Fancy a seat at this table?

As the mature US, European and Asian mutual fund markets saturate or become increasingly competitive, most of the bigger international asset management firms are looking to expand their distribution into newer geographic areas. Latin America, Eastern Europe and increasingly the Middle East are being actively considered as markets by these managers for the establishment of a formal presence.

The changes in the regulatory environment and the huge increase in liquidity, especially in the Gulf, have raised the interest of several international asset managers who are actively considering expanding their scope of activities to this part of the world. However, there are several key issues and challenges that need to be evaluated and overcome by these firms looking to set shop in the Middle East.

The six oil-rich Gulf states - Saudi Arabia, the UAE, Qatar, Bahrain, Kuwait and Oman - along with Egypt, are the Middle East's key markets. Given the size of some of these markets and their current state of development, a presence in each of them is not an economically viable option. So establishing a regional hub is a more sensible approach and so far most international asset managers have either opted for Dubai or Bahrain. This decision has been primarily influenced by regulatory environment and quality of life considerations. In recent times Qatar, with its newly established financial centre, has been pushing itself into contention. The tremendous liquidity and the recent capital market reforms have resulted in several firms establishing or actively considering setting up a presence in Saudi Arabia.

Also multiple countries have unfortunately meant multiple regulatory jurisdictions. While there has been some rationalisation recently (especially in the tightening of anti-money laundering regulations in all countries in the Gulf), portability continues to be a key challenge for asset management firms.

Unlike the European Union, domiciling its products in one country in the region does not give a firm the right to passport them to others countries in the region even within the Gulf states, for instance. For those firms looking to offer exposure to local asset classes in their funds, the challenge is even greater.

It is not possible for example for foreign asset managers to invest in Saudi stocks unless they establish a local presence. This has obviously resulted in creating entry barriers and rising regulatory and business costs. So the answer to where one should establish a presence in the region is not an easy one.

Workforce

Lack of an experienced, well trained and well qualified workforce also poses its own challenges. The limited pool of suitable financial professionals in the region has tremendously increased the wage bills. This combined with rising rents, especially in the UAE and Qatar, has raised the cost of doing business in the region.

A general lack of disclosure and transparency along with the dearth of availability of quality data is another issue that hampers growth of business in the Middle East. It is difficult for a fund company or any financial services firm to establish a presence in a region where trustworthy data on the size of the market, local products and key distribution entities is hard to come by.

In the past, there were limited opportunities for either retail or institutional investors in the Middle East looking to invest in regional asset classes.

As a result, most investors from the region invested overseas, giving international fund managers an edge over local players. This trend seems to be changing, slowly but gradually, for several reasons.

The development of the local stock markets, real estate sector and private equity opportunities, though in their nascent stages, has provided an opportunity to investors looking to invest in the region. As the markets in the Middle East develop, the home bias of regional investors will come to the fore.

This will increase the demand for local mutual fund products which will primarily benefit the local asset management industry (which has a decent size of about $60-$65 billion) unless the international players develop their expertise in and offer products that provide exposure to Middle Eastern or Mena (Middle East and North Africa) asset classes.

The increase in demand for Sharia or Islamic products is another big trend that is much talked about in the region. While its impact on the asset management industry has been limited to date, this is an interesting development that foreign asset managers interested in the Middle East have to look out for. To capture assets in this space they need to develop an expertise in managing funds based on Sharia principles for which they need to build the necessary infrastructure.

Both the above developments signal a change in landscape for foreign asset managers who are serious about the region.

It is no longer enough for them to offer only their offshore products. If international players want to capture a significant market share, they will have to look at developing local solutions for which they have to build expertise and invest significant resources in the region.

The Middle East, especially the Gulf, offers tremendous potential for international asset management firms.

Besides the increased liquidity generated by sustained high oil prices, the positive changes taking place in the capital markets, as well as the regulatory and distribution areas are the primary reasons for this increase in potential.

Setting up a local presence in the region is an important step in order to capture some of this potential. Besides a local presence, a focus on developing local products, especially those based on Sharia principles, is also very important.

Several key issues and challenges must be considered and overcome before the decision to establish a Middle East presence is taken. However I do believe that it is worth taking a plunge.

- The writer is senior director at Franklin Templeton Investments, Dubai. Views expressed here are his own.