SuperReturn Middle East LP snapshot: Hans-Jörg Baumann, StepStone Private Debt
In October, SuperReturn Middle East once again takes over the Ritz-Carlton in Dubai. The event will bring together 500+ senior attendees including 175+ LPs and 200+ GPs from MENA & beyond, to discuss the the hottest trends and biggest challenges facing private markets in the region.
In the coming months we're shining the spotlight on some of the LPs and GPs speaking at the event, giving you a sneak peak on the insights they will share, whilst highlighting key developments in the region. This week we're speaking to Hans-Jörg Baumann, Founding Partner & Chairman, StepStone Private Debt about private debt in the Middle East, how new managers can approach this and what future regulatory developments to look out for.
There is still a lot of investor optimism for private credit: What are the key factors driving this and how is this developing in the Middle East in particular?
Investor optimism for private credit remains strong, driven by several key factors. One of the main attractions for investors is the reliable cash flows and attractive returns, typically ranging from 8-12% (p.a. gross), with spreads of 475-625 basis points. The floating-rate structure of private credit loans is expected to remain advantageous for income generation going forward as higher inflation than during the pre-covid period is poised to incentivize central banks to keep interest rates higher than in recent history, despite expected rate cuts. First lien senior secured loans in private credit are typically backed by covenants and collateral, which help mitigate risk and ensure a level of security for investors. This stability is highly appealing in today’s unpredictable market conditions.
For borrowers, the tightening of traditional bank lending standards and increased banking regulations have considerably changed the financing landscape. As banks become more restricted by tighter regulatory capital requirements, they become more cautious and restrictive in their lending practices, thus a gap in financing for many businesses has emerged. Private credit funds are stepping in to fill this gap, providing essential capital for growth, acquisitions, and other corporate activities. This disintermediation from banks allows businesses to optimize their capital structures amidst higher borrowing costs. For borrowers, private credit offers greater flexibility and efficient execution compared to traditional bank loans.
Looking ahead to 2024 and 2025, elevated interest rates compared to the previous decade and resilient corporate performance are expected to sustain demand for private debt, which has become one of the most attractive asset classes in nowadays markets. Despite challenges, private debt remains a compelling source of risk-adjusted returns, income, and diversification for investors. The ability to achieve these returns while maintaining a level of security through first-lien secured loans makes private credit an attractive investment option. It’s fair to say, that currently the most matured market and region in terms of disintermediation by private markets activities are USA, followed by Europe.
In the Middle East, this global trend is mirrored but with regional nuances. The region’s ongoing economic diversification efforts, particularly in the Gulf Cooperation Council (GCC) countries, are a key factor. Governments in the Middle East are actively seeking to reduce their dependence on fossil revenues by promoting private sector growth and developing new industries. This shift has created a fertile ground for private credit, as companies across various sectors require financing to fuel expansion and innovation.
However, the local market in the Middle East is still relatively infantile compared to the more mature markets. Banks have a large dominance in the region, which means that private credit is still in the early stages of development. This dominance of banks presents both a challenge and an opportunity for private credit funds. The concept of bank disintermediation is gradually taking hold, as private credit funds begin to fill the financing gaps left by traditional banks, which are often constrained by regulatory requirements.
Additionally, the Middle East’s relatively young and rapidly growing population is driving demand for infrastructure, real estate, and consumer services, all of which require substantial capital investment. Private credit funds are stepping in to fill these financing gaps. Moreover, sovereign wealth funds and family offices in the Middle East are increasingly investing in private credit internationally as well nationaly. These entities are looking for stable and higher returns to meet their long-term financial goals, and private credit aligns well with these objectives.
The development of financial markets and the gradual easing of regulations in some Middle Eastern countries have also contributed to the increasing attractiveness of private credit. Investors are drawn to the region by the prospect of higher yields compared to more mature markets, along with the potential for strong long-term returns as the region’s economies continue to develop and mature.
How are, or can, new managers capitalizing on this interest?
Building strong relationships across the entire private markets’ ecosystem are a key advantage for new managers as they capitalize on the growing interest in private debt.
Adopting flexible and adaptable investment strategies allows new managers to respond quickly to market changes and capitalize on emerging opportunities. By being agile, they can adjust their strategies to align with shifting economic conditions, regulatory environments, and investor preferences.
New managers can capitalize on the current interest in private credit by emphasizing its ability to offer stability, consistent returns, and portfolio diversification in a volatile economic climate.
How are regulatory reforms and economic development in the Middle East such as Vision 2030 in KSA and Vision 2040 in the UAE creating opportunities for private debt funds?
Regulatory reforms and economic developments like Saudi Arabia's Vision 2030 and the UAE's Vision 2040 are indeed creating significant opportunities for private debt funds. Vision 2030 in Saudi Arabia aims to diversify the economy by promoting sectors such as tourism, entertainment, healthcare, and technology, which increases the demand for private capital to finance new projects and business expansions. Private debt funds can offer the necessary financing with flexible and tailored solutions to meet the specific needs of these emerging industries. Additionally, regulatory reforms under Vision 2030, aimed at improving the business environment and attracting foreign investment, create a more investor-friendly landscape, encouraging private debt funds to operate confidently in Saudi Arabia and other countries in the Middle East region
Similarly, the UAE's Vision 2040 focuses on economic diversification by fostering growth in non-oil sectors like logistics, renewable energy, healthcare, and financial services. This creates a need for significant investment, and private debt funds can support this development. The emphasis on infrastructure development under Vision 2040 presents opportunities for private debt funds to finance large-scale projects, offering stable, long-term returns. Furthermore, both Vision 2030 and Vision 2040 prioritize sustainability, aligning with the growing demand for ESG-focused investments. This focus on sustainability allows private debt funds to attract socially conscious investors and finance green projects and renewable energy initiatives.
The supportive regulatory environments in both Saudi Arabia and the UAE, characterized by streamlined business processes and incentives for foreign investors, further enhance the attractiveness for private debt funds. These funds can also capitalize on cross-border investment opportunities due to the strategic locations of both countries, facilitating trade and investment in the broader Middle East, Africa, and Asia regions. Overall, the combination of economic diversification, regulatory reforms, infrastructure development, and a focus on sustainability under Vision 2030 and Vision 2040 creates a conducive environment for private debt funds to invest and support regional growth.
How are credit fund managers differentiating themselves from equity fund managers in the risk management space?
Credit fund managers distinguish themselves from equity fund managers in the risk management space by adopting a more conservative and structured approach to capital preservation, risk mitigation, and income generation. One of the primary ways credit fund managers set themselves apart is by prioritizing the preservation of capital and generating steady income. Unlike equity fund managers, who often pursue higher returns through capital appreciation and may tolerate more market volatility, credit fund managers focus on protecting the principal investment. This is achieved through rigorous credit analysis and due diligence, ensuring that borrowers have the financial strength to meet their debt obligations consistently. Moreover, credit is typically at the top of the capital structure compared to equity. This means that in the event of a liquidation, credit investors have a higher claim on the company’s assets than equity investors. This seniority in the capital structure provides an additional layer of security for credit fund managers, making it a more attractive option for those focused on risk management and capital preservation.
Additionally, credit fund managers implement stricter covenants and collateral requirements in their lending agreements. These covenants act as protective measures, allowing managers to intervene if a borrower’s financial situation weakens. Collateral, which provides tangible assets backing the loans, offers another layer of security. If necessary, these assets can be seized and liquidated to recover the invested capital, thus safeguarding the investment.
Regular monitoring and reassessment of portfolio companies are also hallmarks of credit fund management. This continuous oversight enables early detection of potential risks and allows managers to take proactive steps to address any emerging issues. While equity fund managers also monitor their investments, they often lack the direct control and protective measures that credit fund managers can enforce through their lending agreements.
As an LP, why do you choose to attend SuperReturn Middle East and what does it mean to your company?
I've had the pleasure of attending SuperReturn on multiple occasions, and this marks my second time participating in the Middle East.
SuperReturn Middle East offers an excellent platform for connecting people and organizations in a dynamically changing investment world. I am continually impressed by the dedication that goes into organizing such a dynamic and impactful event.
Moreover, the event offers invaluable insights through its well-structured panels and sessions, covering market trends, investment strategies, and regional dynamics. These insights are crucial in keeping us informed and enabling us to make well-founded investment decisions.
