November 2008

THE GULF: Joint Ventures

Property finance is a key part of Swip’s strategy in the Gulf. Peter Dorward (pictured), Swip CEO in Saudi Arabia, interviewed by Nick Fitzpatrick peter_dorward.jpg Gulf fund management markets are diverse. While Bahrain might be described as an offshore market for Saudi Arabian wealth, Dubai can be seen as an international funds centre, while Abu Dhabi has a reputation for liquidity.

Saudi Arabia, although opaque, is characterised by mega-caps and this year both Scottish Widows Investment Partnership (Swip) and France’s BNP Paribas Investment Partners have formally launched businesses there.

Why Saudi Arabia as opposed to other competing jurisdictions such as Bahrain or Qatar? For Peter Dorward, CEO of Swip Saudi
Asset Management, the reasons are compelling.

“Saudi Arabia is the biggest economy and the fastest growing in the region. It’s huge compared to others. The oil price is just one of the reasons why there is still a lot of liquidity in the market.”

He adds: “I believe that basing our business in the Kingdom of Saudi Arabia is the best strategic decision in the medium to long term for access to the whole of the GCC [Gulf Cooperation Council states] for our investment management capabilities.”

Swip’s Saudi Arabian business focuses on institutions, such as sovereign wealth funds and quasi-corporate pension schemes in the region. The cash management needs of corporates and banks are also being pursued, and there is the potential to manage the banks’ mutual funds.

Fault line of change
Wide-reaching regulatory changes are affecting potential clients and creating interesting opportunities for fund managers in Saudi
Arabia. Insurers and the nascent mortgage finance industry are on this fault line.

Insurers are going through significant overhaul at the moment in a number of ways, says Dorward. Growth in certain lines of business, new regulations and licensing regimes together with new regulatory capital requirements present challenges that need to be considered by investment managers.

Dorward adds: “One other sector is beginning to emerge which may be interesting from an investment management perspective and that is mortgage finance companies. The Kingdom is about to implement new mortgage laws, which will help develop the residential side of the real estate market and begin to resolve the supply issue prevalent in the Kingdom.“

Opportunities here might include asset-liability matching, Dorward says.

Saudi Arabia’s per capita GDP increased by 168% from SR32,900 (£5,142) in 2002 to SR55,198 in 2006, its highest level since 1981. Residential building expenditure reached SR39bn in 2006.

Spending on residential property is expected to rise to SR65bn by 2010 after the new law addresses unclear aspects of mortgage lending, believes NCB, a Saudi consumer bank.

Aside to all this, Swip is also to offer its own real estate investment skills. “We have a wealth of experience in managing real estate in the UK, Europe and the US, and also bring experience in fund structures around real estate portfolios which we will bring to the market as and when appropriate.”

Currently Swip Saudi Asset Management provides access to its investment capabilities through separate, segregated accounts.

“As we develop our business, from a fund perspective, the regulations of the Capital Market Authority (CMA) do allow authorisation of non-Saudi- domiciled funds. For instance we could apply for Swip’s Luxembourg SICAV range to be authorised by the CMA but on a private placement basis, given that our investor base is primarily institutions or sophisticated investors.”

Alternatively, Dorward explains that the firm could establish Saudi-domiciled funds, similar in structure to Oeics and authorised by the CMA, on a feeder fund basis, investing in turn in either its Luxembourg range of Sicavs or UK Oeics.

On the real estate side, real estate investment fund regulations allow similarly structured funds to be established and authorised by the CMA. These funds would also be domiciled in Saudi Arabia.

Joint venture
Swip’s business in Saudi Arabia is a joint venture. Dorward headed Swip’s Middle East sales team from 2000 to 2003 and the work on establishing the Saudi business has taken 18 months. Swip’s partner is Manar Financial Investment, a local firm, and Swip’s stake in the joint venture is 51%.

“You do not have to establish a JV with a local partner, but for an organisation to step into this market on its own would be interesting, although some US investment banks have done that,” he says.

Overseeing fund management activity is the CMA, established in June 2003, two years before Saudia Arabia entered the WTO. According to Dorward, the set-up process for an asset manager is relatively smooth.

“The CMA’s implementing regulations were developed with close reference to those of the UK’s FSA and the SEC in the US. The CMA does not regulate banks or insurance companies, which is the responsibility of the Saudi Arabian Monetary Authority. The creation of the CMA allowed Saudi Arabia to lay down robust regulations, specifically for those organisations operating within the capital markets, including asset managers.”

The first step is to seek regulatory approval from the CMA and commit regulatory capital at the same time. Subsequently, and once initial regulatory approval has been granted, a fund management business must apply to the Saudi Arabian Government Agency for a licence and then the Ministry of Commerce & Industry for agreement to incorporate the company. It is at this point that the company is fully incorporated and is effectively ready to trade.

Local law
“It’s not as convoluted as it may sound. The regulator is open, very helpful and good to deal with. It helps, though, to have a local lawyer who speaks the language and also who understands some of the legal aspects of operating in the UK. The people who deal with the application process do speak English but sometimes our not being able to speak Arabic can be a barrier when dealing with other authorities.”

But are the rigours and intricacies of Sharia finance law equally a barrier?

Dorward says: “Islamic finance is fundamental to what goes on here. Not all banks are 100% Islamic, but it is a key issue from an investment perspective. This is why we continue to develop our thinking, to build on our already existing expertise at managing equity portfolios on a Shariah-compliant basis.” ©2008 funds europe

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