Private credit is now becoming a well-established asset class in the Middle East. As activity grows, sponsors and investors are focusing as much on regulatory costs and efficiency as on the mechanics of structuring. The choice of jurisdiction directly affects speed to market, ongoing overheads and investor confidence.
As regional markets mature and diversify, alternative lending strategies are gaining traction among sponsors, institutional investors and family offices alike. This growth is driven not only by the search for yield and flexible capital solutions but also by the evolving regulatory landscape, which shapes how these transactions are structured and executed. Understanding the regulatory nuances is essential for market participants seeking to deploy capital efficiently while maintaining compliance and investor confidence.
This is the third article in our series on private credit in the Middle East. The first examined orphan issuer vehicles in private credit transactions, while the second looked at the rise of private credit platforms in the Middle East: structuring scalable lending through Cayman Islands SPCs.
Here, we consider the regulatory framework – how Cayman Islands special purpose vehicles (SPVs) are treated, what regulation looks like, when it is required and how the Cayman Islands generally compares with the Abu Dhabi Global Market (ADGM) and Dubai International Financial Centre (DIFC) regimes.
Cayman SPVs: efficient, credible and investor-friendly
Cayman Islands SPVs have become a preferred structuring tool in Middle East private credit transactions, striking a balance between regulatory efficiency and institutional credibility.
- Private Funds Act (PFA). The PFA applies only where equity interests are pooled. Most private credit SPVs raise capital through debt instruments (such as notes or loans) and therefore fall outside their scope. Where equity is pooled, the vehicle would most likely need to register with the Cayman Islands Monetary Authority (CIMA) and comply with certain regulatory requirements under the PFA.
- Profit-participation loans (PPLs). Sponsors increasingly use PPLs and similar instruments to aggregate capital from multiple investors. These remain outside fund regulation provided they retain clear debt characteristics and avoid equity-like features.
- Securities Investment Business Act (SIBA). Cayman Islands SPVs engaged in loan origination or note issuance do not require a licence or registration under SIBA unless they are conducting securities investment business in or from the Cayman Islands (eg, discretionary portfolio management, advising etc), which is not usually the case for typical private credit transactions.
- Beneficial ownership reporting. Cayman Islands SPVs must maintain a private beneficial ownership register via a corporate services provider.
- AML and CRS/FATCA compliance. Anti-money laundering (AML) / know-your-client (KYC) and CRS/FATCA obligations are likely to apply.
- Economic substance (ES). All private credit Cayman Islands SPVs must file an annual ES notification. An ES return must also be submitted where an SPV conducts such activities or any other relevant activity under the ES regime. Private credit SPVs earning income from “financing or leasing activities” may be subject to enhanced substance requirements but can be structured to avail of an exemption from ES requirements.
In practice, Cayman Islands SPVs offer a streamlined, cost-effective way to raise capital (typically through debt) while remaining outside the scope of private fund registration and requirements. At the same time, they operate within a transparent framework that satisfies regulatory and investor expectations.
When regulation is required – Cayman Islands
Some sponsors prefer a regulated wrapper, either to meet investor expectations or for marketing purposes. The Cayman Islands provides this through:
- Private Funds Act funds. If the vehicle issues equity interests and meets the private fund statutory definition, it must (among other things) register with CIMA, appoint an auditor, file audited accounts, meet governance and internal control requirements and maintain valuation and conflict-management policies.
- SIB Act licensing. Where securities investment business (eg, managing, arranging or advising in respect of securities) is carried on in or from the Cayman Islands, licensing or registration is required unless an exemption applies.
This flexibility means the Cayman Islands can offer both unregulated SPVs and regulated funds depending on the sponsor’s objectives.
ADGM and DIFC credit fund regimes
Both the ADGM and DIFC have introduced dedicated regulatory frameworks for credit funds, going beyond the lighter-touch approach of Cayman Islands SPVs.
- ADGM. The Financial Services Regulatory Authority (FSRA) launched its private credit fund regime in 2023. It allows loan origination within a fund structure, provided the fund is managed by an FSRA-licensed manager and complies with the fund’s governance and reporting requirements.
- DIFC. The Dubai Financial Services Authority (DFSA) introduced its credit fund regime in 2022. It mandates that at least 90 percent of a fund’s assets be deployed in credit, with oversight by a DFSA-authorised manager and additional credit-specific risk management controls.
While these regimes offer a regulated and supervised label, they entail greater licensing, capital requirements, and reporting obligations than Cayman Island SPVs.
Key risks and structuring considerations
- Instrument design. Ensure profit-participation loans (PPLs) and notes retain clear debt characteristics and avoid equity-like features that could trigger fund regulation.
- SIBA scope. Confirm that any management, arranging or advisory activity is not conducted in or from the Cayman Islands unless appropriately licensed or registered under SIBA.
- Economic substance. Assess early whether the entity is in scope and plan for board-level oversight and decision-making, and filing requirements.
- Beneficial ownership. Maintain accurate and up-to-date registers with your corporate services provider.
- Cross-border enforceability. Be aware that collateral laws vary by jurisdiction and may affect enforcement strategies.
- Investor preferences. Where a regulated structure is preferred, Cayman Islands private funds offer a credible and compliant solution.
Conclusion
Cayman Islands SPVs remain the most efficient and widely accepted structuring option for private credit transactions in the Middle East. They enable sponsors to raise capital from multiple investors using debt instruments (without falling within the scope of fund regulation) while still meeting global standards for transparency, anti-money laundering and economic substance.
For sponsors seeking a regulated structure, the Cayman Islands Private Funds Act offers a globally recognised framework with a lighter regulatory footprint than the credit fund regimes in ADGM and DIFC.
The choice is not binary: the Cayman Islands provides both a scalable, unregulated platform and a credible, regulated fund domicile – allowing sponsors to tailor their approach to investor preferences and transaction objectives.
*Please note that Walkers (Middle East) LLP does not provide DIFC or ADGM legal advice. This article is intended for general information only and should not be treated or construed as legal advice.
Senior Associate Szymon Durlo contributed to this article.
Ciaran Bohnacker is a partner in Walkers’ Global Finance & Corporate Group and based in Dubai.
Louise Denman is a senior counsel and leads the Regulatory & Risk Advisory team in the Middle East & North Africa region.
Szymon Durlo is a senior associate at Walkers in Dubai.
