Business with the Gulf: On the ground or in the air?

Nobody doubts the opportunity for foreign managers in the Gulf. But how to play it?

The key question for most foreign managers is representation on the ground. Can a successful business be run out of London or another financial centre, with representatives frequently flying in, or must a permanent presence be established on the ground? And if so, what should that presence be – just sales and relationship management, or analysis and manufacturing?

Historically, many institutions have handled the region from afar, but are starting to move resources in. UBS, for example, has had representation in the Gulf for 30 years (starting in Abu Dhabi) but on the asset management side has only recently based somebody permanently within the Dubai International Financial Centre.

"Going forward the region will need people on the ground," says one western asset manager. "We can’t continue covering it just from London or New York or Zurich."

Indeed, the rosters of the Dubai International Financial Centre and, to a lesser extent, the Qatar Financial Centre, are filled with the names of foreign banks, fund managers and insurers that in many cases are building a physical presence in the region for the first time.

But what are they putting there? Chiefly, it’s sales people. The priority has been to find ways to market existing product into the Middle East, and to supplement the existing sales teams from London and Geneva with people who are permanently based there.

This approach alone is already potent – not just to sell overseas product but potentially to sell GCC-focused funds as well. Haissam Arabi, managing director of SHUAA Asset Management in Dubai, expects foreign managers targeting the region, without necessarily being based in it, to be a major threat. "These groups will be able to take the lion’s share of asset gathering," he says. "The Goldmans and Merrill Lynches with their own MENA funds managed out of London in New York don’t necessarily have the same competitive advantage of being positioned on the ground like we do, but they have geographic reach."

In Arabi’s view, this doesn’t necessarily require them to build product teams located in the Gulf. "As for setting up on the ground with analysts, I doubt that will be the case," he says.

But many foreign funds do believe they have to be in the Gulf to take full advantage, and not just with sales staff. Take Schroders: after opening its DIFC office about a year ago, it initially staffed it with sales people, but is understood to be considering bringing other professionals to join them now. "You are seeing more people sending down or employing analysts here," says William Wells at Schroders in Dubai. "You’re certainly going to see sell-side analysts here from the investment banks: they see the potential of foreign investors investing in local markets, and whoever you are, you want to make sure it’s you’re research they’re using."

Survey respondents’ views on their presence in the Middle East, 2007

If you have an office in the Middle East, do you expect to boost your resources in the next two years?

Source: Cerulli Associates

Those on the ground feel the debate has moved on from "should you be on the ground" to "what exactly should you put on the ground." Daniel Smaller at Algebra Capital says: "Everyone now has to decide, do you make Dubai a centre for manufacturing? We think you should. When we created Algebra we felt that our competition in many ways hadn’t arrived yet." He says that his firm’s tie-up with Franklin Templeton was done in part because "we wanted to prepare ourselves for those asset management groups who were going to view Dubai as a key financial centre and have manufacturing based there. If the competition continues to manage Middle Eastern funds out of London or New York or someplace else, we feel that being on the ground with nine analysts is quite enough to differentiate ourselves."

The Franklin Templeton deal was a landmark, and closely watched. The US house took a 25% stake in Algebra Capital in a deal announced in September. This was an example of a multinational deciding it needed manufacturing expertise in the Middle East, but opting to get it by buying a stake in a local manager rather than building organically.

The two groups are in the early stages of working together but it has certainly helped Algebra: it has already topped $1 billion under management. "To go from zero to a billion in six months for a brand new firm that’s beginning to find its feet, you can see how much traction it has," says Harshendu Bindal at Franklin Templeton. Partly, it reflects the fact that there are very few independents. "When you look to the MENA market and say: who can manage my money, there are only two or three," he says. The two groups recently launched a Middle East investment product in South Korea and many more are expected to roll out in coming months.

For Franklin Templeton, it gets around any challenge of having to build local investment capability. "We view them almost like a manufacturer for us in this part of the world," he says. "We get them to sub-advise any mandate that’s MENA-centric."

Will others follow? Well, they’d be likely to if there was a choice of purchases. "There’s always a possibility, but there’s a finite supply of local asset managers with critical mass," says Nick Tolchard at Invesco. "We’re monitoring the players in that space and we certainly keep our eyes open. But I would have said we were in more of an organic phase ourselves."