The private equity (PE) market in the UAE in 2022 could be accurately described in two parts. The first half of the year witnessed deal activity that carried over much of the momentum from 2021's record levels of activity. During the second half of the year however, the UAE felt the impact of rising inflation which affected the cost of raw materials and of salaries, and rising interest rates in the US which in turn impacted the profitability of portfolio companies.

During the second half of 2022, PE firms became extremely cautious as a result of the rising inflationary pressures and the macro impacts of the war in Ukraine. In addition, a critical factor affecting fundraising in 2022 was the disconnection in the financing markets which meant that the traditional sources of PE financing were limited.

There has been a trend into consumer-driven sectors, such as healthcare, Fintech, education, retail, food and beverages and tourism, where value added opportunities have arisen. The technology-media-telecommunications (TMT) sector has also continued to be an extremely buoyant sector.

During 2022, 105 deals worth USD14.2 billion were signed in the UAE.

In the first half of 2022, 51 inbound deals worth USD7.4 billion were made. The inbound investment was largely as a result of the USD5 billion deal signed in June 2022 by Caisse de Depot et Placement du Quebec to acquire a

The other top subsectors were transportation, power and utilities, technology, chemicals and real estate.

Several outbound deals, largely in the technology and consumer products sector, were also completed. The largest outbound deal was signed in May 2022 when Emirates Telecommunications group company acquired a 9.8% stake in the UK's Vodafone Group Plc in a deal worth USD4.398 billion.

The recent growth of locally-based securities exchanges such as the Abu Dhabi Securities Exchange and the Dubai Financial Market has seen an increase in local IPOs. If this trend continues, PE investors could begin to view local IPOs as a more viable exit strategy from certain investments.

PE investments in the UAE can overlap with what are traditionally considered to be VC investments, particularly in the case of small and medium-sized enterprises (SMEs) and in the growth phase of the target company. However, PE investments differ markedly from VC investments in a number of ways. While PE funding is available for expansion projects for SMEs, it is more commonly used to finance infrastructure and development in mature companies. In addition, PE investments pull funding from different sources than those traditionally available in the VC market and are generally used for more capital-intensive industries.

PE funds obtain their funding from:

Investors also include sovereign funds and family investment offices from the Gulf Cooperation Council (GCC) that includes countries such as Saudi Arabia and Kuwait.

The most common sources of funding for VC and early-stage companies are:

On 31 January 2022 the UAE Ministry of Finance announced the introduction of federal corporate tax in the UAE that will be effective from 1 June 2023. The Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses (UAE CT) was issued in the UAE on 9 December 2022. The UAE CT regime is based on international best practices, with a low/minimal compliance burden on businesses. UAE CT will apply on the net profits of businesses across all the emirates for all businesses and commercial activities.

There is no personal income tax in the UAE.

Within the Emirate of Dubai there is a free zone known as the Dubai International Financial Centre (DIFC). Activities conducted in or from the DIFC are subject to regulation and supervision by the Dubai Financial Services Authority (DFSA). The DIFC also has its own legal, regulatory and court system. The DIFC Foundation Law (Dubai Law 5 of 2021) provides the overarching framework regulating the functioning of the DIFC free zone and all businesses established in or operating from the DIFC. The DIFC offers a 50-year exemption from corporate tax. The other free zones in the UAE, such as the Abu Dhabi Global Market (ADGM), also have 50-year tax-free periods.

Under the UAE CT:

A "Qualifying Free Zone Person" is defined as a person that meets the condition set out in Article 18 of the UAE CT, which includes:

"Qualifying Income" is defined as any income derived by a Qualifying Free Zone Person that is subject to corporate tax at the rate specified in the UAE CT.

The Minister of Finance can prescribe additional conditions for a Qualifying Free Zone Person to meet.

However, all free zone entities will be required to register and file a corporate tax return, irrespective of whether they are a Qualifying Free Zone Person or not.

Both corporate entities and individuals who conduct business/business activity in the UAE are considered a taxable person and will be liable to pay corporate tax. A taxable person can either be a resident person or a non-resident person (including branches, partnerships and foundations).

A resident person includes:

A non-resident person is a person who is not considered a resident person that:

There are certain persons/entities that are exempt from UAE CT including but not limited to:

There are additional conditions attached for each of these entities/persons to use the exemption under UAE CT.

"Qualifying Investment Fund" means any entity whose main activity involves issuing investment stakes with the purpose of raising capital, pooling resources from investors, or setting up a collective investment fund.

The intention of this is to allow the investors to gain profits from the entity's buying, holding, managing or selling of investments subject to compliance with the prevailing laws and the conditions outlined in UAE CT.

The UAE CT is applicable on or after 1 June 2023 to taxable income above AED375,000 at a rate of 9%. UAE CT must be filed no later than nine months from the end of a company's tax yera.

A local investment fund must be established through one of the following three methods:

While UAE Law No. 32 of 2021, as amended (Companies Law) contemplates local funds having a corporate personality, it does not prescribe a specific form for funds. As with the previous regime, a UAE fund is established through the contractual relationship between the sponsor and its investors, and each investor will have a balance sheet entry in the accounts of the fund administrator (which must meet comparable eligibility requirements as those of the sponsor).

Previously, few funds were domiciled in the wider UAE due to a lack of suitable fund structures. The recent SCA regulations from 2021 and earlier in 2023 changed the way funds are regulated in the UAE, including in respect of the marketing of funds in onshore UAE.

Private funds are investment funds established in the UAE offered for subscription to the "professional investor" or the "counterparty" with a minimum subscription of AED180,000.

There are three categories of professional investor under the SCA:

Professional investor by nature. This category encompasses various entities, including:

Professional investor (based on service). This category refers to individuals or entities engaged in activities providing credit facilities for commercial purposes, including to undertakings, their controllers, affiliated group members, or joint venture partners. It also includes those involved in arranging credit facilities and investment transactions related to structuring and financing companies.

Professional investor (assessed). This category includes a natural person whose net worth exceeds AED4 million, approved by the SCA or a similar regulatory authority who:

It also includes a:

"Counterparty" means a regulated entity which is licensed by SCA or by any other regulatory authority similar to SCA.

The three types of corporate entity that can be used to establish a domestic fund in the DIFC are:

Trust structures are predominately used for property funds and investment partnerships are commonly used for private equity funds. An investment partnership is a limited partnership registered with the DIFC, comprising general partners and limited partners. The general partner must be authorised by the DFSA to act as the fund manager.

The three types of funds that can be established in the DIFC are:

Fund managers of QIFs are exempt from many of the detailed requirements applicable to public funds or exempt funds.

Similar structures are available in the ADGM.

In 2018, the DFSA also introduced the concept of an open-ended real estate fund and real estate investment trusts. These structures are particularly useful for PE firms that invest in real estate.

See Question 4.

See Question 4.

The average life of a fund is three to five years.

In line with previous years, PE funds continue to be cautious as a result of the market conditions, but sectors considered include the consumer, logistics, healthcare, education, infrastructure and TMT sectors.

SCA regulations require a PE fund's promoter, principals, and manager to be licensed by the SCA. As with the fund manager and its principals, a "local promoter" in relation to the offering of a foreign fund in the UAE (or a local fund that is not promoted by the licensed sponsor of that fund) must be a UAE entity licensed by the UAE Central Bank or the branch of a foreign entity that meets local regulatory requirements (including SCA registration and licensing obligations) and whose parent is subject to the supervision of an IOSOCO regulator.

The rules are the same for VC funds.

There are two categories of persons that can establish and manage a fund in the DIFC:

DFSA-Licensed Fund Manager. To obtain a DFSA licence, the applicant must demonstrate that:

Once a licence has been granted, the DFSA supervises the fund manager's activities on an ongoing basis.

If the applicant only intends to establish and manage exempt funds or QIFs, there is a fast-track process that involves self-certification relating to the adequacy of the systems and controls. However, the DFSA still supervises these fund managers on an ongoing basis.

External Fund Manager. An external fund manager is a fund manager from a jurisdiction other than the DIFC who can establish a domestic fund without having to obtain a DFSA licence. To do this, the fund manager must:

The ADGM also maintains a funds regime, which is very similar in structure to that maintained in the DIFC.

In the DIFC, PE funds usually take the form of exempt funds or qualified investor funds (see Question 5). The fund manager of an exempt fund is not required to keep the fund property with an eligible custodian. The fund manager must instead both:

The marketing of funds is based on generally accepted principles of disclosure through prospectus requirements. The level of prospectus disclosure required for public funds (which are open to retail investors) is higher than for exempt funds (which are open to professional investors only).

Foreign funds can only be marketed in or from the DIFC by DFSA licensed firms holding advisory or arranging authorisations. A foreign fund must meet the eligibility criteria set by the DFSA.

The ADGM also maintains a funds regime, which is very similar in structure to that maintained in the DIFC.

The Central Bank and SCA are generally responsible for the regulatory oversight of financial activities in the UAE outside the DIFC and the ADGM (where the DFSA or the FSRA, as applicable, carries out these functions).

Local onshore funds offered in the UAE must comply with the SCA Regulations. In particular:

The promotion of units of foreign funds in the UAE is only limited to private offering to a professional investor. as a result, no other promotion exclusions such as those relating to promoting listed products or promoting through reverse solicitation and so on apply in case of units of foreign funds. Further, any such foreign fund would have to be registered with the SCA before its promotion.

These rules apply equally to VC and PE funds.

Funds in the UAE are established by sponsors that are subject to ownership restrictions as set out in the Companies Law. Until recently, UAE nationals had to own at least 51% of any sponsor of a PE fund. However, see Question 14 on the changes to the Companies Law with regards to amendments to ownership restrictions.

The promotion of a foreign fund that is registered with the SCA is limited to private offering to a professional investor.

See Question 5 for a description of "professional investors" under the SCA regulations.

PE funds in the DIFC tend to be exempt funds and therefore are only open to professional clients. In addition, units in the exempt funds can only be offered by way of private placement. A person can be classified as an "assessed professional client" if all of the following apply:

The DFSA can impose any additional restrictions on any fund that it regulates.

The SCA issued Chairman Decision No. 01/Chairman of 2023 concerning the regulations on investment funds, under which the minimum subscription limit per investor is AED180,000.

In the DIFC, professional clients must make a minimum subscription of USD50,000 to participate in an exempt fund and unit holders of a QIF must subscribe for at least USD500,000 of units in the QIF.

In a PE fund, the fund manager typically controls almost all activities of the fund. Investors are usually not involved in the operations of the fund. However, investors can negotiate side agreements with the fund.

Examples of protections that investors typically seek includes:

Aside from the negotiated side agreements, investors are typically passive investors.

Investors in VC funds often seek information rights, which would require the fund manager to provide both:

However, given the very small number of VC funds in the UAE, investment managers are generally granted significant powers over the fund.

PE funds commonly take equity in a portfolio company. It is not common for PE funds to provide debt funding. However, Islamic banks commonly invest through equity and financing. Conventional banks are not permitted to take equity. The use of convertible loan notes has also become more commonplace in the UAE.

In the UAE, as in most other jurisdictions, the advantage of taking equity in a portfolio company is the ability to obtain the maximum return on the investment as a result of an exit. The disadvantage of taking equity is the financial loss if the portfolio company performs badly and/or goes into liquidation.

The advantage of debt funding (particularly emergency funding) is the ability to negotiate a high rate of interest on the debt. In addition, the debt will rank in the event of liquidation and it is possible to secure the debt with the company's assets.

Taking equity in a portfolio company is generally the most commonly used form of instrument.

In a limited liability company, there are statutory pre-emption rights which must be respected on a transfer of shares. Shareholders can sell their pre-emption rights to other shareholders or third parties (Companies Law). Regulations in respect of the procedure in selling the pre-emption rights have not yet been issued.

As a result of recent legal developments in the UAE, the long-standing requirement for UAE companies to have one or more UAE shareholders holding at least 51% of the issued share capital of the company was generally removed. Changes relating to foreign ownership of companies took effect from the beginning of April 2021. Additionally, the recently-enacted Cabinet Decision No. 55 lists the following as "Strategic Impact Activities":

Strategic Impact Activities are subject to the approval and requirements of the relevant regulatory authority in terms of:

Local licensing authorities (that is, the relevant economic departments) of each emirate can determine a list of activities for which up to 100% foreign ownership is permitted. This also raises the question whether there will be policy differences between emirates as to percentages of permitted ownership. Accordingly, foreign companies, with some exceptions, are now able to invest up to 100% in UAE limited liability companies (outside the free zones).

Certain entities may be required to seek merger clearance from the UAE Ministry of Economy (Competition Law) (see Question 33).

See Question 4 regarding the introduction of corporation tax in the UAE.

It is not common for buyouts of private companies to take place by auction.

Buyouts of listed companies are not common.

See below in Acquisition of a Listed Company.

The principal documents produced in a buyout, whether in an acquisition of a private company or a public company, and which are not required to be made publicly available, are:

PE funds usually seek protection through warranties in relation to various aspects of the target company's business. In addition, covenants regarding the following matters are usually provided:

Information about the management team can be requested and indemnities are sought if there are particular areas of concern.

The PE shareholder will also have veto rights with respect to certain key decisions of the portfolio company.

Shareholders holding 5% or more of the company can apply to the competent authority or a competent court claiming the affairs of the company have been conducted to the detriment of any of the shareholders. The aim is to provide better protection for minority shareholders.

It is also possible to obtain warranty and indemnity insurance.

For company directors:

There are also obligations under UAE law in relation to privacy and the divulging of trade secrets, as well as the obligation of confidentiality and the duty to avoid causing harm.

Directors' duties in the DIFC include the duty to:

The terms of employment typically imposed on management include comprehensive restrictive covenants. It is also usual for management to be obliged to transfer any shares that they hold in a target company on termination of their employment. The value received for the shares usually depends on the circumstances under which the manager's employment has ended. Senior executives (CEOs) tend to receive the majority of their compensation by way of performance-based bonus schemes rather than fixed compensation.

In addition to this, employee share options are sometimes included.

PE funds can have a right to appoint directors to the board of the portfolio company, and this is commonly exercised. PE funds can also be given veto rights where their votes do not control the board. These protections are usually found in the shareholders' agreement.

Debt financing by PE funds is uncommon. Investment is usually made through equity investments. However, Islamic banking institutions commonly provide debt and equity funding (see Question 14). The debt financing is usually in the form of loans or convertible loans. These transactions are structured to ensure compliance with sharia law.

Debt providers commonly take a mortgage over the borrower's real estate. Assignment of receivables, insurance policies and commercial mortgages can also be entered into.

The most significant development in taking security interests is the implementation of Federal Law No. 4 of 2020 (UAE Cabinet Decision No. 29 of 2021 on the Implementing Regulations for UAE Federal Law No. 4 of 2020 on Guaranteeing of Rights related to Movables) and all related decrees, decisions and regulations (as issued from time to time) (together, the Mortgage Law), that repealed Federal Law No. 20 of 2016 on Mortgaging of Moveable Property as Security for Debts (Old Mortgage Law).

Any decisions, rules and regulations issued under the Old Mortgage Law continue to be in force until new decisions, rules and regulations are issued to replace them.

The Mortgage Law:

The Mortgage Law defines movable assets broadly and provides a non-exhaustive list of tangible and intangible property over which mortgages can be created, including:

Another key feature of the new law is the proposal to make certain information relating to the registered mortgage available to the public.

Once the mortgage is registered in the Security Register in accordance with the Mortgage Law, the mortgage becomes effective against third parties and no subsequent security interest can be created over the relevant mortgaged asset.

Shares in a limited liability company can be pledged to another partner or third party in accordance with the memorandum of association of the company (Companies Law). Such a pledge is not valid until registered in the commercial register with the competent authority. This makes it easier for UAE limited liability companies to raise debt financing by giving lenders a strengthened security package. The mechanism for the registration of share pledges has now been established by certain competent authorities.

Covenants can be obtained from the company to prevent it taking any further debt which ranks before that of the lender. Alternatively, taking any new debt can be made subject to the existing lender's consent.

Outside the DIFC. A public joint stock company and its subsidiaries cannot in any circumstances provide financial assistance to any shareholder to enable that shareholder to acquire shares or bonds in the company (Companies Law). The prohibition is broad and includes loans, gifts or donations, assets of the company as security and a security or guarantee of the obligations of another person.

DIFC. In the DIFC a company cannot provide financial assistance for a person to acquire shares in the company or a holding company of the company unless the financial assistance falls within certain exemptions provided for in the Companies Law (Article 55, Companies Law (DIFC Law No. 5 of 2018)) (see below, Exemptions).

Exemptions include instances where:

On a company's insolvent liquidation, priority is granted to certain preferred claims, including the payment of:

Payment is then made to secured creditors and lastly to unsecured creditors. The priority order is the same regardless of whether the insolvent is a corporation, trust or partnership (or similar).

The DIFC Preferential Creditor Regulations apply to any company to which the DIFC Insolvency Law (DIFC Law No. 1 of 2019) applies. Together, the Insolvency Law and the Preferential Creditor Regulations provide that on the winding up of a company, its preferential debts must be paid after the expenses of the winding up, in priority to all other debts whether secured or unsecured. The following are deemed to be preferential debts:

Investment can be provided through convertible loan notes where the investor has the option to convert the debt into equity at a certain price (not less than the nominal value of the shares). An investor can use this mechanism to achieve more potential increase in value.

Management incentives are commonly granted through the issue of shares or a higher participation in the company's profits. Employee share option schemes can also be implemented. This is similar for VC funds.

At present no taxes are imposed in the UAE on portfolio managers investing in their company (see Question 4).

Limited liability companies must set aside 5% of their net profit each year for the formation of a statutory reserve (Article 103, Companies Law). Accumulation of this reserve can be suspended if it reaches half the capital. The shareholders can agree to form other reserves if desired. Dividends can only be paid from the distributable profits of the company.

There is a statutory requirement that the directors in a portfolio company must be liable to the company, the shareholders and third parties for all:

The UAE authorities have recently taken firm steps towards addressing corrupt practices in the private sector. Many individuals who have engaged in corrupt conduct have been subject to investigation and prosecution in recent years. The Penal Code imposes a punishment of a fine and/or imprisonment on those who engage in corrupt conduct. The UAE law criminalises bribery in both the public and private sectors.

Corporate divesture by way of a sale to a trade purchaser or an asset sale are the most common and most effective forms of exit strategy.

For VC funds, the most likely liquidity events for successful companies are in the form of trade sales and secondary buyouts. While some investors have exited VC investments by way of an initial public offering (IPO), this is uncommon.

In a corporate divestiture, the seller usually has more flexibility around the negotiation of the purchase price. This can be due to the fact that the trade purchaser is looking to make a strategic acquisition, to expand into a new market or offer a new product or service to its customers that complements their current offering.

Another advantage of a corporate divestiture is having multiple potential purchasers involved in a bidding war or formal auction process for the portfolio company.

A disadvantage of a corporate divestiture is that it can take up significant management time and nearly always takes longer than expected, even for smaller companies.

It is usual for a PE and VC funds to invoke a put option in the event of an unsuccessful investment. The investor can usually invoke the put option if certain financial thresholds concerning the company's revenue or net profits have not been met. Deferred payment clauses are also possible. The mechanism is used to reduce the investment cost or to avoid making further investment where the portfolio company is not achieving certain financial milestones.

Many VC funds negotiate a right to force the sale of the company after a certain period, in which case the founders (or any other shareholders) have no right to vote on the exit transaction.

On a practical level, a disadvantage of invoking a put option is that specific performance (or any other equitable remedy) is at the discretion of a UAE court and, in general, equitable remedies are not available in cases where an award of damages is considered to be an adequate remedy.

The ability for a foreign investor to wholly own or own a majority of the shares of a UAE company is welcome news to many foreign investors and supports the UAE's development objectives.

Various new SCA regulations relating to funds have been enacted in the last three years. These are:

The SCA regulations constitute the UAE fund regime for onshore local funds and foreign funds that are marketed in the UAE (outside its financial free zones). The fund regulations set out, among other things, registration and licensing procedures for local funds, promotion rules for local and foreign funds, and additional obligations and key exemptions for certain specialty funds.

The SCA regulations apply to all investment funds and parties that are "related" to investment funds. An "investment fund" is a financial base where the monies of investors are pooled for the purpose of investment against the issue of pari passu investment units.

"Investment unit" is a security that represents the share of its holder in the net asset value of the investment fund or its assets, according to its nature.

The SCA regulations provide for (or otherwise contemplate) the following types of funds:

The provisions related to these funds are based on the Undertakings for Collective Investment in Transferable Securities model, which creates a harmonised regulatory regime that permits funds to be sold to any investor in the EU. While the GCC states have not adopted a comparable framework, it appears that the regime may be developed in this manner in the near future.

The DIFC has made a series of changes to the regulations applicable to collective investment funds, to encourage the establishment of these funds in the free zone. The Emirate of Abu Dhabi has established the ADGM which has a funds regime that is similar to that of the DIFC.

See Question 4.