ADGM’s financial regulator boosts framework to permit private credit funds

The move by FSRA will allow for alternative financing for private enterprises, especially in the SME sector

The Abu Dhabi Global Market. FSRA's move is aimed at encouraging investment in the Middle East’s private credit market. Alamy

The Financial Services Regulatory Authority (FSRA) of Abu Dhabi Global Market on Thursday said it enhanced its regulatory framework to enable ADGM-based collective investment funds to invest in credit by originating and participating in credit facilities.

The enactments follow the publication of a consultation paper by FSRA on December 12 last year seeking views concerning the establishment and operation of private credit funds in the ADGM.

The move is aimed at encouraging investment in the Middle East’s private credit market by providing clear and transparent rules for credit fund managers operating within the ADGM.

“The framework for private credit funds will improve access to alternative financing for private enterprises, driving innovation, productivity growth and competitiveness in the small and medium-sized business sector,” ADGM said.

Private credit is where a non-bank lender provides loans to companies, typically to small and medium sized enterprises that are non-investment grade.

Meanwhile, private credit funds are collective investment funds that provide loans to borrowers, purchase existing loans from third party lenders or invest in a combination of the foregoing.

Typical credit funds earn returns from investment in loans, either by way of origination, participation or purchase, or a combination of the foregoing, according to ADGM.

“The global private credit market has experienced significant growth in the past decade," said Emmanuel Givanakis, chief executive of ADGM FSRA.

"Providing the opportunity for fund managers to create private credit funds in ADGM supports the FSRA’s objective to continue to enhance and develop ADGM’s comprehensive and vibrant financing ecosystem, for both professional investors and those companies seeking funding.

“It will help support and bolster the growth of such companies, while providing greater investor choice and ultimately contribute to the growth and diversification of the economy of Abu Dhabi, the UAE, and the broader region.”

The private credit industry, or non-bank lending, is estimated to be worth about $1.3 trillion.

Private credit accounted for about 17 per cent of total credit last year and has increased by 14 per cent each year since 2000, about twice the rate of public credit, according to Bank of America Merrill Lynch.

In the first six months of 2022, 66 private debt funds raised a total of $82 billion — compared with about $93 billion collected across 130 vehicles in the same period a year earlier, according to PitchBook's H1 2022 Global Private Debt Report.

The popularity of private credit funds has grown due to the relative attractiveness of returns on lending compared to other asset classes, and in part also because of the opportunity they present to finance growth-stage companies.

In March, Ares Management Corporation, an alternative investment company that manages $352 billion in assets, and Abu Dhabi’s sovereign investor Mubadala Investment Company formed a joint venture to invest in global secondary market private credit opportunities.

In January, Alpha Dhabi Holding, a unit of Abu Dhabi's International Holding Company, and Mubadala said they were forming a joint venture to co-invest in private credit opportunities amid a tightening monetary environment globally.

In October, Mubadala and private equity firm KKR also forged an alliance in which both companies will co-invest across performing private credit opportunities in the Asia-Pacific region to address a shortage of capital and support the long-term growth plans of businesses.

In November, Chimera Capital, an Abu Dhabi asset management company and subsidiary of Chimera Investments, and investment company Alpha Wave Global launched an open-ended credit fund with initial commitments of $2 billion that targets global private credit market opportunities.