Western money managers are pouring into the Middle East in hopes of luring its fast-growing pools of petrodollars.
Western money managers are pouring into the Middle East in hopes of luring its fast-growing pools of petrodollars.
"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 Stephen Fitzgerald, managing director and head of New York-based Goldman Sachs Asset Management International with responsibility 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:
Morgan Stanley Investment Management (MSIM), through its New York-based parent company Morgan Stanley, went on a buying spree to expand in the Middle East.
Citi Alternative Investments, based in New York, has been building from the ground up.
London-based GLG Partners LP has taken the less-traveled route to finding a business partner: To boost its profile, GLG officials decided to sell a stake in the company to a prominent private-equity investor based in the region.
"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 of this year. "Everybody from all over the world is going out there."
With crude oil prices hitting the $100-a-barrel mark at the start of the new year, the region has become a magnet for fund managers. But even a hypothetical level of $70 per barrel would pump $628 billion a year from oil-exporting nations into the world's capital markets — or nearly $2 billion a day, according to a report published by McKinsey & Co. of New York.
A FRACTION OF ASSETS
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 at 19% a year, compared with 5% a year 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, London-based managing director and chief currency economist at Morgan Stanley. 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 for decades with institutional and private clients from the Middle East, 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.
SHIFT FROM BONDS
"Up until recently, the only [investment] that was talked about was fixed income," said James Dilworth, London-based chief executive officer for MSIM with responsibility for Europe, the Middle East and Africa. "The appetite now is for equities and alternatives."
Mr. Dilworth estimated assets in the Middle East under management at MSIM at $45 billion, accounting for about 30% of total assets for the region he oversees. 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, managers with alternative investment capabilities have been among those most actively trying to expand in the region.
Citi Alternative has been able to cross-sell its strategies through links with parent Citigroup Inc., according to Jamal A. Al-Naif, who heads up Citi's institutional efforts in the Middle East.
DIVERSIFIED BUSINESS
"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, a specialist in alternatives, is another firm 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:
Goldman Sachs Asset Management of New York (GSAM), which caters to a largely institutional clientele in the Middle East. Goldman will likely benefit from a partnership an-nounced in February between its parent company, Goldman Sachs Group Inc., and NCB Capital, a subsidiary of the National Commercial Bank based in Riyadh, Saudi -Arabia.
The transaction involves strategic cooperation in asset management as well other banking activities in the region, according to a news release issued 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.
Franklin Templeton Investments of San Mateo, Calif., which announced in September that it would acquire a 25% stake in Algebra Capital Ltd., a Dubai-based fund manager.
Pioneer Investments of Boston, which is targeting the region as a source of growth. As a first step, executives appointed Gokhan Unal in October to be head of institutional investing for the 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 in Boston.
Meanwhile, SEI Investments of Oaks, Pa., is evaluating its options for Mideast expansion.
One key element will be to look at establishing partnerships with leading domestic banks, said Jahangir Aka, SEI's director of business development for the Middle East.
The firm would not provide a figure for assets under management in the region.
SLOW AND STEADY
"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 ac-cording 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."
