The Financial Services Regulatory Authority (“FSRA”) of the Abu Dhabi Global Market (“ADGM”) announced amendments in May 2023 to its regulatory framework allowing collective investment funds to invest in credit investments.
The update to the ADGM’s Private Credit Funds regulation is a welcome amendment to the regulatory framework and is in line with the ADGM’s objective to continue its rise as a leading International Financial Centre both in the region and globally.
The amendments were necessary to permit licensed companies and funds to operate in or from the ADGM as credit providers and to obtain the approvals under the Financial Services and Markets Regulation (“FSMR”). In summary, the amended Private Credit Funds framework is designed to improve access to alternative financing for private enterprises and improve competitiveness in the SME sector.
We summarise below key developments under the Private Credit Funds regime in the ADGM:
The fund manager must maintain systems and controls that are suitable for managing the risk appetite, providing of credit, ongoing monitoring, managing of collateral; impairments and prompt valuation of assets;
The fund would be restricted in providing credit to natural persons, related parties, other funds, for speculative investments or to banks and other lenders;
Any borrowing by the fund will be limited to 100% of the capital of the fund;
The fund would be required to limit its exposure to any single group of borrowers by up to 25%;
The investment strategy of the fund must be designed to achieve a diversified portfolio;
The fund’s prospectus which is issued or distributed must have prominent suitable warning drawing attention to the unique risk profile appropriate to investments in credit;
In addition to general reporting obligations on the fund’s performance, additional reporting obligations be mandatory under the Private Credit Fund regime;
The fund manager will be required to have comprehensive stress testing and analysis programme in place.
The ADGM Private Credit Funds framework is a welcome move and was expected following the consultation from the FSRA. In comparison the Dubai International Finance Centre also issued its own rules and framework for similar activities in 2022 paving the way for the ADGM to follow the approach.
The above changes are certainly in the right step and we anticipate implementation of the changes will result in growth and diversification for the Abu Dhabi economy enabling investors, borrowers to have access to a diverse selection of credit providers in a thriving ecosystem for SMEs.