Challenges of asset management

By Stan Szecowka

editor@gulfweekly.com

Private wealth in the Middle East is estimated to be increasing at the rate of 11.9 per cent a year.

The 2007 World Wealth Report, published by CapGemini and Merrill Lynch, says there is an estimated private liquidity of $1.4 trillion in the GCC region, most of it in Saudi Arabia, UAE, Qatar and Kuwait.

It is no secret that high oil and gas prices and the repatriation of assets following 9/11 are among the major factors behind the strong liquidity.

But, what does the region do with the excess wealth? It is one thing to create wealth. However, it takes a separate set of skills to manage it.

In the past, countries in the region have wasted cash on a number of things. Now they are diversifying, building the infrastructure and the economy and going on a buying spree.

Funds backed by Middle East governments have spent $64 billion so far this year, compared with $30.8 billion in all of last year and $4.5 billion in 2004, according to Dealogic. Acquisitions in the US and Britain account for slightly more than half of the total this year.

Investment funds of Abu Dhabi, Kuwait and Saudi Arabia have been in the market for quite some time now. But, more recently, newer investment firms set up by Qatar and Dubai have hogged the limelight through their aggressive bids for stakes in high-profile targets such as Nasdaq.

Another positive sign in the region is that local banks are now entering the asset management sector and competing with international private banks.

In February 2007, for example, the Bahrain-based Gulf Finance House (GFH) announced a major restructuring of its operations to include the new core areas of business such as European private equity, asset management and wealth management.

Private equity, retail investment and real estate too have found favour with investors. Arcapita, Investcorp and Istithmar are now being joined by several large US and European private equity houses like the US group Carlyle which plans to raise $1 billion for a fund focused on investment opportunities in the Middle East.

Meanwhile, demand for Islamic finance products would increase significantly in the region coming years.

The past few decades have seen significant development in the world of Islamic finance, especially in areas such as Islamic mortgages, debt instruments such as sukuk, and on financing, such as commodities and projects.

However, Islamic asset and fund management has not prospered in the same way. To date, the Islamic investment and mutual funds sector has been dominated by the Shariah funds offered by banks, which are modest in number and funds under management.

The growth of asset and asset management firms requires the Middle East countries to put in place a system that provides for transparency and disclosure. 

To this end, the financial centres that have sprouted in GCC countries including Bahrain, Dubai and Qatar are creating a regulatory environment that sticks to international disclosure and transparency norms.

Bahrain has had a legal code which is very closely connected to the English legal code and it has a well developed offshore centre established in the 1970s.

Dubai and Abu Dhabi too have made much progress with the regulatory set up.

Similarly, the creation of the Capital Markets Authority in Saudi Arabia, and the kingdom’s membership of the WTO, will help revitalise the infrastructure of the local legal code.

Qatar is also developing fast, and the development of the Qatar Financial Centre will have a very strong impact on making the Qatar legal code credible.

The business environment in the region is bolstered by the presence of major legal firms and rating agencies. The four major international rating agencies (Capital Intelligence, Fitch, Moody ’s and Standard & Poor’s) are also present in the region.

This is encouraging further investment in the region and reassuring foreign investors that rule of law will be upheld.

Security concerns and geopolitical risk continue to be important issues for foreign investors. But most banks are willing to take those risks to tap the opportunities that are available in the region.

It is now up to the governments to create the right climate by working towards transparency and disclosure.