Shariah venture debt is an investment opportunity currently being offered to Asian investors by US-based Atel Capital, with Maybank Investment Bank of Malaysia likely to be among the main channels, Atel Capital Group Chairman and CEO Dean Cash shared with IFN Investor.
While venture debt operations have been handled by Atel Capital since 1999 from a conventional financing perspective, the addition of a Shariah option came about in 2022 after a fortuitous dinner meeting with a Dubai lawyer.
“Before that, we just wrote it off because the Shariah guys won’t do loans. So, we didn’t ever consider it. When the Dubai lawyer told us it could be possible, we got interested and we have used the Murabahah structure since to attract a number of investors from the Middle East, mainly Saudi Arabia.”
With over 200 venture debt deals handled so far, including exits, the Shariah investment portion makes up about 20% of Atel Capital’s portfolio while conventional holdings make up the remainder, Dean said.
Interest from Asian investors was clear during a recent presentation that Atel Capital conducted with Maybank Investment Bank in Singapore. Dean said potentials range from between US$5 million to US$10 million per investor, with indications of around US$100 million potentially being raised.
The main attraction would be potentially higher returns for such investments. “At an average 4% return from loans in this region, that just doesn’t compute for us. I can do an investment grade credit at a higher rate than that in the US. So, there’s a very big hunger for a product like what we have for investors in the Asian region, especially if it is Shariah compliant.”
While venture debt investments may sound very risky, Dean said Atel Capital’s track record for default or loss is 0.67% over the last 25-26 years. This is due to venture debt financing deals offered to start-ups only after they had been vetted by large venture capital firms and have already received early funding.
“Let’s say they raise US$100 million of venture capital. On top of that, we extend a loan to them, say US$10-20 million. We do it for short-term, maybe three years. If the start-up succeeds or fails, we are not doing venture capital as all we need is for the company to last for 36 months to pay us back.”
Due to the equity non-dilutive deal, Atel Capital can charge higher rates and will get 43% of the financing amount back in 12 months. “None of these start-ups go bankrupt in 12 months. If they’re going to have a problem, it’s usually at 18-20 months. By that time, we would have gotten back 75-80%.”
In addition, Atel Capital gets the collateral assets – including a negative pledge on the intellectual property. “If they have patents and things like that which have some value and they get sold, we get it before any of that money can go to other creditors.”
Dean explained start-ups are willing to take on such venture debt deals as these would be cheaper in the long run. “When start-ups take from venture capital, they lose a bunch of equity. Because that equity valuation goes up with subsequent funding rounds, our non-dilutive financing deals look better.”
