$757 Million Invested Through Venture Debt in MENA Region in 2023
The latest report from MAGNiTT highlights a significant surge in venture debt investments across the Middle East and North Africa (MENA) in 2023, marking a transformative year for this financing method. Venture debt investments in the region reached a record $757 million, representing a 262 percent increase compared to the previous year. This surge contrasts sharply with a 20 percent year-over-year decline in venture capital funding, underscoring the growing preference for debt over equity among startups and investors in the region.
Key Highlights
While the global venture debt landscape saw a downturn, particularly in the United States, where lending hit its lowest point since 2019, the MENA region experienced its fourth consecutive year of growth. This upward trajectory was largely driven by an increase in mega-deals, with four major facilities accounting for $750 million of the total lending value.
Saudi Arabia emerged as the frontrunner, capturing 53 percent of the total venture debt lending in the region, a significant rise from the 15 percent share it held between 2018 and 2022. The UAE also played a pivotal role, securing multiple mega-deals, including substantial investments in the Buy Now, Pay Later (BNPL) sector.
The fintech sector dominated the venture debt landscape, accounting for 79 percent of the total lending. Key players like Tabby and Tamara drove this growth, with significant funding rounds that underscored the sector's potential. Other prominent sectors included transport, logistics, and e-commerce, which together received nearly all of the remaining venture debt funds.
The average size of venture debt deals has increased dramatically. The report noted a rise in the average facility size to $63 million in 2023, largely influenced by mega-deals. This shift indicates a growing appetite for larger investments, contrasting with the smaller deal sizes prevalent in earlier years.
Philip Bahoshy, Chief Executive Officer of MAGNiTT, commented, “Venture Debt is a relatively new facility in the MENA region. Despite the high interest rate environment, we’ve observed significant funding, particularly in the BNPL segment. Investor interest has grown notably, with new funds established through investment from the Jada Fund of Funds in Partners for Growth, as well as Shorooq Partners’ latest Private Credit Fund. This trend indicates strong and growing confidence in the venture debt market.”
Bahoshy added that Venture debt as an asset class has been consistently active in the MENA region since 2020. However, in the past two years, growth has been heavily skewed towards late-stage rounds, where companies are raising substantial venture debt to support their growth towards IPOs.
The pool of investors has diversified, with eight active investors in 2023 compared to just one in 2020. The United States led the international investor participation, while local investors from Saudi Arabia and the UAE also made significant contributions. Notably, Goldman Sachs led the investment landscape in both deal count and capital deployed, marking its significant entry into the MENA venture debt market.
Property Finder recently announced the successful raise of US$90 million in debt financing and the buyback of shares from BECO Capital. Michael Lahyani, CEO and founder of Property Finder, hoped that this investment “sets the precedent for other founders in the region to take their innovative companies to new heights, attracting global talent and in turn creating the returns that fuel the entrepreneurial ecosystem across MENA.”
Hannan Moti, co-founder of iCodejr, has plans to raise funds later in the year. He added, “For startups like us that have achieved product market fit, I would choose venture debt for my working capital needs given its cost-effectiveness over other debt instruments, and the fact that I get to retain equity. However, specifically in the MENA region, should the proposed venture debt not be Sharia-compliant, some founders may face a dilemma.”
Future Outlook
The 2023 MENA Venture Debt Investment Report paints a promising picture for the future of venture debt in the region. The continuous rise in venture debt as a preferred financing method underscores its importance in providing minimally dilutive capital to startups. As the ecosystem matures, further diversification in investor participation and sector focus is expected. The significant investments in fintech, along with strategic initiatives aligned with national economic goals, suggest a robust trajectory for venture debt growth in the coming years.
