Venture Capital In The Middle East - 10 Leaves

  • 05-03-2021
The Middle East in general, and United Arab Emirates and Saudi Arabia in particular, has seen a number of government-led initiatives for technological innovation in recent years. A large untapped market for Arabic-based content, a very young population and excellent technological connectivity makes the region a hotbed for enterprising entrepreneurs who are hungry for success.
 

Dubai has emerged as the undisputed entrepreneurial capital of the Middle East due to its open business policies, world-class lifestyle and recent success stories. Home to Careem, the Uber-esque company that Uber acquired for over $3 billion and Amazon-acquired Souq.com, that was purchased for around US$ 600 million, Dubai has been in the tech limelight of late. Initiatives such as the Innovation Hub at the Dubai International Financial centre (one of the top 10 onshore financial centres worldwide) have gone on to create the groundwork for an ecosystem where technology companies can flourish, and more importantly, access capital.

Neighbouring Abu Dhabi hasn’t been too far behind, with the Hub 71 initiative bringing in over 100 companies that are housed in WeWork, on the purpose-built Al-Maryah Island. The latest success story – the listing of Middle-East Spotify rival anghami.com  on Nasdaq via SPAC merger only goes to show that this is just the beginning.

Dubai attracts investors, advisors and both home-grown and expatriate entrepreneurs to its 30-odd special economic zones (called free zones) that offer multiple initiatives, such as reduced licensing costs, flexible office space and a tax-free environment to thrive.

These factors are positive. But most fledgling startups hit a roadblock when it comes to raising capital through traditional methods. Banks are unwilling to lend to companies that do not have a (profitable) track record, given the risks associated with untested business models and young teams. Here is where, like anywhere else in the world, that alternate modes of finance such as venture capital find an opportunity.

While there are some prominent venture capital names here already – MEVP, Beco Capital, 500 Startups for example, opportunities abound for international VC firms to setup and become part of the growing startup ecosystem.

Opportunities:

The Middle East is a dynamic new market. We have seen startups from Europe, London and the States starting to take notice of the region, to access this market and extend their service and technology portfolio to the region. They can do this by a) setting up a subsidiary here or b) acquiring an existing technology firm that has a good market share and hence hit the ground running.

They can target two markets on the trot – the Saudi and UAE markets are the biggest in the GCC. While the Saudi market is larger, the UAE boasts of a more flexible startup ecosystem. Many startups from the West also use Dubai as the springboard to target the greater MENASA region, thus getting a footprint into North Africa as well.

For Venture Capital firms, the opportunities are even more exciting. We have seen many VC firms bringing their portfolio companies to the region, and also picking the best in the region to invest in and take the idea/opportunity back to their home countries.

VC firms from more mature markets also bring much-needed technological expertise and vast experience in funding and management, both of which are required to grow the ecosystem here.

Co-investment with locally-based venture capital fund managers also makes sense, given their regional expertise. Deals abound in the innovation centres that have been created, and prices are lower than what would be typically available in say Europe, the States or India. Having a local presence and tying up with VC Fund managers here would help create a deal pipeline that can be interesting.

So how does one go about it?

VC Fund Managers who are interested to enter the region, can consider the DIFC as a viable option.

What is the DIFC?

The Dubai International Financial Centre 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.

Does the DIFC have a fund regime?

Yes! Since the late 2000s in fact. While it started slow, the DIFC now has nearly 100 well-regulated and established funds in the centre. There are multiple ways of establishing a fund in the DIFC, both private and public funds.

Why setup a Venture Capital Fund in the DIFC?

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.

The Dubai Financial Services Authority, or DFSA, acts as the independent regulator of fund managers and investment funds setup in the DIFC, which provides a high degree of comfort to individual and professional investors. The DIFC offers both Domestic Fund Manager and External Fund Manager licenses, both of which allow for the management of Public, Exempt and Qualified Investor Funds. The DIFC Registrar of Companies (ROC) offers multiple fund structures, included open-ended and closed ended investment companies, and GP-LP structures.

With DIFC Funds, Fund Managers can target the GCC market, and the wider MENASA region, taking advantage of the numerous Double Taxation Avoidance Treaties that the UAE has in place. Zero-rate personal and corporate tax also make the DIFC an attractive destination to setup and manage investment funds.

The DIFC has now implemented a Venture Capital Fund Manager regime, that aims to attract VC firms from all over the world, into the centre.

What is the DIFC Venture Capital Fund Manager Regime?

The DIFC has implemented a path-breaking VC Fund Manager Regime, that promises to add to the current startup ecosystem being built through the DIFC Fintech Hive and the DIFC Innovation Hub. The regime is a carve-out of the already fast-tracked Restricted Fund Manager regime, that is in place for entities that wish to only manage private funds

What is the definition of a VC Fund as per the DIFC?

 The DFSA has listed a few criteria that specify what they consider to be a VC Fund that can be established in the DIFC.

A VC fund would have to:

  1. Be an Exempt Fund or a Qualified Investor Fund, open to Professional Clients only;
  2. Be a closed-ended fund;
  3. Invest at least 90% of it’s committed capital in unlisted businesses, which are not more than 10 years old; and
  4. Fund the underlying ventures through equity instruments only.

VC funds are usually closed-ended, for a fixed tenure and can be structured as Closed-ended Investment Companies or Partnerships.

Read more about DIFC Venture Capital Funds by clicking here.

DIFC Capital requirements for VC Fund Managers:

The DFSA has implemented more flexible requirements for a VC fund under the new DIFC Venture Capital Funds Regime. The firm will not be required to maintain a set amount of capital but would be expected to maintain and have access to financial resources that are adequate to the size and complexity of it’s business.

 Does the DFSA specify any mandatory roles or appointments?

 The DIFC is a well-regulated jurisdiction, and hence the DFSA mandates some mandatory appointments for all regulated entities

  1. Senior Executive Officer - The SEO will need to demonstrate experience of at least 5 years in financial services, preferably in a well-regulated jurisdiction. He/she will have to be based in the UAE in due course.
  2. Finance Officer - Will have to be a qualified finance professional with relevant experience. This person can be based outside the UAE as well. 
  3. Compliance Officer - Will need to be DFSA -authorised and have relevant experience. This position can be outsourced.
  4. Money Laundering Reporting Officer - Will need to be DFSA-authorised and have relevant experience. This position be combined with the Compliance officer position above.

 

For DIFC VC Fund Managers, the DFSA has dis-applied the requirement of a Finance Officer. In addition to this, it has removed the requirement of a Compliance Officer until capital commitments are received.

What other allowances does the DIFC VC Fund Manager regime offer?

 In addition to the above, the DFSA:

  • Allows self-custody of fund property;
  • Makes the appointment of an investment committee optional;
  • Allows VC funds to invest more than 25% in a single undertaking;
  • Makes internal audit of the fund manager optional; and
  • Applies simpler capital requirements.

How much time does it take to set up a VC Fund Manager in the DIFC?

The DFSA currently aims to issue in-principal approvals for Venture Capital Fund Managers in one week after receipt of a complete application. In all, the complete process can be actually completed within a month.

The Fund can be applied for once the VC Fund Manager is licensed. It takes between 2-5 working days to complete the process of registering an Exempt Fund or a Qualified Investor Fund in the DIFC.

How much does it cost?

There are two components of fees:

Application fee: US$ 2,000 for a Venture Capital Fund Manager license application.

License fee: from US$ 2,000 for a Venture Capital  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$ 0 (was US$ 800 earlier).

Application for Incorporation of a Private Company Limited by Shares (5 working days): US$ 0 (was US$ 8,000 earlier).

Commercial License on Incorporation (5 working days): US$ 0 (Year 1), US$ 4,000 (Year 2), US$ 8,000 (Year 3), US$ 12,000 apply from Year 4 onwards.

We have special packages for DIFC VC Fund Managers. Do get in touch to discuss.

 

Data Protection:

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.

Office spaces:

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 Co-working Centre – from a dedicated desk at US$ 500 per month – Approved for DIFC VC Fund Managers.

DIFC Fitted Offices – from US$ 55 per square foot.

Other buildings – from US$ 20,000 per annum.

Visas:

a. Establishment Card Application – US$ 630.

b. PSA Deposit – US$ 682.

c. Visas (per visa) – from US$ 1,500.

d. PSA Deposit (per visa) – US$ 682.

 

Launch your VC Fund with 10 Leaves:

The fastest way to launch your Venture Capital Fund in the DIFC. We have everything sorted for you, in one seamless solution!

Structure your VC Fund:

Tailor your fund to your needs: investment objectives, liquidity mechanics, waterfall, carried interest, legal structure.

Regulatory Authorisations:

Liaising with the DFSA to complete the approvals for the fund manager and the VC Fund.

Documentation:

Our legal arm – 10 Leaves Legability, assists in the preparation of all fund documentation including Private Placement Memorandums or PPMs, Investment Management Agreements, Subscription Agreements and Fund Constitutions.

Fund Accounting and Administration:

Assistance in accounting, VAT advisory, filing of regulatory returns and risk management through our exclusive partners.

Bank account opening:

Assistance in opening bank accounts with leading banks in the UAE.

 Fund Distribution Consulting:

Assistance in completing the required registrations of Fund Passporting for fund distribution in the wider UAE.

VC Fund Database Selection:

Consultations on registrations and publishing on leading fund databases, for promotions to their extensive curated audiences.

Our differentiators:

1. We are a specialized consultancy and Fund Launching Platform, and we simplify the deployment and maintenance of complex legal entities like VC Funds.

2. Launching a Fund in the DIFC was traditionally an extremely cumbersome process complete with endless paperwork and coordinating with multiple service providers. It was also a very costly affair, with prices north of US$ 40,000 just for fund documentation.

3. We have digitised and largely automated the process to make it accessible and save you time and money.

Contact us to discuss your fund requirements today! 

Get In Touch With Us
 
 
 

POPULAR ARTICLES

 

Corporate Governance For ADGM Foundations - 10 Leaves

Corporate governance for ADGM Foundations: What...

Corporate Governance For ADGM SPVs - 10 Leaves

Corporate Governance For ADGM Special Purpose...

New ADGM Company Service Provider Regime - 10 Leaves

The Abu Dhabi Global Market (ADGM) has been open for...

Launch Your Fund With 10 Leaves

  We have been speaking a lot about options to set up...

Venture Capital In The Middle East - 10 Leaves

The Middle East in general, and United Arab...

ADGM SPV Nexus Requirements - 10 Leaves

  INTRODUCTION: The Abu Dhabi Global Market (ADGM)...

What is the Coaching Cloud? Its Role in Enhancing HR

Amid strong contention on whether AI will...

Contact CONTACT