By Friso Buker
|| Friso Buker|
A recent Boston Consulting Group study claimed that, out of the ten countries with the highest concentrations of ultra high net worth households, prominent Gulf nations – namely Qatar, the United Arab Emirates, Saudi Arabia and Kuwait – take up more places than any other global region. Saudi Arabia holds the top position with an impressive 18 per 100,000 of households with more than $100 million in assets under management. Qatar, the UAE and Kuwait also made it to the top ten in terms of the highest proportion of millionaire households with 8.9%, 2.6% and 8.5% respectively. The Middle East – along with Africa – showed a significant level of growth in wealth as assets under management rose 8.6% to $4.5 trillion in 2010 with the BCG projecting it will reach $6.7 trillion by 2015. And before one feels the need to claim that all of this wealth is predominantly under the control of the state, the same BCG study found that well over half of the wealth in these Gulf nations are being held by private households scattered throughout the region.
In essence, the report paints a picture of a region that is potentially lucrative for organizations looking to raise capital and to place Middle Eastern assets under management. But it also states that wealth management trends in the Middle East have displayed a distinct lack of financial adventurousness. While 56% of independent Gulf Cooperation Council investors preferred to keep their investment in cash or very short term liquid investments, 31% preferred to invest in regional or home equity markets with 13% opting to invest in bonds. Whatever spare investment cash left over is sunk into a very small numbers of funds that are managed outside of the region.
With all that wealth lying relatively dormant in the Middle East, why aren’t the investors actively considering a much wider range of investment alternatives beyond cash, real estate and low yield bonds?
Financial Conservatism in the Middle East?
The BCG study postulates that this regional trend is simply a reflection of the overall level of risk aversion that has become the historical norm within the Gulf (especially during the global financial upheaval), but anyone who has done business in the Middle East for any significant period of time can tell you that this is only one part of the story. The other comes from a keener understanding of the dynamics involved within any negotiations involving multi-million dollar transactions in the Middle East. And it is this part that mostly remains a mystery to those almost willfully ignorant non-Arabs looking to do a significant level of business in the region.
The massive levels of economic growth and wealth creation that the Gulf has experienced over the past two decades may lead many people to believe that the region has also undergone a radical change in Arab society as well as the way that business is conducted. This could not be further from the truth. By and large, citizens of the Gulf nations – and of the Arab world as a whole – have not changed the major cultural determinants that underpin their respective societies. The more obvious determinants include Islam, a reliance on and devotion to social networks that are based on familial and “tribal” allegiances, a desire to be perceived as hospitable, the seemingly overwhelming levels of bureaucracy and the high value placed on trust and personal relationships. These determinants are reflected in practically every facet of Middle Eastern society, including (and especially) business.
Despite these cultural traits being obvious to anyone who looks closely enough, wealth managers from around the world have so far failed to adapt their working practices and financial marketing techniques to attract the ever wealthier regional investors. Numerous related articles – most recently with titles such as “No honey, no money: Wealth managers learn the regional ropes” and “Qataris unmoved by wealth managers” – have so far failed to make any significant dent in the way investment opportunities have been presented to the Middle East. Instead of adapting their practices to meet the business traditions of the customer, wealth managers largely continue to market their offerings in a way that best suits their own Western business culture, much to the obvious chagrin of potential investors.
The Well Worn Path to Investment Marketing Mediocrity
But that does not mean that investment firms have not at least tried to overcome these capital raising difficulties by incorporating different marketing strategies in their attempts to access the investor market. But despite their strategies, wealth managers have historically had mixed – and usually lackluster – results.
The four most common “approach models“ – incorporating a permanent presence, utilizing placement agents, employing investment guides and sending official representatives - constitute the main methods wealth managers have used to raise regional capital in the past. Despite the differing levels of effectiveness and apparent advantages of each model, the established hurdles are still proving difficult to overcome.
Establishing a permanent presence with all the necessary licenses and meeting all the necessary statutory regulations has proven to be effective for those organizations who are able to afford it, given that the entire process of incorporation can take up to a year and involves ring fencing upwards of $2 million. This has proven to be a viable option for wealth management firms that have a wide variety of investment vehicles to entice the local investment community, but identifying a network of willing investors will still prove to be difficult chore for newcomers to the region.
Whenever cost-effectiveness is an issue, wealth management firms have tended towards building a small network of placement agents or third-party marketers, i.e. independent representatives who promise to trawl their respective regions for high net worth individuals and/or family offices with the intention of piquing their interest in placing assets under management in a particular fund. While this method of raising capital may seem initially appealing, it has also proven to be a highly ineffective way of raising Middle Eastern money and leaves the commissioning firm open to the risk of financial and corporate misrepresentation, which may in turn “poison the well” for any subsequent attempts to market investment products.
Recently, sending official representatives for a few days in an attempt to meet potential investors at exhibitions or conferences has proven popular for business visitors to the region, but given the desire of the investors to build trust & long-term business relationships with those who are looking to manage their wealth, it’s not surprising that many locals have balked at the concept of trusting a company representative who expects to raise capital after a handful of rapid, short meetings before they catch their flight home. In this respect, the term “carpet bagging” has increasingly been used by locals to describe this fairly haphazard method of raising funds.
But not all “approach models” have proven to be as ineffective as those previously mentioned. Historically, the use of investment guides – i.e. established residents who provide access to potentially broad networks of active investors for a fee – has proven to be a relatively fruitful method of identifying sources of capital to be placed under management. But the process of finding the right investor guide with the right network is fraught with problems, as the most effective ones tend to work almost exclusively for a small number of fund management firms and there is little or no information on which to gauge the number and/or quality of previous clients sourced by the guide that may constitute a definable track record. In addition, investor guides employed by established investment firms have been notoriously unwilling or unable to provide any effective levels of customer relationship management once the investment representative have left the country.
The Future of Hedge Fund Investment in the Middle East
At present, the common perception of fund managers who manage between $30 million and $200 million is that the larger funds have gotten the Middle Eastern capital raising game sewn up and that these larger funds exert a capital raising “gravitational pull” that is capable of easily canceling out the marketing efforts of their smaller rivals. Unfortunately, this perception is not completely without merit.
But rather than abandoning all hope of tapping into this burgeoning investor pool, fund managers should formulate different market entry strategies that will allow them to side-step the substantial hurdles that lay before them and that will ease their marketing burdens. One relatively new strategy would be to develop partnerships with regional financial institutions – such as small investment banks – that are tapping into the demand from both managers and investors for greater hedge fund visibility in the region. Not only are these institutions able and willing to tap into their established network of active investors to provide both investment marketing and capital raising services, but they are also able to provide more reputable established investor relation services that are capable of developing, maintaining and expanding investor relationships even further beyond their own influence as the financial institution continues to grow. However, these regional institutions have a strong tendency to select funds to represent that either offer market-leading returns or that are closely aligned with regional investor market dynamics and/or preferences. Funds that have a distinct investment strategy or philosophy – aligned with a historical track record that emphasizes medium-term wealth preservation and/or growth – are far more likely to gain a significant foothold in the investor community than a fund that has only demonstrated a few years of reasonable growth coupled with high levels of volatility.
Until fund managers of all stripes finally come to the conclusion that their current marketing efforts and strategies will fail to generate the levels of capital that they are looking for, the goal of placing Middle Eastern assets under management will remain as difficult as ever.
Friso Buker is strategic marketing manager at Dubai-based Royal Investment Bank, an investment advisory firm specializing credit related transactions; and the strategic director for Bridgehead Administration, which facilitates contracts between hedge fund managers and investors in the Middle East and North Africa.