The venture capital sector has showed continued sustained growth with significant public initiatives to grow the sector and continued record fundraisings for regional start-ups and out-bound investment by regional asset managers, venture capital funds and leading business figures. OSAMA AUDI surveys the venture capital landscape.
Review of 2016
Following a strong 2015, MENA-based venture capital investments showed surprising strength in 2016. The continued strength in venture capital investments is driven by high mobile use penetration and little competition when compared to more developed markets. The success of regional venture capital investors in platforms as diverse as online food ordering website Talabat.com which was acquired by Rocket Internet and subsequently acquired by the world’s largest food-ordering platform, Delivery Hero, is testament to souq.com’s ability to complete a funding of a reported US$275 million – the largest e-commerce funding in the Middle East to date, and has spurred additional focus on the venture capital and technology sectors.
2016 was a banner year for venture capital and e-commerce investing in the MENA region and included headline grabbing deals such as the Saudi Arabian Public Investment Fund (PIF) announcing an investment of US$3.5 billion in ride-hailing service, Uber. This was followed by an announcement that rival ride-hailing service Careem has closed in on US$300 million in funding.
In addition, the PIF announced plans to invest approximately US$45 billion into a US$100 billion tech fund which will be established with Japan’s Softbank. Smaller scale venture capital funds have also set up in the MENA region and are executing transactions. Among such funds, Leap Ventures raised approximately US$75 million and closed two publicly announced deals including the acquisition of Uturn, a popular Arabic-language Youtube portal.
More recently, the PIF announced a series of investments or joint ventures with various ventures linked to Dubai-based Mohammad Al Abbar, the chairman of Emaar, the listed real estate developer responsible for, among others, the Burj Khalifa and the world’s largest mall, the Dubai Mall. Dubai-based venture capital player Wamda invested a reported 40% of the US$60 million it raised in regional funding in 11 different technology ventures.
Regulatory update
From a regulatory perspective, 2016 was also a banner year with a number of new pieces of legislation being announced which will likely have an impact on the growth of a lively and sustainable venture capital market in the MENA region. New or proposed legislation includes: (i) a new bankruptcy law for the UAE which, it is hoped, will limit some of the serious risks entrepreneurs take when their ventures fail; (ii) draft rules for listings of small-cap companies in Saudi Arabia; and (iii) the announcement of a low-cost regime to establish so-called intermediate SPVs in the Dubai International Financial Center (DIFC).
New UAE bankruptcy law
Taking the new or recently announced legislation in turn, on the 20th September 2016, the new bankruptcy law for the UAE was enacted. The law comes into effect on the 31st December 2016 and will be supplemented by procedural regulations to be issued in the near future.
The primary purpose of the law is to promote the rescue of businesses, either of individuals or companies, facing financial difficulties. This will be done through an insolvency procedure supervised by a competent court (eg Dubai courts). The court will have wide powers to oversee the reorganization of the relevant debtor’s business, including appointing a trustee (at the cost of the debtor) to oversee the implementation of the insolvency procedure, being either a preventative composition arrangement, a restructuring plan or, as the case may be, a liquidation procedure.
The law will apply to: (i) companies subject to the Commercial Companies Law (ie most companies incorporated outside of the UAE free zones); (ii) decree companies which are totally or partially owned by the federal or local Emirati governments and which stipulate in their bylaws, memoranda of association or articles of association that they are subject to the law; (iii) free zone companies except for companies incorporated in the financial free zones (ie the DIFC or Abu Dhabi Global Market); (iv) traders; and (v) professional civil companies (eg consultancies).
Draft Capital Markets Authority secondary market listing rules
On the 3rd November 2016, Saudi Arabia’s Capital Market Authority (CMA) issued draft rules for a new secondary market. This will prove useful for parties seeking alternative sources of funding and potentially listing at an earlier stage in their lifecycle than has been typically available. Under the draft secondary market rules, companies with a minimum share capital of SAR10 million (US$2.67 million) will be permitted to list. Notwithstanding the foregoing, the CMA may approve listings at a smaller value. In addition, companies which list on the secondary market will be permitted to list only 20% of their shares.
DIFC – intermediate SPV regime
The DIFC announced that it will soon issue regulations in relation to a new corporate form called an intermediate SPV (ISPV). The reference to ‘intermediate’ implies that ISPVs will not be the primary holding entity nor will they be actual operating entities further down the line in any relevant structure. In addition, only entities with a substantive presence in the DIFC will be permitted to establish ISPVs.
A party with a substantive presence in the DIFC can establish an ISPV as a joint venture vehicle so long as the entity with a substantive presence maintains control of the ISPV. Accordingly, ISPVs may be useful to regional family offices, holding companies or funds, with a presence in the DIFC, in order to structure shareholder arrangements in respect of their various joint ventures or subsidiaries which are not wholly owned. The use of an ISPV will enable such parties to entrench enforceable shareholder arrangements without moving such arrangements offshore. The use of an ISPV could enable parties with a substantive presence in the DIFC to take advantage of the DIFC’s flexible corporate laws, which are based on English law, and the common law legal system while maintaining GCC nationality.
Preview of 2017
We expect that the groundwork laid during 2016 will lead to continued expansion in venture capital investing in the region during 2017, with a focus on both early stage investments and start-ups as well as later stage investing such as the investments in, among others, Uber, Talabat.com and Careem. It’s also hoped that recent government initiatives to benchmark regional laws and regulations and global best practices will lead to a legal environment that encourages the growth of venture capital businesses.
Conclusion
2016 was a banner year for regional venture capital investing with venture capital investors, governments and start-ups working closely together to grow the relatively nascent sector. With reports from online payment platform Payfort projecting that the e-commerce sector will grow in the MENA region to US$13.4 billion by 2020 from US$7 billion in 2014, there have been quite a few initiatives announced which are hoped to lead to continued strength in the sector in 2017 and beyond.
Osama Audi is a member of King & Spalding’s Middle East & Islamic Finance and Investments practice group. His practice focuses on advising clients on corporate and M&A transactions (including private equity and venture capital transactions). He can be contacted at [email protected].