Growth of Alternative Capital in the Middle East

For any company, there is usually a lag between initial investment and first profit. During this time, the company will incur many costs and require capital to sustain itself. Without this capital, it cannot survive or grow.

Unfortunately, it is often the case that companies with great potential cannot access the capital they need to reach their next growth milestone. This is particularly evident in the UAE where SMEs contribute 60% of the country’s GDP, yet loans to SMEs accounted for just 4% of outstanding loans. The reason for low availability of conventional bank credit to SMEs is that these start-up businesses lack cash flows and sufficient assets to put up as collateral.

A viable option for businesses in this category is to consider alternative sources of capital, such as venture capital and angel investing. While the West has traditionally been the leader in the field, the Middle East has made many strides to catch up.

Venture Capital

Venture Capital (VC) firms target start-ups and invest on behalf of institutional clients, looking for decent returns. Ensuring the protection of the investment, Venture Capitalists usually take a director position in the business until they exit.

VC is most suitable for early-stage start-ups with few earnings and high potentials. At the Sharjah Entrepreneurship Festival, Crescent Enterprises announced a new venture capital arm of the company. The new section plans to invest $150 million in three years, with half the funds to be allocated in the MENA region.

Angel Investing

Angel Investing works as private individuals or consortiums provide financing in exchange for an equity stake in promising businesses that are yet to take off. The benefits that come along with angel investors are industry contacts, experience, and new ideas.

Angel investors usually expect an exit in a minimum of three years. Angel investing is most likely attracted by ambitious entrepreneurs requiring investment in early stages of businesses.

While Careem, Souq and Zawya’s examples have been quoted to death, another notable mention is Glambox. This is a Dubai based E-Commerce start-up and has been acquired by a Saudi consortium of investors. Another example is $4.5 million seed funding achieved by a UAE-based agricultural technology firm Pure Harvest.

Crowdfunding

Due to the increasing need for SMEs to raise capital, the Dubai Financial Services Authority (DFSA) recently launched a Crowdfunding Regulatory Framework. The framework aims to support growth in the Financial Technology (FinTech) sector, ensuring clear governance for businesses and protection for their customers.

An example is Enerwhere, the world’s first solar utility company, which managed to raise $700,000 through Eureeca, a Dubai based crowdfunding platform. This is the largest crowdfunding round witnessed in the region to date. Beehive, UAE’s first online platform for peer to peer lending, has also managed to facilitate over 200 businesses, raising a cumulative $35 million in the past 4 years.

Private Equity

As the name suggests, Private Equity (PE) is capital not listed on an exchange. PE includes funds and investors aiming to invest directly in private companies or carrying out buyouts.

PE has been the most common form of alternative capital available in the UAE. For example, the Abu Dhabi government-owned company Mubadala Investment has now acquired Russian Verno Capital’s private equity advisory unit. Mubadala plans to strengthen Verno’s internal investment and asset management across Russia and the CIS region.

Another example is Al Masah Capital investing in Diamond Lifestyle Limited (DLL) which operates restaurants under the Johnny Rocket’s brand.

Opportunities

Alternative Capital is a growing sector. However, traditional sources of finance still retain the lion’s share. There is a need to introduce policies and create awareness to enable this promising sector to be fruitful.

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