Western money managers are pouring into the Middle East in the hopes of luring its fast-growing pools of petro¬dollars.
“It’s an invasion,” said Antoine Massad, chief executive officer of Man Investments Middle East Ltd. based in London and Dubai, United Arab Emirates.
“For people like us and our competitors, the Middle East is clearly an important market,” said Steph¬en Fitzgerald, managing director and head of GSAM International, responsible for Latin America, Europe, the Middle East and Asia Pacific.
Managers are pursuing a variety of approaches to establishing themselves in the Middle East. For example:
cMorgan Stanley Investment Management, through its parent company Morgan Stanley, went on a buying spree to expand in the Middle East.
cCiti Alternative Investments, New York, has been building from the ground up.
cGLG Partners LP, London, has taken the less-traveled route to finding a business partner; GLG officials decided to sell a stake of the company to a prominent private equity investor based in the region to help boost its profile.
“The Middle East is one of the top regions in the world for liquidity right now and growing by the minute,” said Rupert de Laszlo, director for business development at bfinance, a London-based investment consultant that will open its first office in Dubai in the first quarter. “Everybody from all over the world is going out there.”
The region has become a magnet for fund managers as crude oil prices surge toward the $100-a-barrel mark. But even a hypothetical level of $70 per barrel would pump $628 billion from oil-exporting nations into the world’s capital markets — or nearly $2 billion a day, according to a report published by McKinsey & Co., New York, earlier this year.
19% growth estimate
While the estimated $3.4 trillion to $3.8 trillion in global petrodollar assets represents only a fraction of the $21.6 trillion in global pension fund assets, the petrodollar growth rate is estimated around 19%, compared with 5% for pension assets, according to the McKinsey report.
At the same time, institutional investors in the region are further diversifying from dollar-based fixed-income investments, offering new opportunities to managers with expertise in such areas as equities and alternatives, consultants and asset managers said.
“Fund managers are salivating over the opportunity” of working with these investors, said Stephen Jen, managing director and chief currency economist at Morgan Stanley, based in London. Mr. Jen has conducted research on the investment patterns of sovereign wealth funds and other institutional investors in the Middle East.
While many fund managers have been working with institutional and private clients from the Middle East for decades, the recent push to place more on-the-ground resources is twofold: to give firms an advantage over competitors when vying for new assets, and potentially to gain investment expertise in the region’s capital markets. Some are going about it by hiring key people already based in the region, while others are searching for strategic partners.
Morgan Stanley took a more aggressive stance — it bought a majority stake in The Capital Group, a financial institution based in Riyadh, Saudi Arabia, and formed Morgan Stanley Saudi Arabia earlier this year. (TCG is not linked to The Capital Group Companies based in Los Angeles.)
MSIM has managed money on behalf of clients in the Middle East since the 1970s and already has an office in Dubai, but the recent expansion into Saudi Arabia signals a deeper commitment to the region. The asset classes attracting clients include hedge funds of funds, and MSIM executives believe the firm’s capability in this area will go a long way in boosting business in the region.
Broader appetite
“Up until recently, the only (investment) that was talked about was fixed income,” said James Dilworth, London-based chief executive officer for MSIM in Europe, Middle East and Africa region. “The appetite now is for equities and alternatives.”
Mr. Dilworth estimated assets under management at MSIM in the Middle East around $45 billion, accounting for about 30% of total assets for the EMEA region. Growth in the region has been about 30% over the past year, with new business coming from both institutions and private investors.
According to the McKinsey study, Middle East investors hold an estimated $350 billion in alternatives such as private equity and hedge funds.
Indeed, those managers with alternative investment capabilities have been among those most actively trying to expand in the region. Jamal A. Al-Naif, managing director and head of the Middle East, said Citi Alternative has been able to cross-sell its strategies through links with parent Citigroup Inc.
“If you look at our business three or four years ago, it was predominantly structured credit,” Mr. Al-Naif said. “Over the last three or four years, our business has diversified. Structured credit is now about 30%, and the growth has been in hedge funds, real estate and private equity.”
GLG Partners is another alternative house that is strengthening its roots in the Middle East. With $20.5 billion in assets under management as of Sept. 30, GLG sold a 3% stake in June to Istithmar, a Dubai government investment corporation set up in 2003 to focus on private equity, real estate and other direct strategic stakes in companies. Officials from both companies declined to comment, but a GLF news release issued in June said the transaction “will help to support the further development and expansion of our business in the Middle East.”
Other U.S.-based managers expanding in the Middle East include:
cGoldman Sachs Asset Management, New York, which caters to a largely institutional clientele in the Middle East. Goldman will likely benefit from a partnership between its parent company, Goldman Sachs Group Inc., and NCB Capital, a subsidiary of the National Commercial Bank of Saudi Arabia, Riyadh, which was announced last February. The transaction involves strategic cooperation in asset management as well other banking activities in the region, according to a news release at the time. GSAM had $285 billion in assets under management for non-U.S. clients as of Sept. 30. The firm does not break down assets according to region.
cFranklin Templeton Investments, San Mateo, Calif., which announced in September it would acquire a 25% stake in Algebra Capital Ltd., a Dubai-based fund manager.
cPioneer Investments, Boston, is targeting the region as a source of growth. As a first step, in October executives appointed Gokhan Unal to lead the charge in the new role as head of institutional, Middle East and Asia, based in Bahrain. Prior to joining Pioneer, Mr. Unal was senior vice president and head of distribution for the Middle East and Asia for MFS Investment Management, Boston.
Partnerships with banks
SEI Investments, Oaks, Pa., is evaluating its options for a Mideast expansion. One key element will be to look at establishing partnerships with leading domestic banks, said Jahangir Aka, director of business development for the Middle East. The firm would not provide a figure for assets under management in the region.
“We believe success in the region will come from taking a measured approach,” Mr. Aka said. “It’s a complex, relationship-based market.”
London-based Man Investments is reaping the benefits of its efforts to focus on building stronger Mideast institutional relationships over the past several years. Institutional assets have grown exponentially, accounting for a 40% share of the firm’s total assets under management in the region. About three years ago, only about 5% was institutional, with the remainder in largely private client assets. Man, the largest listed hedge fund manager in the world, does not break out its assets under management according to region. The firm had about $70 billion in total assets as of Oct. 31.
“At the moment, Mideast institutions have been luckier than those from other regions; they haven’t had to divest or shift (out of fixed income) in order to invest in alternatives,” Mr. Massad said. “We expect this to continue … there’s enough for everyone, provided they’ve got the right recipe for success.”
