In the backdrop of rising inflation and interest rates, the past two years have seen an exponential rise in the activity of private credit funds within the UAE and the broader Middle East.
An increased appetite for international and regional private credit funds to engage, operate and establish within the UAE has occurred alongside the announcement of significant regulatory updates within the two key financial free zones of the UAE: the Abu Dhabi Global Market (ADGM) and the Dubai International Financial Centre (DIFC), according to White & Case LLP, an internationally reputed law firm with a global dedicated Private Credit & Direct Lending capability, including within the UAE and the wider Middle East.
Private Credit Demand Soars
The financial market within the UAE has historically been dominated by local and regional financial institutions offering relationship-based lending to local corporate entities. While the importance and activity of these financial institutions is firmly established, there is now market space for private credit to augment this activity, White & Case said.
This occurs during a time where European private credit providers can afford to be more cautious with the deployment of their capital throughout 2023.
“These combined factors provide support to the numerous discussions that we have had with market participants, who have voiced an increased appetite for private credit providers to offer alternative and flexible financing for regional corporates. Accordingly, we expect a continued increase in private credit exposure within the Middle East,” the law firm said.
Private Credit Fund Rules
On 4 May 2023, the FSRA issued its Private Credit Fund Rules (the “Rules”), which enable ADGM based funds and their fund managers to originate and invest in private credit. This newly established regime was enacted following a consultation paper issued by the FSRA on 12 December 2022 on a proposed regulatory framework for private credit funds, which aimed to respond to interest from existing fund managers and potential applicants seeking to establish such funds.
In this context, the FSRA has made amendments to the ADGM Financial Services and Markets Regulations 2015 and its various rulebooks to propose a proportionate and risk-appropriate regulatory framework, enabling fund managers in ADGM to manage funds that may invest in credit facilities, whether through the origination of, or participation in, credit facilities or the purchase of credit-related instruments.
In particular, the FSRA has expanded the current range of specialist classes of funds offered in the ADGM by introducing a new category of Private Credit Funds. To qualify as a Private Credit Fund, certain conditions need to be fulfilled, including the establishment or domiciliation of the relevant fund within the ADGM.
The implementation of the Rules follows the establishment of a new regime for private credit funds operating in the DIFC, as implemented by the Dubai Financial Services Authority (DFSA) on 1 June 2022. Although both regimes share similarities, they are not fully aligned, and several distinctions must be considered in establishing and operating a private credit fund under either regime.
Another Positive Step
The announcement by the FSRA of the Rules, together with the 2022 DFSA update, represent another positive step in the development of the UAE financial market and, together, strengthen the credentials of the UAE as being able to perform a key role within the global private credit market.
About White & Case LLP
The law firm clients cover the full spectrum of the private credit market and include performing and distressed credit funds, sovereign wealth funds, alternative capital providers and in-house bank direct lending teams.
White & Case means the international legal practice comprising White & Case LLP, a New York State registered limited liability partnership, White & Case LLP, a limited liability partnership incorporated under English law and all other affiliated partnerships, companies, and entities.
(This article is prepared for the general information of interested persons. It is not, and does not attempt to be, comprehensive in nature. Due to the general nature of its content, it should not be regarded as legal advice).