Saudi Arabia’s US$400 billion Public Investment Fund became the latest sovereign investor to enter the growing market for direct lending by becoming an anchor investor in a shariah credit fund. It could signal the beginning of a strong thrust into private credit in an effort to stimulate broader lending availability in Saudi Arabia and beyond.

The US$300 million fund, launched by NBK Capital Partners, will be disbursed across the GCC region and North Africa with 10 to 12 investments each ranging from US$15 million to US$50 million over eight years. It will be NBKCP’s first fully Islamic fund.

Global SWF’s 2021 annual report noted the growing popularity of private credit as an asset class in its own right. The asset class has increased significantly, from 2% of portfolios in 2015 to 3.2% in 2020 among the Top 10 state-owned investors.

Sovereign investors benefit from lower liability constraints that enable them to take on more liquidity risk than banks. Their greater risk appetite is driven by their long-term investment horizon. The asset class has been notably resilient amid the pandemic with managers successfully protecting their portfolio values as well as deploying dry powder to add assets. Investment is expected to pick up in 2021 as the market readjusts.

PIF has already sought to expose itself to the credit market by founding the Saudi Real Estate Refinance Company (SRC) in 2017, which is supporting growth of the Kingdom’s mortgage market. SRC aims to increase home ownership from 50% in 2018 to 70% of Saudi nationals by 2030 and raise the contribution of real estate financing to non-oil gross domestic product from 8% to 15%.

Saudi banks’ private sector loan growth came in at 14.9% y-o-y in November 2020, according to SAMA, led by the rapid expansion of the mortgage market. However, other sectors have experienced sluggish lending activity over 2020 with the backdrop of the Covid-19 pandemic. The investment in the sharia credit fund signals PIF is eager for more broad based loan availability, auguring the possibility of private credit investment.