MENA’s debt market: under construction

The market for MENA-focused private debt funds is still in its infancy, but is slowly gaining momentum. NBK Capital led the way with the Middle East’s first dedicated mezzanine fund last year. Others have followed suit. In April, Gulf Capital held a third close for its maiden credit fund on $215 million.

Walead Cherif, a portfolio manager at Gulf, told Private Debt Investor: “MENA-based companies lack collateral. The market opportunity is there, and at the moment cash-flow lending in non-existent”.

Cherif hopes the asset class’ growth will lead to dedicated private debt funds assuming the role banks currently play in the market. Those banks spend too much time scrutinising the balance sheets of potential borrowers, Cherif argues, and not enough time building an effective partnership with robust firms who may have strong growth potential. 

Gulf has found it slow-going raising its Credit Opportunities Fund, which launched two years ago and is now on its third close. It emphasises the difficulty managers have in convincing investors to back what for many is a new type of product.

A $20 million cornerstone commitment to Gulf’s fund from the International Finance Corporation (IFC) was therefore an important landmark to the development of the debt market in the region.

Gulf is adamant its fund has traction in the market, albeit more so from onshore investors than offshore ones. “We are targeting institutions and family houses based in UAE, Saudi, Quwait, UAE and Oman. About 85 percent of our investors are from MENA, and 15 percent are from international institutions,” he adds. It reflects a wider trend whereby MENA-focused funds (whether private equity or debt) have dwindled in popularity with foreign investors with home-grown LPs left to write the cheques.

Many MENA investors are either too small or lack sufficient understanding of the asset class to make substantial commitments to credit funds, believes Amjad Ahmad, senior managing director at NBK Capital.

“Large institutional investors are clear on the value proposition of these funds. However, investors in the region still continue to struggle to grasp the complexity of the underlying product,” Ahmad says.

The other element to MENA-focused debt investing is the complications posed by sharia law, which essentially forbids individuals from profiting from lending money. Structuring a credit vehicle to comply with sharia is no easy task as a result. “If it worked we’d see it everywhere,” one Dubai-based fund manager said.

All that could be set to change, however. US-based asset manager Z Capital, for instance, is launching a new sharia-compliant distressed debt fund of at least $100 million in partnership with Saudi Arabian group MEFIC Capital.

But there are plenty of sceptics. “It just doesn’t make sense from an economic point of view – and will always work in favour of the borrower,” predicted one Dubai-based manager.

Gulf’s approach is different. It’s essentially offering tailored solutions to borrowers – if a company needs a sharia-compliant loan, then the firm has the capacity to deliver that. This approach avoids the need to brand the whole fund as “sharia-compliant”.

At present, MENA-based debt funds are a small drop in a very big pond. There are just six credit funds being raised in the region at present chasing $2 billion in commitments, according to in-house data, (and four of those are largely Africa-focused vehicles). It will take a sea change in local LP attitudes to bring about significant upturn in the industry, but firms like Gulf, NBK and MEFIC are paving the way.