Liquidity in the Middle East is changing form as sovereign wealth funds are demanding that the asset managers they invest with establish a local presence in the Gulf. The change is leading to a deepening pool of investors being based in the region, and growth of the local capital markets and investment industry.
“Recently we’ve seen BlackRock set up a base in Saudi Arabia, Brevan Howard in Abu Dhabi and at least 60 more hedge funds based out of Dubai,” said Hitesh Asarpota, CEO of Emirates NBD Capital in Dubai. “That’s in addition to the Middle East liquidity that was already there.”
The region’s wealth funds are powerful players but historically they have invested by being limited partners in global investment funds, often based in London or New York. But their preference is shifting to investing closer to home. Saudi Arabia’s Public Investment Fund signed a memorandum of understanding with BlackRock in April that would allow the US asset manager to establish a multi-asset class investment platform in Riyadh. PIF has anchored it with an initial investment mandate of up to $5bn. It said it wanted to drive further growth of the Saudi capital markets.
“The Middle East for a long time has been an exporter of capital,” said Asarpota. “But now we’re seeing encouragement for this money to be used to create more jobs in their own countries.”
Another recent change has been some corporates and family offices investing more in fixed income, having previously concentrated on real estate and equities. “It’s largely for diversification,” said Asarpota. “Over the last few cycles it’s become clear the benefits of having a diversified portfolio. They’re still off what we see as the ideal 60% fixed income, 40% equities XXX ratio but it’s getting closer. It’s a move away from a strong preference for trophy real estate assets.”
However, bond demand in the Middle East will not be available to all issuers. The biggest fixed income investors in the Middle East remain bank treasuries. Another capital markets banker in Abu Dhabi said these investors, which are managing funds to keep reserves of high quality liquid assets for regulatory purposes, have to factor in their own cost of funds.
“Most sovereigns globally raise money at levels lower than those banks, so the maths doesn’t work [for them to buy sovereign bonds],” he said. “It tends to only make sense if a bank is also a bookrunner on a bond and so commits money themselves. It may work for African sovereigns but investors are cautious of being left with high default rate assets.”
Asarpota disagreed, however. He said that as the investor pool deepened, more issuers globally were seeing the benefits of courting bond investors in the Middle East.
This is especially seen in the sukuk market. Asarpota said several Turkish companies were in advanced stages of bringing sukuk deals and US leasing companies were also planning them. He expects to see more from Egypt and some African issuers are in the starting stages of sukuk.
“It makes sense for issuers because they then don’t have to pay a premium for diversification,” he said. “For AerCap and AirLease we placed 75%-80% into this region. But any issuer can tap this liquidity even in conventional format. I can pretty much guarantee a 5% to 10% allocation on even a central and eastern European sovereign bond. There is liquidity here for fixed income if you do the work of marketing here to attract it.”