Credit Funds in the DIFC
DIFC is one of the world’s top eight onshore financial centers and offers a secure and efficient platform for businesses and financial institutions to reach into and out of the emerging markets of the region. The quality and independence of DIFC’s regulator, the prevailing common law framework, excellent infrastructure and tax efficiencies make it the perfect base to take advantage of the rapidly growing demand for financial and business services in the MENASA region.
DIFC fills the time-zone gap for a global financial centre between the leading financial centres of London and New York in the West and Hong Kong and Tokyo in the East.
What is a credit fund?
Credit funds are collective investment funds that use fund property (i.e., investors’ money) either to originate, or to purchase, loans, or both. The limited options for borrowing from banks in certain markets have led to the increase in the opportunity for fund managers to provide private credit, through specialize credit funds.
Fund managers have been able to obtain access to reliable deal flow directly from targeted market segments, making use of underlying collateral, as well as gaining access to lending transactions with banks and purchasing loan portfolios from banks and other loan originators.
What does DFSA consider a Credit Fund?
Credit Funds are a specialist class of funds in the DIFC, in which investor’s money can be used for the direct purchase of loans or purchase of loan portfolios. To be a Credit Fund, at least 90% of the Fund Property should be used for either loan origination or loan portfolio acquisition. These funds can be Exempt Funds or Qualified Investor Funds, but not Retail Funds. They can be set up as Investment Companies or Limited Partnerships. The Investment Trust structure is not permissible for Credit Funds in the DIFC. Also, such funds would have to be closed-ended, with a maximum tenure of 10 years, and cannot have leverage of more than 10% of the Fund’s Net Asset Value.
Types of permitted lending products
The DFSA permits the following types of lending products, with a credit fund:
- Investment in debt instruments such as bonds or securitized debt
- Financial leasing, along with discounting and factoring of invoices
- Trade finance
Credit funds are not able to issue letters of credit or give financial guarantees.
Credit funds would have to implement an explicit risk diversification strategy to achieve a diversified portfolio of loans that limits exposure to any one issuer or group to a maximum of 25% of net assets within a specific time-frame.
Types of borrowers
Credit funds are not allowed to grant loans to individuals, the fund manager, other funds, related parties, traders in equity and commodities (including digital assets) and other credit providers.
The DFSA also imposes certain requirements for fund managers who operate credit funds from the center. These include establishing and maintaining policies and procedures for managing risk, criteria for assessing creditworthiness, collateral management, valuation and impairment, and debt management. A fund manager would also have to establish internal methodologies to assess credit risk of exposures to individual obligors, securities or securitisation positions and credit risk at the portfolio level, and measures to address concentration risk.
Fund managers of Credit Funds would have to establish and maintain a comprehensive stress-testing programme as part of their systems and controls.
Why setup a DIFC credit fund?
The DIFC is a leading financial hub in the region. Besides offering a wide range of financial service activities, the centre also provides an integrated environment and world-class standard of living. It is well regarded in the international community as well.
You can read more about DIFC Investment Funds here:
Here are some specific advantages of establishing in the Dubai International Financial Centre.
LEGAL AND REGULATORY FRAMEWORK
- Legal framework supports cross-border activities
- 100% foreign ownership permitted
- No restriction on foreign talent or employees
- No restrictions on capital repatriation
- Zero tax for 50 years on profits, capital or assets from 2004
- Zero tax on employee income
- Highly regarded, independent regulator
- Independent, English-speaking, common law judicial system
- Distinct from the UAE legal system
- Risk-based regulatory approach
- Central to regional deal making
- High concentration of international firms, investment funds, wealth management firms, banks, and financial institutions
- World-class regional and international law and auditing firms, and other professional services
- The largest fund domicile in the region
- Management offices, holding companies and family offices are located closer to the assets they own or manage
- The Middle East, Africa and South Asia (MEASA) is increasingly the centre of gravity for the global economy
- Dubai plays a central role in the growing South-South trade, principally between Asia and Africa
- Well-positioned to harness the potential of emerging markets
Types of Funds
A DFSA Credit Fund has to be a Professional Fund and cannot be open to Retail Clients.
Exempt Funds are open only to Professional Clients (as defined by the DIFC). The other features of an EF are:
- Minimum subscription of US$ 50,000; and
- Units are offered to persons only by way of a Private Placement.
Qualified Investor Funds
Qualified Investor Funds are open only to Professional Clients (as defined by the DIFC). The other features of a QIF are:
- Minimum subscription of US$ 500,000; and
- Units are offered to persons only by way of a Private Placement.
Setting up a fund structure in the DIFC
Setting up a Credit Fund in the DIFC requires setting up a Domestic Fund Manager. External Fund Managers are not permitted to establish and operate domestic credit funds.
DIFC Capital requirements
The base capital requirement for a Category 3C Fund Manager of Credit Funds is $100,000. Actual capital required will depend on the nature, quantum of business and forecasted annual expenditure, as per the financial model of the proposed firm.
The DFSA expects that the firm be adequately staffed depending on the scale, scope and nature of the product portfolio that is proposed to be offered from the DIFC. At a minimum, the DFSA would like to see the following appointments:
(i.)Board of Directors – a well-organized Board with robust governance policies. The Chair would have to be a non-executive Director.
(ii.)Senior Executive Officer (SEO) – Senior fund management professional with over 10 years of experience, ordinarily resident in the UAE.
(iii.)Finance Officer (FO) – Senior and suitably-qualified finance professional. In case of a group, the FO can be from the parent company and does not have to be resident in the UAE. This role can also be outsourced.
(iv.)Risk Officer – This position is usually outsourced, and not mandatory.
(v.)Compliance Officer (CO) - Senior compliance professional with over 10 years of experience, ordinarily resident in the UAE.
Money-Laundering Reporting Officer – Senior AML professional with over 10 years of experience, ordinarily resident in the UAE. This function can be combined with Compliance and one individual can carry out both responsibilities.
The CO and MLRO roles can also be outsourced.
(i.)Internal Auditor - Senior and suitably qualified internal audit professional. Usually outsourced to a professional firm.
(ii.)External Auditor - Senior and suitably qualified external audit firm. The DFSA maintains a list of recognised auditors, and there are 15 such firms at present.
The DIFC Application Process – fast tracked
The DIFC application process commences with formal introductions to the DIFC and the DFSA.
Following the introductory call, a Regulatory Business Plan (RBP) is prepared, along with financial projections, for a quick review by the regulator.
The comments of the regulator are incorporated into the RBP, and a comprehensive application is compiled, comprising policies, processes and other related documentation. The KYC and associated forms of all key individuals are also prepared for submissions.
The formal application is then sent across to the DFSA, who reviews the pack over a period of 7-10 business days, and then accepts it. The detailed review process then commences, and this can take anywhere between 45 and 60 days to complete.
The regulator maintains communication with the applicant at all times during the review, reverting with an initial review 2 weeks into the application, and then follow-up reviews thereafter. The DFSA also meets with the SEO, FO and CO/MLRO designates, and conducts a detailed interview with them.
An in-principle approval is issued in case the application is successful. The applicant then proceeds to satisfy the in-principle conditions, and this involves the setting up of a legal structure, opening a bank account, and depositing the share capital in the account. Other tasks include finalization of auditors and obtaining professional indemnity insurance for the firm.
Once done, a final submission is made to the DFSA, following which the regulator issues the Financial Service Permissions and the process is then complete. The firm is now open for business.
Setting up a DIFC Regulated Firm involves the following interactions:
Dubai Financial Services Authority (DFSA)
The DFSA is responsible for reviewing and approving all applications for financial services. Costs depend on the activities applied for, which puts the applicant in one of five categories.
Generally, there are two components of DFSA fees. One – an application processing fee, and the other, an annual licensing fee.
Application fee: US$ 10,000 for a Fund Manager license application.
License fee: US$ 10,000 for a Fund Manager license application.
Registrar of Companies (DIFC ROC)
The ROC helps to set up the legal structure of the DIFC Regulated Firm. Shareholders can be individual, or corporate. There are many options available, such as ‘Private Company Limited by Shares’ and ‘Limited Liability Partnerships’. In case of Private Company Limited by Shares, the costs for setting up include:
Application for reserving a name (2 working days): US$ 800
Application for Incorporation of a Private Company Limited by Shares (5 working days): US$ 8,000
Commercial License on Incorporation (5 working days): US$ 12,000 (annual fee)
The data protection notification is part of the process of registering a new entity in the DIFC. The costs involved are as follows:
Registration - US$ 500
Annual renewal – US$ 250
Every entity registered in the DIFC is required to lease a physical office. You can choose from the Gate and surrounding buildings, or other buildings within the DIFC, such as Emirates Financial Towers, Central Park, Park Avenue, Burj Daman and Currency House.
Prices vary, depending on the space availed and the building. Here is an indication of the prevailing rates:
DIFC Business Centre – from a two-desk office at US$ 35,000.
DIFC Fitted Offices – from US$ 55 per square foot.
Other buildings – from US$ 32,000 per annum
Establishment Card Application – US$ 630
PSA Deposit – US$ 682
Visas (per visa) – from US$ 1,500
PSA Deposit (per visa) – US$ 682
A Credit Fund in the DIFC will also need to appoint some service providers to carry out critical functions, such as fund administration and audits. Read this article on the different services associated with maintaining a credit fund in the DIFC.
Did you know that a Private Placement Memorandum, or PPM, is the key document for DIFC Investment funds? The PPM details material information on the fund and serves as the backbone of the legal documentation involved. Read this article to know more about the documents required for setting up a Credit Fund in the DIFC.
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