ADGM Publishes Consultation Paper No. 8 of 2022 on Private Credit Funds

To capitalise on the growth of the global private credit market in the past decade, the Financial Services Regulatory Authority (“FSRA”) is proposing to expand the current range of funds available in the Abu Dhabi Global Market (“ADGM”) to include Private Credit Funds within its existing collective investment funds regulatory framework. A credit fund will be able to invest in credit facilities it originates, participates in or acquires from third parties.

The FSRA proposes that Private Credit Funds and their fund managers be exempted from the requirement to hold a Financial Service Permission, or satisfy a specified Base Capital Requirement, to carry on the regulated activities of ‘Providing Credit’ or ‘Arranging Credit’. However, given the inherent risks and limited liquidity of credit funds, the framework will provide certain operating restrictions and requirements:

1. Permitted Investments: The fund will only be permitted to invest in ‘Credit Facilities’ including loans as well as ‘Specified Investments’ which create or acknowledge indebtedness.
2. Fund Structure: The fund must be closed-ended and operated as either a Qualified Investor Fund or Exempt Fund (as defined in the FSRA Fund Rules). Further, a Venture Capital Fund will not be permitted to be a Private Credit Fund. This means retail investors will not be able to invest in the fund.
3. Location: The fund manager must be located within ADGM (in general, foreign managers can manage ADGM funds if approved).
4. Leverage: The use of leverage by the fund will be limited to 100% of Net Asset Value, i.e. imposing a cap of 50% loan to value of the fund’s portfolio.
5. Borrowers: The fund will not be permitted to lend to certain types of borrowers, including natural persons, other funds, related persons, other lenders, financial institutions and persons intending to use proceeds of the credit facility for speculative investment purposes.
6. Concentration Risk: The fund will be required to diversify its exposure across multiple borrowers and maximum exposure to a single borrower or group of connected borrowers is to be limited at 20% of the Net Asset Value of the fund.
7. Disclosure: The fund will be required to document its risk appetite statement and credit risk monitoring methods and disclose the same to potential unitholders.
8. Pricing Methodology: The fund will be required to adopt a pricing methodology relating to credit and implement systems and controls necessary to monitor the fund’s existing credit facilities, including policies relating to the renewal and refinancing of credit facilities.
9. Stress Testing: The results of a monthly stress testing are to be shared with the governing body of the manager of the fund at least quarterly.

Fund managers currently operating or seeking to operate in the ADGM and other concerned stakeholders are invited to comment and provide feedback before the deadline of 27 January 2023. You can find the consultation paper here.

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At Al Tamimi & Co we regularly advise local, regional and global financial institutions on FSRA rules, ADGM legal developments and licensing of regulated financial services providers.