ADGM and DIFC Private Credit Regimes: What Fund Managers Need to Know

Small businesses are the engine of the Middle East economy. Within the UAE, small- and medium-size businesses ("SMEs") represent 94% of the nation's companies and institutions and are responsible for more than half of the country's non-oil GDP. In Saudi Arabia, the number of SMEs rose 9.3% in the third quarter of 2022, from a little more than 892,000 to one million by the end of September that year. 

A large portion of these businesses are family-run operations, with business acumen handed down from one generation to the next. Younger employees who cut their teeth in such enterprises are looking towards entrepreneurship to forge their own path and diversify their local economies. Regional governments are in economic and social transformation and are placing their focus on SMEs to drive diversification and to increase their overall contribution to GDP. Limited traditional lending to SMEs has prompted governments to introduce an array of initiatives and programs to address the funding gap. 

Recent regulatory changes in the UAE has opened up private credit as a way to support the next generation of MENA business owners. 

In June 2022, the Dubai Financial Services Authority ("DFSA") established a private credit fund regime primarily for funds domiciled in the Dubai International Financial Centre ("DIFC"). The Financial Services Regulatory Authority ("FSRA") of the Abu Dhabi Global Market ("ADGM") followed suit with its own private credit regulation in May 2023. Both frameworks lay out a platform to provide alternative financing to SMEs at a time where credit is at a premium and the asset class is an attractive source of returns for investors. 

Amid the market volatility of the past couple of years, private credit, which earns returns from investment in origination, participation or purchase of loans, has proven to be a popular asset class for institutional investors looking for investment yield. The increase in global interest rates and the subsequent pullback of traditional bank lending has provided a gap in the market for private credit lending. The private credit industry is estimated to be worth some $900 billion globally, roughly having tripled over the past decade. Within the Middle East, private capital investment overall rose 30% in 2022 from the previous year to $19.8 billion, according to numbers published in 2023.

The Dubai and Abu Dhabi Private Credit Regulatory Frameworks

Dubai 

The DFSA established a new regime for credit funds on 1 June 2022 to promote investment in the asset class and to further cement Dubai as a global hub for private credit investment. Notably, the regulations outline limitations on what vehicles may be used and what types of parties may participate in related transactions. 

Notably, a DIFC Credit Fund must have a DFSA-regulated Fund Manager in place. This rule differs from other types of funds domiciled within the DIFC that are permitted to be managed by non-DIFC fund managers. DIFC Credit Funds are barred from providing letters of credit, financial guarantees and cross-border finance. A DIFC Credit Fund needs to be either an Exempt Fund or a Qualified Investor Fund. This means DIFC Credit Funds are only open to certain investors defined by the DFSA as Professional Clients. All DIFC Credit Funds must be open for a finite term no longer than 10 years and must build a well-diversified loan portfolio with no more than 25% of net assets being exposed to a single entity within three years of the fund's inception. At any given time during the life of the loan, borrowings may account for no more than 10% of the fund. In addition to other regulations, the Credit Fund must not provide credit to natural persons; parties related to the credit fund manager; a financial institution or a person related to one; a person who plans to use the credit to trade in commodities, cryptocurrency or investment, or to provide credit to another party. 

Foreign Credit Funds under the DFSA are subject to largely the same regulations, including the requirement to be managed by a DFSA-regulated fund manager. 

Abu Dhabi

The FSRA of the ADGM on 4 May 2023 released its Private Credit Fund Rules ("Rules") to allow funds domiciled in the special economic zone to invest in and issue private credit within a regulatory framework specific to the asset class. The ADGM has outlined rules for domestic funds, foreign funds, and Islamic finance,including regulations applicable to fund administrators, accounting and reporting requirements, asset valuation and pricing. 

These rules expand upon the ADGM Financial Services and Markets Regulations 2015 with amendments to include guardrails for investing, issuing or otherwise participating in private credit funds. One notable update is the addition of a "Private Credit Funds" category. There are certain stipulations under the Rules that a Private Credit Fund must adhere to in order to be able to market itself as a Private Credit Fund, including domiciling or formation within the ADGM.

How the Maples Group can help with UAE Private Credit Funds

The right fund administrator can be critical to helping get a fund successfully off the ground and ensuring it is well-positioned for ongoing growth. As a regulated fund administrator with a significant regional presence, the Maples Group provides comprehensive services to ADGM and DIFC-domiciled funds, including those established under either special economic zone's new 
private credit regime. Our systems are flexible and readily scalable, with our service offering extending to a large number of funds investing in real assets, growth capital, infrastructure and intellectual property assets, and across all relevant fund structures, including sharia-compliant structures. With expert teams strategically located around the world, backed by award-winning technology, the Maples Group delivers the highest levels of service and support to traditional open and closed-ended investment funds, hedge funds, capital market structures and private equity vehicles incorporated in the DIFC, ADGM and other international jurisdictions.