Abu Dhabi-based Shorooq Partners’ Nahda Fund I will focus on start-up opportunities in the agri-tech, e-commerce, logistics and fintech sectors.

DUBAI: A recently established venture capital (VC) debt fund focused on offering alternative forms of debt financing to early and mid-stage start-ups in the Middle East and North Africa (MENA) region has rolled out.

Abu Dhabi-based Shorooq Partners, whose investment portfolio include regional start-ups like Pure Harvest, Sarwa, Lean, TruKKer, Capiter and Retailo, launched its Nahda Fund I at the end of October.

Licenced at the Abu Dhabi Global Market (ADGM), the Nahda Fund I will focus on three areas including software, platform, and fintech. The fund is particularly interested in start-up opportunities in the agri-tech, e-commerce, logistics and fintech sectors.

“Most start-up and their founders are unable to access finance or debt from either conventional or Islamic banks,” said Samir Yamani, managing partner at Shorooq. “We are here to fill in space where these start-ups can access financing to grow and scale.”

The screening process criteria for potential investee companies include that start-up founders are leaders in their field. The investee firm start-up will need to demonstrate high growth and a valuation of around $100 million plus.

The Nahda Fund I plans to finance large Series A and Series B rounds with an average ticket size of $5 million to $10 million, Yamani said, adding that it will look selectively at pre-series funding opportunities. Nahda I typical financing will be medium term of around one to three years in the investee company.

The fund will focus on debt financing rather than equity financing because it is under served, non-dilutive and what the ecosystem needs.

“Founders seek debt because it is non-dilutive with minimal operational interference whereas equity financing is dilutive and often more expensive,” said Yamani. “In terms of returns on potential investments, from a pure profit rate perspective we are senior secured high yielding in the double digits. This excludes our equity warrants.”

The debt financing into investee firms will be structured in Sharia compliant manner.

“Whilst our fund is not an Islamic regulated fund with a Sharia board, we operate and invest in a Sharia-compliant manner,” he explained. “We will use a method of financing tools like commodity murabaha and ijara arrangements.”

Adding to this, specific elements of ESG (environmental, social, and governance) and socially responsible investing (SRI) is set to play a role in the investing ethos and process.

"Suitable frameworks, monitoring, and scoring are still nascent in our region" he said. "Things like environmental impact, female inclusion and governance are important. However, certain frameworks are built for different societies and their idiosyncratic conditions. Nevertheless we see this as an important area to enhance and be ESG impactful in our region."

South Korean involvement

One key investor in the fund will be South Korea’s IMM Investment, which is a leading PE/VC house with over $5 billion in assets under management, via IMM Investment Global which is based in Hong Kong and is an arm of IMM.

“This is our first MENA fund and we are hoping this will open up new doors to exciting opportunities,” Sean Jin, Director of VC investments within IMM Investment Global, told Salaam Gateway. “We would like to bring our experience of helping Korean start-ups to scale and provide much needed capital as well as relevant strategic advice to investee companies.”

“At the same time, we would also like to instill the international level of management discipline so that the alumni of our fund not only reap the financial benefits but also brace for the growing pain early on so that they are well prepared for the next level of scrutiny, hopefully with international investors,” he added.

Yamani believes that the involvement of IMM and Shorooq’s Asia Pacific investor base will give them the opportunity to experience and be part of Islamic structured transactions.

Sean Jinn said that IMM Investment Global doesn’t view Sharia compliance as a big hurdle as long as their target companies don’t fall short of qualifications both economic and legal.

“We are keen to engage our local network ranging from partners, legal advisors, consultants and investment bankers to review each deal, if necessary,” he said. “We at IMM went through Islamic finance structure with top legal advisors as well as local financiers. We understand it is a local practice that we rather need to adapt in the Middle East.”

Growing number of VC debt providers

Shorooq’s entrance into the VC debt market is not in isolation. The number of debt financing providers to regional-based start-ups and early-stage firms is growing.

In July, Israel-based Liquidity Capital, a fintech and fund manager, announced a joint venture with Dubai-based YAS Investments to launch the YAS Liquidity Fund, a $100 million MENA-focused venture debt fund based at ADGM.

Others like Saudi Venture Capital Company (SVC), a quasi-governmental investor, said last month it was teaming up with angel investors to launch new investment products including debt funds for start-ups and early-stage companies.

MENA first but global long-term

The Nahda Fund I will primarily focus on the MENA and Pakistan first, although they will look at opportunities in markets like Turkey and Bangladesh selectively.

“Although there are opportunities in Malaysia, Indonesia, these are outside of our key regions at the moment,” said Yamani. “We will be looking outside of the GCC over the next few years.”

Despite this growing activity, Yamani maintains that the venture capital industry is still quite nascent in the MENA.

“Historically, MENA investors needed to be comfortable with what they know,” he said. “On the debt side we have lots of low hanging opportunities which make it more attractive to target regionally and by extension support our ecosystem.”

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