Q. Gulf Capital’s Credit Opportunities Fund has a broad mandate. How important is it to have a flexible strategy when targeting investments in emerging markets like the MENA region?
It is very important to have one strategy and to stick to it. However, our credit fund’s approach is to provide tailor-made solutions by structuring instruments that fit the cash flow profile of the investee company. The flexibility is in the structuring and not in the strategy.
Q. What is your LP base like? Do allocations to your fund come from fixed income or alternatives allocations?
Our LPs are mainly institutional investors from the region with one development finance institution. Allocations are from alternatives in most cases, the exception being insurance companies who like the fixed income features of the fund.
Q. What are the major challenges when it comes to credit investing in the MENA region?
The lack of a legal environment that allows structuring solutions, and the weak enforcement of rights.
Q. Are there any particular sectors or geographies that you’re particularly interested in at the moment? Where is the smart money going?
UAE and Egypt are interesting geographies. In terms of sectors, healthcare, education, food, oil and gas are interesting areas for credit in general.
Q. How do financing structures differ in emerging markets compared to developed ones? Presumably loans etc are more strictly covenanted in emerging markets to account for the greater risk of default?
All our loans have covenants. In many cases security can be a challenge to perfect.
Q. What are default and recovery rates like in your target market?
Defaults for low-leverage businesses (with debt to EBITDA multiples below 3.5x) are low.
Q. For companies or sponsors seeking debt financing in the region, what are their options? How important a role will private debt funds have in bridging the financing gap for such businesses?
Their options are bank-derived senior debt or private debt from funds like ours. It’s very important to have other sources beyond traditional bank debt to bridge the gap especially for asset-light businesses. Banks tend to focus on collateral when lending in the region and for businesses with no assets to pledge, it is very difficult to raise debt.
Q. Is this a sustainable opportunity, or a short-medium term one in the wake of the financial crisis? Will the market revert to a bank-dominated status quo in the longer term, or is institutional capital here to stay?
It is indeed a permanent solution for the markets in the region and the trend is very encouraging. Many entrepreneurs who look for growth capital and lack assets to pledge to banks have limited options for financing. Equity financing is expensive and can be difficult when owners do not want to give up control. Mezzanine debt or alternative debt in general can be the solution. ?
Walid Cherif is co-head of Gulf Credit Partners, the private debt arm of alternatives group Gulf Capital. GCP manages the $300 million Gulf Credit Opportunities Fund, which targets debt investments in the MENA region, and Turkey.