Q&A: Fund administration in the Middle East

Apex Fund Services, among the world’s largest independent global fund administration businesses, recently opened an office in the Cayman Islands. Apex provides fund managers with access to key financial centres worldwide and its full suite of administration services, including real-time middle office service and range of fund platforms. CFR spoke with Group Managing Director Peter Hughes about Apex’s business in the Middle East. 

How does the fund industry in the Middle East compare to the rest of the world?

It
is an industry with huge potential but with Sharia funds and
conventional funds. A large portion of the liquid assets globally are
based in this region and are looking to diversify away from their local
markets. The local markets are also opening up to foreign investment
into the commodity plays that are important at the moment. The market is
moving forward but finds it difficult to maintain momentum as the
current events prove, there are long periods of inactivity in the summer
and other events slow the undoubted growth potential of the region that
wouldn’t be experienced elsewhere.

For a fund administrator, how much does the work in the region differ from other markets? 

It
is very different and the key is to be there locally. You have to be in
the right working week, in the right time zones and the nuances are
very different. For example, AML checks, such as utility bills and a
passport, don’t work because nobody has anything other than a PO Box.
You have to actually be there locally to find solutions to those issues.

You also have to have specific systems that are able to deal
with the Sharia products and even go as far as reporting in Arabic to
investors. So if you are based locally you can add a lot of value in
terms of delivering service to clients and it is much harder to do that
from a different time zone, a different working week and without
speaking Arabic.
 

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What was your motivation for being based in the region?

It
is the commitment to be based as close to the clients as possible.
Even, for example, for a market like Abu Dhabi, which is just over an
hour’s drive from Dubai, that shows a real commitment to the fund
managers in Abu Dhabi that we want their business. We want to be based
across the street, know what they are trying to do and we want to help
them. In some ways even an hours’ car journey can be too far away when
you try and deliver this service.

We want to do fund
administration, but we also want to look at ways of helping clients grow
their businesses. Back office and middle office outsourcing, ways that
can get their fund business off the ground without having a huge cost
overhead themselves. We have got good middle office and risk products
which we can lend to our clients too. So it really brings down the cost
of starting up fund businesses.

When there is not much liquidity
around people can appreciate it and although the assets are bigger in
the Middle East, certainly the pressure on fees is just the same as
anywhere else. You need to be conscious of that and offer low cost
solutions and deliver them in the right time zone.

You have
offices in Abu Dhabi, Bahrain, Dubai and Riyadh. Is this solely because
you want to be closer to your clients or also because the markets are
genuinely different?

There are elements of both. Bahrain is a
historical financial centre so a lot of fund managers, who want to
raise money throughout the Middle East, they would do a Bahrain fund
rather than a Cayman fund for example. If you have a Bahrain fund, you
will have a Bahrain-based administrator and there really aren’t any, so
it is a good market for us to be based in.

Other fund managers
in the region have done Cayman funds. There are a huge number of Cayman
funds in the Middle East, just because historically Bahrain has been
quite slow at approving funds and they have been quite expensive to set
up. So it caused delays for fund managers, who have actually turned to
Cayman as a quick solution, rather than being in the local fund centre.

Abu
Dhabi is about being close to where the assets are and where the
sovereign wealth funds are to give us the best opportunity to win those
businesses.

Is the use of Cayman funds a trend that will continue in the future or will it be eroded by the growth within the region itself?

I
think it will continue, but with the AIFM Directive in Europe people
are turning to having European feeders as well. So it will still
continue, but there will be more competition from Europe for the
business as fund managers are looking to raise money in Europe. But I am
sure Cayman is ready for that challenge.

How would you characterise the size of the market compared to the rest of the world?

It
has definitely grown a lot in recent years. The financial crisis did
stop it in its tracks. A lot of real estate and private equity funds are
on hold, then you had the Dubai crisis and debt default, which has
dogged things. The amount was not very significant compared to the debt
of Western economies and it received more headlines than it probably
deserved.

But the market is growing and particularly now as the
market aims to attract money from Europe and the US into the region, we
are seeing a lot more products being launched, this year particularly.
And as countries like Qatar become part of the MSCI Emerging Markets
Index, we will see a huge flow of money into the region. After Qatar the
UAE is probably the next country to be part of that index and all the
index-tracking funds will obviously put allocation into the region. So
people are building products ready for when that happens.
The oil
price is also a factor. When the oil price is high as it is right now,
there is a lot of interest in the region and when the price falls again
there is less interest.

What is the share of Sharia compliant and traditional funds?

There
is only quite a small percentage of 10 to 20 per cent of Sharia funds.
Those are the ones that are looking for local investments from Saudi
Arabia, Kuwait and those sorts of markets. Other markets in the region
are a bit more open and therefore other products are generally
acceptable to them. It is a growing market but at the moment it is a
relatively low percentage of Sharia products.

Has the demand for transparency, information and independent administrators increased?
Yes,
it has. When I remember five years ago, that was not the case. It has
been a learning process. Five years ago the markets were booming there;
they had been up 100 per cent for the year. But since, people have been
looking at the numbers more closely and they want more independence and
independent pricing. Now that they are looking to raise money from
outside the region, they realise that if they want to get allocations
from institutional investors globally, they need to follow global best
practice.

Have managed accounts taken hold in the region?

They
are quite popular in the region. We have a significant number of
managed accounts, which we are structuring for clients. That’s obviously
based in the security and transparency that people are calling for on a
global basis since the crisis and the frustration of funds being
closed. It makes sense as a solution, although the cost can be higher
than people think sometimes, but they are used in the Middle East.

Why has Islamic finance so far not taken off as expected?

It
is possibly due to the stop-start nature and it would have gathered a
lot more momentum had it not been for the fact that it stops during
Ramadan. Then we had the global financial crisis and we had the Dubai
debt default, just as momentum was picking up.

Now we do see
momentum gathering and we see a lot more products than we did a year
ago. So it is making a big stride forward. If it is going to continue
over the summer without any other impacts, is difficult to say. Egypt
did have an impact in the region, but in my opinion that is a fairly
isolated issue that affects the Northern African countries and it should
not affect the fundamentals of the stocks in the region.

Having
said that it has spread to Bahrain, but in Bahrain you find this tribal
situation with a minority ruling over a majority. It is all very
different and you have to be there to understand the different nuances
in the region and how each market is changing.

So there are
these speed bumps in the way of progress, but a good portion of the
world’s assets are in the Middle East and it is going to be a growing
asset management area. And certainly Qatar, for example, is only in its
infancy in terms of asset management.

Having an office in the
Cayman Islands and offices in the Middle East helps us set up Cayman
funds and provide registered accounts, officers and directors and
deliver this in the Middle East. So it is a fairly unique offering.

QAFRONTSM
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Michael Klein

Michael Klein Editor Pinnacle Media Group Ltd.
PO Box 1365, Grand Cayman, KY1-1108, Cayman Islands

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Michael is a
financial journalist and copywriter.  In
the past he has been responsible for the Risk Management and Corporate Finance
sections of a British monthly Corporate Treasury publication.  He has
written various financial handbooks, notably on European Banking and Cash
Management and the Debt Capital Markets.  
In addition he has
worked as a copywriter for banks and investment funds and served as corporate
communications consultant to US and European blue chip companies.  
Michael holds an MA
in Political Science and International Law from the University of Bonn in
Germany. 

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