IN JUNE, CREDIT Suisse announced the departure of its chairman and former chief executive of the EMEA region. Michael Philipp had been at the Swiss bank for three years and was a member of its executive board for the duration. Philipp is leaving the bank to launch his own firm, focused on investment management and advisory services in the Middle East and Africa.
He is the latest and highest-profile example of a growing trend: the establishment of small, boutique-style institutions in the Middle East by senior managers of large banks. They are attracted by the rich opportunities in the region, driven by the steamroller of oil money. The region has developed a financial clout that is drawing people such as Philipp from all over the world. "Apart from oil and gas, and the real estate, tourism and retail sectors in Dubai, the region is all about the financial sector," says Mushtaq Khan, an economist at Citi. "These are all ambitious countries trying to grow their financial sectors."
Philipp is setting off on a well-trodden path. Existing boutiques include GulfMerger, a specialist M&A house that employs just five people. It was founded by Yann Pavie, the former COO and board member of the National Bank of Kuwait (NBK). Arqaam Capital, an investment institution, is another. It was founded by Riad Meliti, the former head of the Middle East desk at Barclays Capital. And there are more. The Middle East is an increasingly welcoming environment for such institutions.
The region’s attractiveness to such institutions has been intensified by the problems in western markets; shrinking margins in the more financially developed of the world’s regions have driven more people toward the high returns on offer in the Middle East and other emerging markets. The increasing wealth levels of local investors mean that there is plenty of money to support new ventures. And it is not just oil money propping up the region. In the UAE, especially, there is substantial diversification.
Fully two-thirds of the nation’s GDP can now be attributed to revenues unrelated to oil. "We are way past the time when the region’s economies would move only in tandem with the oil price," says Hani Kablawi, managing director for the Middle East and Africa at Bank of New York Mellon. "Clearly the shift in long-term investment is not only driven by oil. There is more institutional borrowing and capital-raising, and a trend towards adopting best practices from a corporate governance perspective."
It is an enticing environment for a new company flush with cash and ideas. But that does not explain why more and more people are deciding to penetrate the lucrative GCC market with smaller, specialist financial companies rather than looking to offer a more general service.
One explanation might be that in a nascent market such as this, many local investment banks are insufficiently developed to properly manage the rigours and responsibilities of an extensive product catalogue, or the potential conflicts that can arise. That is the opinion of Pavie, and the reason for his decision to leave NBK to launch GulfMerger in March 2007. In M&A, for example, most financial institutions in the region have either no M&A team or a very small corporate finance team working on several assignments. In private equity, a bank can effectively be competing with another of its own departments, and there are doubts about whether the region’s banks have had the time to establish adequate measures to counter that conflict of interests.
"If you look at almost all financial institutions in the region that focus on the middle market, they’re trying to be in all product lines," Pavie says. "We see value in creating a specialized, focused player, and M&A is a field with strong potential."
Competitive spirit
Many in the market would of course disagree, and argue that there is room for financial institutions of all sizes to prosper. With a region-wide GDP that Morgan Stanley projects will reach $1.045 trillion this year, that is certainly a position it is hard to argue with. It might be that the explanation is far simpler than a dearth of specialist abilities at the larger institutions. Many individuals who have been involved in the region for some time are naturally looking to start their own businesses, and have already established the relationships in the market that enable them to do that successfully. Smaller institutions are a way of targeting a specific market in a more personal way, which suits the people that launch them. Former Mashreq Bank employee Rohit Walia, founder and chief executive of corporate advisory firm Sarasin-Alpen Capital, a subsidiary of Switzerland’s Sarasin Group, says that he wanted to do something different, something more relaxed, and something that would allow him to do what he wanted to do, rather than what he might be told he should do. "We are building an organization that we’re proud to be a part of," he says. "It is completely different to where I’ve worked before; the only thing I’ve kept is the relationships."
However, there are other reasons why many would decide that a smaller, more focused venture would be the preferable vehicle for entry. Many are companies in which the managers have a stake in the business, which is a desirable circumstance and obviously requires less of an outlay than at larger institutions. Another reason could revolve around the influx of foreign businesses and individuals into the region, which means an influx of families, many looking for a big-spending, western lifestyle. As a result, there is increasing competition between countries to attract these companies to their borders. There are policies in place to encourage people to move not only their company headquarters but also their homes inside the countries’ borders. For example, a company that is located in the Dubai International Finance Centre (DIFC) is required to appoint individuals to the roles of senior executive officer, compliance officer and money laundering reporting officer, all of whom must be residents of the UAE. Other GCC nations are also trying to require that a company must be based there in order to do business within their borders. The days when business in the region could be conducted from London are swiftly vanishing. "It used to be the suitcase-banker approach: the banker flies in, does the deal and leaves," says Kablawi. "As the model has shifted and the level of wealth of clients has increased, there is a need to establish a presence on the ground."