02 Oct 2012, Qatar Financial Centre Authority , Hedge Funds Review
Investment managers have undeniably had a tough time since the onset of the global financial crisis, which continues to reverberate and no more so than in Europe. The slowdown in economic activity, an increased perception of risk and changes in investor behaviour have forced asset managers in many parts of the world to reassess their strategies. But, in the Gulf Cooperation Council (GCC) states – Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates – in particular, and the Middle East and North Africa (MENA) region more generally, the fundamentals for the asset management industry remain strong.
The GCC Mutual Fund Industry Survey 2011 recorded that mutual fund assets had risen strongly to US$25.9 billion as of June 2011 compared to US$21.4 billion of mutual fund assets a year earlier. As of the end of 2011, there were 100 asset management companies that manage US$26.5 billion located in the GCC and 328 mutual funds were distributed.
Moreover, the Markab Advisory study, Asset Management Industry in the GCC: Growth Dynamics and Contours of the Next Phase of Evolution, sponsored by the Qatar Financial Centre (QFC) Authority and published in April this year, went further. It concluded that a diversified asset management industry has emerged in the GCC over the last decade, which, despite the financial crisis, has shown signs of maturity and consolidation. The study also found that there is still tremendous potential for catapulting the GCC asset management industry into the next phase of growth.
The GCC combines being a net exporter of capital with financial centres whose legal, regulatory, tax and judicial structures are modelled on those of mature markets and a young and growing private sector. Strong economic growth, high per capita incomes and high savings rates characterise the region.
Qatar is a prime example. The country is fortunate to have the world’s third-largest reserves of natural gas and a stable government with the long-term vision to build a diversified economy as a principal objective of the National Vision 2030. It has enjoyed, on average, a double-digit growth rate over the past decade and investable wealth is also increasing very fast. Standard & Poor’s gives Qatar a stable sovereign rating of AA/A-1+ and Moody’s a stable sovereign rating of AA2.
Qatar’s population has quadrupled over the past decade to nearly 1.7 million (Qatar 2010 census). The country has one of the world’s highest incomes per capita, one of highest proportions of high-net-worth individuals, and one of the highest proportions of millionaire households. Qatar’s savings rate is 49% (37% in the GCC), versus a world average of 22%.
Well over half of the region’s investable wealth is in the hands of institutions, individuals and families. Thus sovereign wealth funds, which attract much attention, are far from being the only pools of investable wealth in the Persian Gulf. Sovereign wealth funds control only about 40%. But, taken together, capital is abundant relative to the size of the economies and there is a large and expanding savings pool that creates demand for asset management services and products.
Depth and diversity of opportunity
Instability in some parts of the wider MENA region might obscure this extraordinary story of economic growth and wealth accumulation. But asset managers and investors who have acquired a deeper understanding of the MENA region and each country’s institutional development are already reaping the benefits.
They understand that, geographically, opportunities are to be found, for example, in the Levant countries of Lebanon and Jordan, and in North Africa. Egypt could offer considerable scope, depending somewhat on the outcome of the country’s sweeping political changes.
By asset class, the opportunities are also much more diverse than is often appreciated. While hydrocarbons are the main reason for the growth of the economy and personal wealth in the Gulf, only 31.5% of corporate and sovereign bonds stem from oil and gas.
Contrary to commonly held perceptions, investments are predominantly in conventional assets and not Islamic-compliant ones. For example, in 2011, 76% of new bond issuance was in conventional bonds and only 24% in Islamic sukuk issues.
Private equity, one of the fastest-growing asset classes in the MENA region, expanded at an annual compound rate of 30% between 2006 and 2010. As with fixed income markets, the private equity opportunity is not just in energy, it is spread across the power, healthcare, education, retail and industrial sectors as well.
The opportunity for investment managers
The evidence, therefore, is that experienced asset managers have ample opportunities in these markets. Indeed, many western managers already have well-established relationships with investors in the Gulf, as traditionally most of the region’s investments were westward-looking. Now, as the region’s investors turn more to the east, Asian fund managers are building relationships with the region, too.
However, investors in the GCC are increasingly demanding a better understanding of their needs, better products, better pricing and better overall service. This mirrors the world-class regulatory, legal, tax and business regimes that countries such as Qatar have developed. Today, it is very difficult for asset managers to provide the level of service investors expect without being on the ground in the markets where they seek to do business.
There is a further opportunity for international investment managers to take existing relationships to the next level: helping Gulf investors move into new markets, especially in Asia. The emerging markets of the east are growing rapidly, which is reflected in trade flows, and not just in energy. It is natural for investment flows to follow trade flows, so firms with expertise in Asia would be well-positioned to work with clients in the GCC region.
Less obvious, perhaps, to many accustomed to thinking of the GCC as a capital-exporting region are the opportunities for Asian investors in the GCC. The region’s governments are increasingly interested in attracting private capital to help their massive infrastructure investments – Qatar plans $200 billion worth of such projects over the next decade – and there is demand for private capital apart from private equity in a wide range of sectors. Again, being on the ground can be a crucial differentiating factor.
The QFC is the ideal platform to exploit these growth opportunities
The QFC was established by the Government of Qatar in 2005. It is a key component of national plans to diversify the economy to meet the objectives of the National Vision 2030. The QFC Authority is the QFC’s commercial and strategic arm and is integral to the expansion of Qatar’s financial services sector. One of the sectors on which the QFC Authority focuses is asset management.
The QFC offers a world-class regulatory regime, modelled on international best practice, and a legislative framework based on English common law. It has an independent judiciary, an independent regulatory authority and an independent tribunal to hear appeals against decisions of QFC agencies.
So the QFC is neither an offshore centre nor a free zone, but an English common law-based regulatory and tax environment. Licensed firms do not have to be physically located in QFC premises. Companies licensed by the QFC are free to operate in local and other currencies. The QFC allows licensed firms to be 100% owned by foreign companies and all profits can be remitted outside Qatar.
The QFC Authority has its own employment and sponsorship rules, which run parallel to those in the State of Qatar. While local employment and skills transfer programmes are encouraged, there are no restrictions on the number or percentage of expatriate workers employed by companies in the QFC.
Financial firms investing in Qatar enjoy an attractive and transparent tax regime. All QFC-registered companies are subject to a 10% corporation tax on locally sourced profits. Qatar has signed double-taxation treaties with more than 30 countries. Further tax treaties are at various stages of finalisation and unilateral tax relief applies to several countries including the US, the UK and Japan.
Qatar’s growing international recognition
Qatar’s success as a place to do business is attracting increasing international recognition.
The World Economic Forum Global Competitiveness Report 2012–2013 ranked Qatar as the world’s 11th most business-friendly country, the highest ranking in the Middle East and up three places from the year before.
The World Bank benchmark index report Doing Business 2011 ranked Qatar 36th in the world and third in the region. The country was rated the second most tax-friendly country in the world in the report Paying Taxes 2011: The Global Picture produced by the World Bank, the International Finance Corporation and PwC. The QFC also won the Global Investor award of Best Financial Centre in the Middle East 2011 and 2012.
Seizing the opportunities
Endowed with massive hydrocarbon wealth in an energy-hungry world, capital will continue to accumulate rapidly in the GCC. This capital will need to be invested. And some of the fastest-growing parts of the world, from Hong Kong to South Africa, are within six to eight hours flying time from Qatar. It is an unfolding and potentially lucrative opportunity that fund managers should seize.