Private credit funds to list on Tadawul

Private credit is going retail in Saudi: So-called “financing investment funds” — vehicles that extend direct and indirect credit to businesses — will be able to list on Tadawul’s main and parallel markets under proposed rules now up for public consultation, the Capital Market Authority (CMA) said in a statement . The move would open to retail investors an asset class once reserved for deep institutional pockets via private placements, possibly providing a new source of long-term capital for credit-hungry mid-market firms.

Why now? Banks have limited resources, and they’re all-in on gigaprojects. Borrowing appetite at everything from Neom to Diriyah is eating up the two key resources of any bank: Liquidity and the time of their bankers. It’s not that banks are more selective, it’s that they don’t have bandwidth. In many respects, it costs a bank as much to write a small-ticket loan for a mid-sized family business as it does to kick the tires on a much larger (and thus more lucrative) facility for a state-backed giant.

“There’s a clear pipeline of companies that are growing but still under-served by traditional financing,” senior investment banker Mustafa Fahim tells EnterpriseAM. Investment funds going public could help bridge that gap “by bringing more market-based credit into the system,” he added.

The missing middle will capture the flow: “The real [potential] is in mid-sized companies — industrials, healthcare, education, and some tech-enabled businesses,” Fahim told us. Private investment funds look at “companies that are scaling well, but don’t always have efficient access to flexible credit. That missing middle is where these funds can play a meaningful role,” Fahim adds.

Guardrails around risk are conservative but understandable, Fahim told us. On the main market, borrowing is capped at 15% of net asset value, while funds listed on Nomu are allowed to run with higher leverage of up to 50% of fund size, the CMA statement read. Exposure limits are also tightened, with indirect financing funds restricted from allocating 25% or more to a single borrower or group.

Uh, Enterprise? Why do Nomu-listed funds get more room on leverage? It comes down to the investor base, Fahim explained. Participation in the parallel market is limited to qualified and institutional investors who meet professional, income, or net worth thresholds. They’re investors who are (theoretically) better-equipped to assess risk, allowing regulators to tolerate higher leverage.

Tighter restrictions on Tadawul’s main market are designed to protect a wider investor base. While similar vehicles in more mature markets like the US typically run higher leverage to juice returns, the Saudi cap is a tactical choice to keep risk in check. “This is a new product for the market, so the focus is clearly on stability and building investor confidence first,” he said.

How fund managers will likely hunt for alpha: With leverage restricted, fund managers will have to work harder for their returns. “Managers can still generate returns by targeting higher-yield segments and leaning on structuring,” Fahim said. In practice, this means moving up the risk curve into instruments like high-yield sukuk, mezzanine debt, and subordinated structures to drive returns on a risk-adjusted basis.