Unlocking the Global South Rise of Private Credit

[Music] good afternoon everyone so we have 25 minutes but maybe a couple of days worth of conversations we could have today so I'm going to Dive Right In um private credit has seen exponential growth um just last year we saw about $15 trillion in assets cross 1.53 um 1.5 trillion dollar in assets but it's projected to be about 3.5 trillion in Assets in just three to five years um set the scene for me here we haven't seen it quite take off in the global South and especially in our markets what's it looking like and maybe I'll start over there with you Omar thank you very much good afternoon everyone the global South historically has exported most of the capital that we have from a sovereign wealth perspective and a lot of our family groups have done that to diversify away from their core economies and core geographies what has happened so differently now why we call it the Renaissance of our Middle East 2.0 since the discovery of oil is the re Reliance realization that Vision 2030 in Saudi the vision 240 in UAE requires that the middle class actually grows in a significant way and to do that you need alternative financing to do that because the generally the banks who are asset back lenders lending to the largest institutions largest family held institutions as well as Government entities are not playing in the space so how does the middle class middle class grow it's alternative credit for private credit humbly speaking at roia Partners we target mid-market lending to corporates primarily in GCC Saudi and UAE and why that is the funding Gap that exists is over $250 billion it's a funding Gap that existed for a long time so to your point why haven't we seen this before because there wasn't a real true Visionary plan to actually change the middle class dyam Dynamics which now there is with real backing from sovereigns that backed us and backed a couple of our our peers so things are changing things are changing a very positive way it's not just about nice buildings it's actually about evolving landscape and financial world that we have in ecosystem um David and series Omar Works more in the med Market space but what are you seeing at your end of things with the larger deals um why haven't what are you um seeing in terms of how it's taking off here see just to put a little bit of context on what drives private credit one's obviously the demand side of things and there are plenty of opportunities in the entire Global South including the Mena region the issue that we've got is there's a lot of capital sloshing around waiting to be put to work but there are a few sector specific or Geographic specific structural points that are holding this back now I'm not saying they're going to hold this back forever or they're going to be addressed over time but structural change in any economy takes time I mean one of the key things you need is basically a a very strong local presence if not boots on the ground at least a very significant amount of time for that investor to come in understand the market understand the structure understand the legal ramifications of a downside planning Etc and that's not easy for a lot of global Capital investors to do secondly Mo this is credit I mean I guess uh uh Omar is referring more to growth Capital where we focus most of our time on is traditional direct lending where it's an operating business it's got some issues as far as the funding Gap is concerned and uh it's it's not a venture type debt investment and for that downside protection becomes really really important so a lot of it is asset based lending but it will change but there need to be some structural factors that CH that need that's going to drive that change so I see a lot of opportunity going forward but I think it's going to take time but David perhaps your views on the other end of the spectrum yeah and I think to to paint the picture a bit more the one point .

5 trillion or even more of private Credit in the world 2third of that nearly is in the US right about 24% on top of that is in Europe yeah right so when we talk about the global South we're talking about a tiny percentage Asia is about 4% and look at how big the global South is exactly and when I look at the numbers for Middle East some of the numbers I've seen is not 2% of the overall private credit space uh globally now clearly there's a a huge amount of growth that we can expect to come from that um it you know as the economy sophisticate as we've seen the economy sophisticate so rapidly particularly in the UA and Saudi recently with new legislation new Regulators new um new ecosystem with professionals it it it's rapidly sophisticating so therefore the next step as part of in our world to join that sophistication you need that alternative credit opportunity um in order for you've got two sides of that coin right where's where's the supply and where's the demand we saw a very similar dynamic in India we do a lot of our a lot of our private credit funds are in India uh or in Asia but and part of that is in India we saw a similar Dynamic um before their new bankruptcy law came in in 2016 there was very little onshore International lending um because the risk was seen to be too much if you went through restructuring it would take 20 years 25 years so the risk risk adjusted returns just didn't make sense we see a very similar Dynamic here over the last few years but now there's new bankruptcy laws and so on over the last five years the Indian market the AUM of the alternative credit space has grown from 5 billion to 25 billion arguably just off of the legislative changes because you put in place an environment and the legislation and as those precedents start coming through the international investors other investors start getting comfortable with investing they see real start seeing real returns they see the bankruptcy um laws working restructuring working getting real dollars out the back so you can rely on your security you you realize that when you have collateral secured collateral you can actually enforce as a downside protection so that increases your demand and at the same time the regulator put a lot of pressure on the banks to start dealing with their problems so we we started you had the demand and the supply working at the same time and all of a sudden the market started growing you start setting the Precedence you start then attracting more foreign investment and we see that this region is the very start of that process and and our laws have just come in quite recently and are beginning to be tested um talk to me about um how the returns differ um across perhaps the more evolved Market majority in the US compared to maybe what we can expect to see here what's making it attractive for us here and I'll move back to Omar because I see him smiling as he's thinking about it what's quite surprising and pleasantly surprising that is for a lot of LPS that we spoken to internationally who've had as well as regionally who've had exposure to large credit managers is the fact that we humbly speaking in a very Emerging Market Middle East growing where we're able to give senior secured loans getting mesac returns so generating 50 to 18% without using any leverage and that's a huge significant differentiator without leverage zero leverage uh I mean the banks don't give us leverage anyway so even if we want to use it it doesn't hasn't evolved to that space But we actually just based on the credit itself the credit of companies that are growing that are going through huge transformation whether it's Saudi companies growing more in Saudi or UAE companies growing into Saudi or in UAE so these are growth Capital needs pure on the actual merits of the loans themselves were're able to generate these returns and in terms of the security package that you get whether it's you know full Suite of covenants which is you unmatch in the west the West is a sponsor Le market so while the good news of the sponsor Le Market is that you have a abundance of deal flow activity from a lot of m&a the Middle East still does not have that so what we're talking about is looking at a$2 and a. half billion dollars worth of transactions each year uh just bilaterally through us talking to advisers and business owners in UAE and Saudi particularly to fill that funding Gap that exists so you're when managers look at us from outside in they think well what is the alpha that's the alpha to get these type of returns in the west they use a lot of Leverage to get those type for senior security you know if you go down the Spectrum and maybe go to special stats you can get that without leverage but that's kind of where the the alpha for us is Sher sh David I see you nodding because we were talking about this just as we were coming would you agree with those numbers and compare I would absolutely agree with what Omar said because look drawing parallels from different parts of the world a private credit situation either in the US or Europe always has an advisor they always have a process they always have effectively an auction so what's going to win out is not the quality of your Capital it's price but in the global South that doesn't exist so if you're prepared as I said earlier to spend the time and effort to get proprietary deals they're not going to be your returns are not going to be bid away because it's not an auction process if you're a first mover or you a unique angle you're going to get that deal and it's not going to be shed so that's another thing that kind of allows those returns those unlevered returns to be driven because they're not going to take cap proposal from Omar and then shop it to 15 other funds that doesn't exist that Dynamic and it will it may change over time but today that's one of the advantages of those uh or one of the drivers of those returns So speaking of demand um paint me a picture of the kind of demand um that we can see because it's just getting started um you know David you talked about the numbers were're so tiny in comparison to the rest of the world so what kind of demand are you expecting to see and what sectors are attracting the most interest um from private midd yeah in the Middle East and also if you want to maybe go slightly wider than that sure um so in the Middle East we're seeing opportunities just falling in our lap which you know until we raise the right kind of capital for a private credit fund for dedicated the region it'll be a challenge to deploy too much uh at the moment just to put into Contex a good problem to have Well we'd rather we'd rather have the capital to to deploy but we we run about 3.4 billion in total uh we run a secondary fund which is about 600 million that is open-ended that we can invest in secondary credit and that's where most people uh in the Middle East know us from because we we invest in secondary uh Bank bank loans claims high yield bonds and so on throughout Asia Middle East and Europe so we've deployed in this region in that market since 2011 so we've been part of this credit story and particularly in the stress to stress space for that time what we do in Asia we also run closed-ended private credit funds where we typically lend lend to midmarket corporates on a senior secured basis and just from a return perspective we achieve sort of mid- teen net returns for senior secured risk which you can't find in the US right unless you lever it um here the type of Opp OPP unities we're seeing is very obviously we're we're moving in slightly different circles domar with the opportunities we're seeing is on the special sit space where you've got uh typically private Cor corporates in the industrial or real estate sectors that are not finding Traditional Bank finance and do not have the alternative there is no dedicated capital in this space for for that type is it just mostly real estate and infrastructure where you're seeing the demand or what sectors in in different geographies it's different so in the UAE it's a very real estate driven opportunity set um and what we're seeing is that banks are reaching their limits lending to the government um uh borrowers and you're leaving private developers that have a great opportunity set great growth Market um with a with a gap in financing so there's an opportunity there and we're seeing some of our peers providing some Finance in that space and next door in Saudi I guess it's a much bigger in Saudi OPP opportunity set that we're seeing is very different it's very much on the industrial side where we're talking to uh CEOs and advisor of large corporates that are suppliers to the Giga project right so because the banks are lending to the Giga projects well the the opportunity is they've got a huge order backlog there's a huge high growth environment for their product um they may have had issues over the past cycle where the banks have or have not solved their the debt structure through a structuring um but that in any case the banks are not providing that working capital line so there's liquidity need to grow into this high growth environment this is exactly the type of lending we do in Asia where we can solve their liquidity issue on a senior secured basis because we're more flexible in in structure because we can get to know that mid-market company um we can really understand their product and once you solve that liquidity issue and they grow into that opportunity set then the banks come back right and they want to get rid of us cuz we're expensive um Sher you were talking to me earlier about also the size of deals on these um tell me a little bit more about that opportunity cuz yes there's opportunities falling into everyone's laps but what what's the numbers on there see on my business it's somewhere between what David does and what Omar does uh but sort of closer to uh David's point where it's slightly stressy now most direct lending deals in this region have been in the 10 to $20 million range equivalent now that is very very small compared to Europe or the us but then again the Market's different when Europe and the US were nent you could still do $25 million direct lending deals and then as the product became more accepted they grew in size so the opportunity for anyone trying to invest in this region is to pick those businesses which require 20 million today but with the strength of the business model and the growth embodied in it they're going to want 200 300 400 million in 3 to 5 years said Customer Loyalty that's that's the that's that's theet sweet spot but to add to something that David said rather than looking at things by industry or uh by type of business some of the things that we're seeing is for example Asia be it Korea be it India be it the Middle East there are lots of family businesses and their family conglomerates and now we're in the third and the fourth generation from the founders so over time they've built a collection of 20 25 30 businesses a lot of them are related a lot of them are unrelated and now there's a third and fourth generation that wants to start businesses that are unrelated to the historical family business right and traditional sources of Finance are more than happy to finance the traditional business that they know for 30 years but not the grandson's pet project that has real potential iess but doesn't fit within and that's where I think Omar might come in um Omar talk to me also about the numbers here in terms of is it sort of a we talking 1020 million range or uh what sort of um Solutions are you seeing for midmarket that perhaps you could compare to traditional lending sure thank you so typically we do anything from $10 million to $30 million historically when my partners and I many moons ago started the first fund at our pre predecessor shop the average deal size was about 15 if you're lucky you get $20 million deal everybody's high-fiving each other for $100 million deal flow annually today because of the evolution of the market things have progressed the average deal size is 2530 and now it's very common that we're seeing 50 60100 million deal last year um or was it earlier this year we lost to a franc San Francisco partner based uh private credit firm who invested 90 million in in property finder uh great deal that we liked we looked at but $9 million was too long too large for our current fund size so the good news is the opportunity set is larger than ever the deal flows there they're all senior secure at least the ones we're looking at and international managers are looking at this space in a very different lens to give you an example our old shop uh the the Alternatives team who we were all friends and part of got acquired recently this year by Jenice Henderson now most of the folks at least in the Middle East perspective never really knew Jan Henderson very well and well what do they look so what do they find so differently they're not doing this as a token investment they're seeing this from a risk reward perspective there's a real opportunity set which we've been you know obviously biasedly saying there is a real demand here and to add to that the regional allocators Alexa madla capital and a bunch of sovereigns from Saudi have backed us because they're also seeing the reality on the ground that don't just give us money because this is a token investment and we're based in adgm give us on the merits of the credit that we're actually providing and the returns that we're generating for our investors and that's the lens that looking at us now which is very different so it wouldn't be fair for us to just talk about opportunities though these are new and also Emerging Markets so um what's the largest r RK you're seeing in our markets because they are still relatively new to this space and also um you know we're quite unique in how we do things here I want to be mindful of the time so if each one of you could list one one thing I think the reality when people ask how many enforcements you've had to actually go through and their answer is zero and it gives people a surprisingly dis surprise discomfort they say well this hasn't been tested yet right it will come at some point we will have to use an enforcement ment scenario use an En go through an enforcement and when it does we'll deal with it with the proper regulations like an atgm so the challenge is it's a new market so it's not tested yet it's not tested yet even though we're using English law for from a jurisdiction perspective it hasn't been tested yet well special situations carry even more heightened risk um what's your biggest concern see uh whether it's a special situation or growth lending the concerns are the same so if I were to ask the to list my top two the first one would have been what Omar's already mentioned but the second one would be look you have to get comfortable making investment decisions with less than perfect information you cannot look at this with the US lens or a European lens where you've got all sorts of information it's organized as's a process Etc the secret sauce here is you've got to be able to use a lot more judgment based on the information you have rather than working from a perfect example of what a us or european investment committee would need and if you can get there that's where you can generate the proprietary opportunities but David your thoughts yeah by the way I wouldn't call special sits higher risk really I think that's a misperception because people see that special situation the point is pricing that risk right right so if you're buying in the secondary Market on a distress situation you're pricing at a price that V creates the value at a level that limits your downside right if we're lending on a special sits perspective we we're putting in a dip Financial would you say it's less risky then I I would argue so okay but it obviously we can have that face off later it depends on the price you pay right yeah it depends on how it depends on how good you are priceing that risk on the special situation side when we are lending to a company say a bridge loan or a dip Finance or dip like financing where you're priming or getting senior security over assets above the other lenders that arguably is much more a safer investment than coming in at the same at the same priority level right so um um that was just a point on that but the key the key point to all of this is understanding your geography if you fly into the this region and expect to do a private credit deal with a family and have no and have no risk you're you're you're barking out the road tree so s Omar like ourselves we've been operating in this market for a very long time we understand the ecosystem we understand where the risks are and it's about pricing those risks right I guess so what the theme that I've been hearing a lot is the days of fly in and out are gone you've you've got to be based here um as we uh we only have a couple of minutes left um let's talk about the future so with all this pain will come opportunity um in the next five years where do you see the biggest opportunity and a side question to that um we've just heard about sort of seen the deal recently with the mubadala in Blue Owl capital um that was around a billion dollars are you going to see more Sovereign wealth funds kind of go down that route and we'll start over there with you Omar I'm biased but I think the the best days are ahead of us here in the Middle East and it's not just about real estate and fancy hotels it's about the real emergence of the middle class with the help of humbly speaking ourselves and a few others that really help Finance great businesses with great Founders that simply haven't had the same financing options that the Western peers in the in the both Europe and particularly us have had for decades so I think the next 5 years you're going to see an emergence of not just a senior direct lending strategy but a real estate an infrastructure you name it across the Spectrum whatever the areas of the world has will be able to replicate here in the Middle East yeah I'm going to be very quick I completely agree with Omar nothing more to add what are you eyeing though as as you know the most uh interesting opportunity for yourself look uh the at least as far as private capital is concerned you have to go with the size of the economy so the U and the KSA are going to be the two biggest sources of uh Focus but look you can't necessarily ignore all of the other GCC Nations you can't ignore Egypt you can't ignore Jordan so uh the focus here is to at least keep tabs on pretty much all of the major economies here but I think just given their size the UA and the KSA will probably lead David your opportuni is falling in your lap but the next five years what's interesting honestly I think so the direction of travel in this region is very very clear right over over the last number of years everything has sophisticated at a hugely I mean look where we are adgm is this is the third year of these conferences and what they've achieved in a very short space of time is is miraculous and so what you can see the sophistication you can see the the will of the powers that be to create a sophisticated economy and so therefore if you simply overlay what we see in other geographies that sophisticate sated economies alter ative credit private credit is a large part of that so it's very clear the direction of travel this is going to grow at a huge rate over the next 5 to 10 years no no doubt I'm afraid that's all the time we have but our panelists will be around hopefully to take questions later on thank you very much can we have a round of applause for all the great insights thank you [Music]