Middle Eastern sovereign wealth funds are opening up
April 2015

The activities of sovereign wealth funds (SWFs) have traditionally been cloaked by a veil of myth and secrecy. This is particularly true for those in the Middle East. In recent years, however, many funds have opened up and become more transparent. We examine this phenomenon, and how fund managers can reach out to these fast-growing asset pools.

Ranked the world's 24th-largest SWF, the UAE's Mubadala Investment Corporation is particularly open about its completed transactions, listing its investments at length and reporting details of its revenues. It achieves the highest rating of ten according to the Linaburg-Maduell transparency index level of transparency, a feat also achieved by Bahrain's Mumtalakat Holding Company putting them on a par with the biggest SWF of all, Norway's Government Pension Fund. Globally, half a dozen funds have the lowest score of one, including the Libyan Investment Authority and Algeria's Revenue Regulation Fund. For others in the Middle East, scores generally range from four to six, with a three for the UAE's Emirates Investment Authority and RAK Investment Authority. The world's second-largest fund, the Abu Dhabi Investment Authority, scores six while third-largest SAMA Foreign Holdings in Saudi Arabia is rated at four.

A lack of transparency is not necessarily a bad thing, says Gavin Ralston, head of official institutions at Schroders. "Excessive transparency places greater pressure on short-term performance and a lack of it might be better for the long-term good of the country concerned."

In essence, SWFs are like any other institutional investor, adds Richard Souri, head of Middle East at Old Mutual Asset Management, if one can ignore the sheer scale of the numbers involved, and their freedom to take a longer-term view than pension funds because they are not subject to the same asset-liability constraints. "Each investor has specific strategies and goals in mind and they need products that fit those strategies."

Competition among both asset managers and investment bankers for the attention of these asset pools is fierce and so informed independent advice on how to make a successful pitch to these investors can be invaluable. Bruce Frumerman, CEO of the New York-based financial communications and sales marketing consultancy Frumerman & Nemeth Inc. notes that in their hunt for positive risk-adjusted return, Middle Eastern SWFs follow the same due diligence steps as sophisticated institutional investors elsewhere.

Once a fund has conducted its initial vetting of a money management firm's key differentiating data performance, risk characteristics, the volume of assets under management and the length of track record it turns its due diligence focus to four key subjective points of judgment. He describes these as: identifying the investment edge that is behind the fund's performance; understanding and buying into the investment philosophy and process used; gauging whether the methodology behind the performance appears to be repeatable; and understanding how the strategy is expected to perform in different market environments.

"Performance aside, the money management firms that communicate a cogent, compelling and linear storyline to due diligence teams so that they understand and buy into the firm's investment beliefs, and how its money manager assembles and manages the firm's basket of holdings are the ones most likely to win mandates and attract sticky assets," explains Mr Frumerman.

Fund managers might take some care in what they wish for in this cut-throat segment of the market. "It's great to have SWF allocations, but managers will face massive pressure on fees," says Stephen Blackshaw, a partner at law firm Sidley Austin.

Essential attributes to win Middle East SWF business

Patience is essential for any fund manager looking to do business with a Middle Eastern SWF. "If you think you can go from zero to having an asset allocation in a year you are in for a big disappointment," says one industry professional. "It can take years to build a relationship to a point where they are confident to award you a mandate," adds Mr Ralston.

A physical presence in the region is another must-have. The days when a western supplicant could fly in, do a few visits and win business are long gone. "You need a permanent office in the Middle East to build up proper relationships," says Jon Mills, an audit partner at KPMG with global responsibility for SWFs.

At one end of the spectrum, many people already enjoy access to the top decision-makers, who will all be local as few westerners have the required combination of technical skill, language and cultural know-how to aspire to that level. But there is no room for complacency. "When there is change at the top in a Middle Eastern SWF, all bets are off," says one professional.

The element of trust is of paramount importance. The ongoing dispute between the Libyan Investment Authority and Goldman Sachs over the appropriateness of complex investments sold by the latter is predicted to underline that truism, notes Mr Mills. One area of behaviour that demands special care and attention surrounds local customs such as the exchange of gifts, cautions Mr Blackshaw. Any hint of paying for access to decision makers is taken extremely seriously.

Middle Eastern SWFs don't have the near- to medium-term liabilities that their counterparts elsewhere face, says Mr Souri. This allows them to take a more strategic view in their investment strategy, affecting their asset allocation and duration appetite. For investors with such liquidity, the global financial crisis has expanded the range of opportunities available. As a consequence, these pools of assets have been a force of stability in the world's markets, providing a vital source of capital when most needed.

In terms of asset allocation, Middle Eastern SWFs are credited with having been at the forefront in moving beyond traditional investments such as government stocks and equities and into hedge funds, private equity, real estate and infrastructure, says Mr Mills. For fund managers offering a good product that fits an individual fund's strategy there are no insurmountable hurdles, other than the inevitable cultural taboos.

A number of other reasons are cited by Mr Souri to do business with SWFs in the Middle East. "They are highly educated and sophisticated investors, who are open to working on interesting investments; this on its own can make it a rewarding experience." Above all, they have large pools of capital looking for a rewarding home.





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The activities of sovereign wealth funds (SWFs) have traditionally been cloaked by a veil of myth and secrecy. This is particularly true for those in the Middle East. In recent years, however, many funds have opened up and become more transparent. We examine this phenomenon, and how fund managers can reach out to these fast-growing asset pools.

Ranked the world's 24th-largest SWF, the UAE's Mubadala Investment Corporation is particularly open about its completed transactions, listing its investments at length and reporting details of its revenues. It achieves the highest rating of ten according to the Linaburg-Maduell transparency index level of transparency, a feat also achieved by Bahrain's Mumtalakat Holding Company putting them on a par with the biggest SWF of all, Norway's Government Pension Fund. Globally, half a dozen funds have the lowest score of one, including the Libyan Investment Authority and Algeria's Revenue Regulation Fund. For others in the Middle East, scores generally range from four to six, with a three for the UAE's Emirates Investment Authority and RAK Investment Authority. The world's second-largest fund, the Abu Dhabi Investment Authority, scores six while third-largest SAMA Foreign Holdings in Saudi Arabia is rated at four.

A lack of transparency is not necessarily a bad thing, says Gavin Ralston, head of official institutions at Schroders. "Excessive transparency places greater pressure on short-term performance and a lack of it might be better for the long-term good of the country concerned."

In essence, SWFs are like any other institutional investor, adds Richard Souri, head of Middle East at Old Mutual Asset Management, if one can ignore the sheer scale of the numbers involved, and their freedom to take a longer-term view than pension funds because they are not subject to the same asset-liability constraints. "Each investor has specific strategies and goals in mind and they need products that fit those strategies."

Competition among both asset managers and investment bankers for the attention of these asset pools is fierce and so informed independent advice on how to make a successful pitch to these investors can be invaluable. Bruce Frumerman, CEO of the New York-based financial communications and sales marketing consultancy Frumerman & Nemeth Inc. notes that in their hunt for positive risk-adjusted return, Middle Eastern SWFs follow the same due diligence steps as sophisticated institutional investors elsewhere.

Once a fund has conducted its initial vetting of a money management firm's key differentiating data performance, risk characteristics, the volume of assets under management and the length of track record it turns its due diligence focus to four key subjective points of judgment. He describes these as: identifying the investment edge that is behind the fund's performance; understanding and buying into the investment philosophy and process used; gauging whether the methodology behind the performance appears to be repeatable; and understanding how the strategy is expected to perform in different market environments.

"Performance aside, the money management firms that communicate a cogent, compelling and linear storyline to due diligence teams so that they understand and buy into the firm's investment beliefs, and how its money manager assembles and manages the firm's basket of holdings are the ones most likely to win mandates and attract sticky assets," explains Mr Frumerman.

Fund managers might take some care in what they wish for in this cut-throat segment of the market. "It's great to have SWF allocations, but managers will face massive pressure on fees," says Stephen Blackshaw, a partner at law firm Sidley Austin.

Essential attributes to win Middle East SWF business

Patience is essential for any fund manager looking to do business with a Middle Eastern SWF. "If you think you can go from zero to having an asset allocation in a year you are in for a big disappointment," says one industry professional. "It can take years to build a relationship to a point where they are confident to award you a mandate," adds Mr Ralston.

A physical presence in the region is another must-have. The days when a western supplicant could fly in, do a few visits and win business are long gone. "You need a permanent office in the Middle East to build up proper relationships," says Jon Mills, an audit partner at KPMG with global responsibility for SWFs.

At one end of the spectrum, many people already enjoy access to the top decision-makers, who will all be local as few westerners have the required combination of technical skill, language and cultural know-how to aspire to that level. But there is no room for complacency. "When there is change at the top in a Middle Eastern SWF, all bets are off," says one professional.

The element of trust is of paramount importance. The ongoing dispute between the Libyan Investment Authority and Goldman Sachs over the appropriateness of complex investments sold by the latter is predicted to underline that truism, notes Mr Mills. One area of behaviour that demands special care and attention surrounds local customs such as the exchange of gifts, cautions Mr Blackshaw. Any hint of paying for access to decision makers is taken extremely seriously.

Middle Eastern SWFs don't have the near- to medium-term liabilities that their counterparts elsewhere face, says Mr Souri. This allows them to take a more strategic view in their investment strategy, affecting their asset allocation and duration appetite. For investors with such liquidity, the global financial crisis has expanded the range of opportunities available. As a consequence, these pools of assets have been a force of stability in the world's markets, providing a vital source of capital when most needed.

In terms of asset allocation, Middle Eastern SWFs are credited with having been at the forefront in moving beyond traditional investments such as government stocks and equities and into hedge funds, private equity, real estate and infrastructure, says Mr Mills. For fund managers offering a good product that fits an individual fund's strategy there are no insurmountable hurdles, other than the inevitable cultural taboos.

A number of other reasons are cited by Mr Souri to do business with SWFs in the Middle East. "They are highly educated and sophisticated investors, who are open to working on interesting investments; this on its own can make it a rewarding experience." Above all, they have large pools of capital looking for a rewarding home.




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