investments. He said the focus of the asset class has shifted in recent years, with alternative lenders moving down the risk curve to lend in areas from which banks have retreated.
Private credit investment returns can typically be in the mid-teens when cash coupons and interest rates of 5–8% are taken into account, he said. Structures can include additional payments when the investment is returned, which borrowers may prefer instead of diluting their equity as in private equity.
Of IMF concerns, he said there is no doubt that as the amount of capital in the asset class increases, there will be higher systemic risk. Strong underwriting standards must be maintained to ensure capital is returned, he said.
US-based Andalusian Credit Partners (ACP), founded in 2023, counts a former vice chairman of the Federal Reserve, Roger Ferguson, as its executive chairman, and it is in “active conversations” with UAE regulators about opening an office in the country.
Ferguson highlighted ACP’s “fairly conservative” underwriting. “The [midmarket] companies we look at don’t get much attention from the really big private equity firms, but they’re really important to the US economy, creating jobs,” he said.
CEO and CIO Aaron Kless told Zawya he was increasingly confident the expansion of private credit will play a pivotal role in financing MENA growth, with a significant rise in private credit opportunities in the region.
ACP has $500 million AUM, with its credit client base focused on mid-market companies in sports, media and entertainment, financial services and speciality services. Its largest credit partner is the Brazilian bank BTG Pactual.
Kless’s view on concerns about diluted returns is that over the past two to three years, most capital inflows into private credit have been among larger managers focused on the upper middle market, which he refers to as the “broader syndicated loan (BSL) replacement market”, leading to tighter spreads, looser terms and higher leverage in that space.
ACP is focusing on the core middle market of borrowers with $10–$60 million EBITDA, where less competition means spreads have been more stable and leverage lower, he said.
(Reporting by Imogen Lillywhite; editing by Seban Scaria)