Saudi strategy: going it alone or finding a partner?

Some, like Merrill Lynch and JP Morgan, have gone it alone. Some have partnered with very big names: Goldman Sachs has taken a stake in NCB Capital, the securities arm of National Commercial Bank, which through its Al Ahli funds range is arguably the most powerful player in domestic Saudi Arabian asset management. "We’ll work together jointly in Saudi Arabia on investment banking, marketable securities and the fund business," says Sami Abdo, managing director of investment services at NCB Capital. "It has progressed tremendously. It opens up a very wide range of products to our customers, and brings them global capability; it also helps us build our internal capability. But we keep our identity."

Elsewhere BNP Paribas owns a stake in the securities division of Saudi Investment Bank. Credit Suisse is a partner in Saudi Swiss Securities, whose founders include the Olayan group, a private global investor run from Saudi Arabia, and other prominent Saudi families. Some have partnered with a handful of Saudi individuals to build new businesses not tied to a business family, such as Morgan Stanley, which tied up with The Capital Group, founded by Fahad Almubrak, who formerly ran the Rana Investment Company, and Basel Algadhib, formerly JP Morgan’s Middle East investment banking head. Deutsche Bank tried two different approaches, first announcing a joint venture with Al Aziza Commercial Investment Company, which is chaired by Prince Alwaleed bin Talal bin Abdulaziz Al Saud, but later launching its own solo business, Deutsche Securities Saudi Arabia, which appears to be its focus now.

Several other foreign banks were already in Saudi even before the CMA’s arrival: these are the ones that have been in Saudi Arabia for decades, sometimes almost a century, but were required to sell majority holdings to Saudi nationals in the 1970s. HSBC is represented through SABB, and is another of the leading asset management players in the country; ABN Amro through Saudi Hollandi, and Calyon through Banque Saudi Fransi. Citibank was formerly a stakeholder in Saudi American Bank, later renamed Samba, but sold out in 2003.

For all of them, it’s a time of great opportunity and challenge. Douglas Hansen-Luke, CEO for the Middle East at Robeco in Bahrain, and until recently the CEO of asset management at Saudi Hollandi, calls it a "big bang".

"After being a closed and relatively insulated market for a long time, they are now moving to a very open, very competitive market," he says. "In one go, they’re trying to implement a professional, highly competitive financial sector capable of financing Saudi Arabia’s huge investment plans and needs."

The different approaches have different merits. "One of the issues of going with a family, or a number of families, is knowledge in the market," says Tarek Sakka of Ajeej Capital, a newly established boutique operation in Riyadh founded by two former Olayan investors. "The issues to consider and balance are market knowledge and insight, the flexibility and control of the business, and the strong senior management team. There is a serious challenge in terms of talent but a number of Arab expats with long experience in the west have already started coming back to the region given the attractiveness of the opportunities." Working with local families clearly brings market knowledge, "but on the other hand what happens sometimes is certain other families may have concerns and may label you as associated with X, Y or Z. And that, sometimes, may have a negative implication."

Playing the Saudi card correctly is of immense importance to foreign houses. "Saudi accounts for at least half of the wealth in the region," says Nick Tolchard, managing director of the international development division at Invesco. "With the potential asset gathering capabilities, any fund manager would be very interested in looking at that marketplace." Tolchard says Invesco "aims to be a major player over a long period of time," and that "it would be remiss not to have started a long-term plan on entering that market". Which suggests that competition is going to get fiercer still.

Each entrant must also decide which bit of the market to go after. Those who are linked to the major banks can get their products to retail through the banks’ branch networks. But for the rest, that’s going to be tougher to do. They have to aim higher up the wealth spectrum. "There’s a combination of a focus on institutional and family office customers, and also more reliance on alternative distribution channels," says Sami Abdo at NCB Capital, the securities arm of National Commercial Bank. "It’s a smaller number of clients and so requires a smaller team. But you will have 80 institutions chasing the same money; eventually you will find the market come down to a much smaller number."

"It’s changing the market gradually," says Abdo at NCB. "As we see the capability build-up of the new companies being completed, I think competition will start to become fiercer and we’ll see the market evolve."

It is surely the case that not every new entrant can survive; indeed, some licences have been retracted already because the holders haven’t done anything with them. "I don’t think there’s room for 82 new players," says Brad Bourland, chief economist at Jadwa Investments in Riyadh. "They will go through a period when some struggle to execute and some do better; there will be a period of consolidation and the market will adjust to the right number of players."