By Andrew Kahn and Armineh Baghoomian
While venture funding continues to pullback globally, one unique pocket of growth seems to have caught the attention of investors worldwide. And deservedly so. The global venture and tech community, ever attracted to growth, has taken notice. No longer drawn to the Middle East solely by the magnetism of large and growing pools of institutional investment capital, global investors are coming to appreciate the region’s homegrown technology ecosystem.
Pioneering Private Debt in the Region
PFG has been active in the region over the last four years, experiencing impressive economic diversification efforts firsthand, led by substantial investments in and support for local technology and innovation sectors. Excited about opportunities near on the horizon, we wanted to share our perspectives on catalysts behind this growth.
Discovered through our global network and partnerships, PFG partnered with our first portfolio company in the region in 2020. At the time, local private equity markets were well established, and the venture capital ecosystem had already delivered a multi-billion-dollar exit, but private debt solutions were a still underappreciated source of capital in the region. In fact, Bloomberg covered our structured working capital financing, citing the transaction as “a rare venture debt deal.”
Since our initial exploration of the market in 2019 and 2020, we have helped pioneer private debt and asset-backed lending solutions, delivering financing for nine companies representing in loans (together with partners PFG has brought in).
Untapped Markets with Tremendous Momentum
Tech lending often colloquially referred to, or categorized as, ‘venture debt,’ has garnered increased interest across the major tech hubs in UAE and KSA. We now see the development and launch of credit strategies by firms in the region to further support the entrepreneurial community. We are excited to see their participation and partnership in the ecosystem, deepening the local capital markets.
We believe that both the UAE and KSA represent largely untapped markets with tremendous momentum and attractive tailwinds. They have a strong combination of economic growth, institutional stability, and favorable technical, financial, and regulatory frameworks, paired with established intellectual property and creditor rights to promote private capital investment. The Middle Eastern technology and innovation sectors enjoy dedicated support from governments that have well-telegraphed plans to continue investing in these sectors as key pillars of ongoing economic development goals.
Saudi’s Vision 2030: A Tech-Powered Diversification
Growing its technology base is a key part of the , which seeks to diversify the economy from oil and gas with a clear focus on the technology sector. The changes resulting from this strategic framework and the pace at which these changes are being implemented are remarkable. Regional and international investors (both GPs (General Partners) and LPs (Limited Partners)) recognize and appreciate the positive changes that Saudi continues to make with respect to entrepreneurship, company formation, reduced and smart regulation, and significant capital to invest through its Public Investment Fund (PIF). The impact on the local ecosystem of innovation and entrepreneurship is expected to be significant.
The growth in technology investment have been tremendous in recent years and the environment reminds us of Australia ten or fifteen years ago when local tech ecosystems began to emerge “down under.” Both UAE and more recently KSA have committed material resources to build their start-up communities. For instance, VC funding in KSA went from $575 million in 2021 to $987 million in 2022. A record 104 investors participated in deals closed by Saudi startups in 2022, up 30% versus 2021. The country also recorded double the number of exits in 2022 compared to 2021, with 10 exits [1].
With a population of 36 million and significant purchasing power, KSA presents a huge opportunity for domestic and international companies. Many major U.S. brands have entered the market and we expect to see sizable growth over the coming two to five years.
In Riyadh, we have met several tech companies experiencing significant growth, with established recurring revenue approaching $30MM or more, and yet were having difficulty accessing local bank debt at the scale they needed. Sourcing accounts receivable financing, or what we refer to as asset-backed lending, is a common challenge for fintech companies at this stage of growth, even for those with an existing book of high credit quality debtors.
This type of specialty fintech lending is becoming more familiar across global markets and has become a more attractive proposition in the Middle East where the conditions are ripe for company growth and steady investor attention.
We founded PFG to be innovation’s partner for growth. We are excited by the prospects of continued growth across UAE, KSA, and throughout the Middle East and we look forward to furthering our mission throughout the region.
—
[1]“2022 Saudi Arabia Venture Capital Report,” MAGNiTT, Jan 2023
The views and opinions expressed in this article are those of the author and may not necessarily reflect the views or positions of any entities they represent.
