Impossibly Wealthy and ‘Notoriously Opaque’

Sovereign wealth funds offer the biggest opportunity in the Middle East for fund managers, particularly those running active strategies such as alternatives and emerging markets, according to a Cerulli Associates report.

Muscat, Oman (Christopher Pike/Bloomberg)

Muscat, Oman

(Christopher Pike/Bloomberg)

Asset managers competing in the secretive Gulf region are circling a more than $1 trillion opportunity to work with sovereign wealth funds, according to Cerulli Associates.

Institutional investors in the six Gulf Cooperation Council countries — Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates — oversee around $3.5 trillion of assets in this “notoriously opaque” market, according to a report Tuesday from the consulting and data firm. About $1.2 trillion of assets tied to the region’s sovereign wealth funds are up for grabs by international fund managers, Cerulli said.

While the larger wealth funds in the Middle East have tended to rely on passive investment strategies for their conventional equity portfolios, fund managers offering actively managed approaches may have a better chance of winning their business.

“There are disproportionately large opportunities for well-established specialists and boutiques — particularly in relation to emerging markets, private equity, real estate, infrastructure, and other alternative asset classes,” Cerulli said in the report. “There are also real opportunities for global asset managers with offerings across large numbers of mainstream and alternative asset classes.”

Sovereign wealth funds represent about $3 trillion of the assets in the Gulf Cooperation Council countries, with government-backed pension plans accounting for most of the remainder, according to the report. The wealth funds are looking for investment strategies that will help them meet their long-term needs after suffering from plunging crude prices a few years ago.

Cerulli expects the “dozen or so” sovereign funds in the Gulf region, which have been at least partially funded by excess government revenues from oil and gas, will likely see slower growth in the coming years as energy prices have struggled to recover from their steep tumble in 2014.

The consulting firm found evidence of contraction at the Saudi Arabian Monetary Authority Foreign Holdings fund that is “massive in absolute terms” relative to the balance sheet of the country’s central bank.

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Fund managers can also hunt for opportunities among affluent individuals in the region.

The Gulf Cooperation Council countries have about 700,000 high-net-worth individuals with a total $2.4 trillion of investable assets, according to Cerulli. Then there are about 100 family offices, or quasi-institutional investors that cater to the exceptionally wealthy in the region.

Cerulli estimated that fund managers can compete for about $800 billion assets held by high-net-worth investors, after accounting for what’s tied up in cash, physical real estate, and their own businesses.

“For asset managers that are looking to serve this market, a competitive edge comes from established relationships with private bankers and wealth managers” in international financial centers such as Geneva, Singapore, and Jersey in the British Isles, Cerulli said in the report.