How a single-source solution can support the Middle East's asset managers

The global financial services provider talks about how it’s developing a single-source solution and addressing distribution challenges in the Middle East, and the evolution of ESG trends in the market

How have changes in the investment landscape influenced the fund solutions GPs are asking for?
The main changes are coming from international practice, regulations, technology, and funds’ aspirations to be more transparent and accessible to investors. Globally, for example, ESG standards have been established and rolled out to different jurisdictions. In the Middle East (ME), managers are becoming aware of this and looking to ‘future-proof’ themselves and stay ahead. 

Regulations are constantly reviewed and GPs are working to comply with them. The overall benefit of transparency on funds’ activities is being recognized and, increasingly, GPs are exercising their ability to ask for more information. GPs are no longer solely focused on financial performance and are managing their activities with greater emphasis on governance, impact, and reputation. For example, GPs are looking to their portfolio companies to provide information and keep up with the current ESG standards being applied.  

What makes the Middle East unique compared to other markets, when looking at single-source solutions?
The ME is still a relatively immature market although a lot of development is coming through. To an extent, managers are playing catch up with what’s happening elsewhere. The capital markets infrastructure in the ME is still relatively fragmented, meaning that some of the technology enhancements available elsewhere can’t be effectively incorporated. In order to keep up with changes in regulation, technology, and requests from LPs, fund managers are looking more actively at outsourcing or seeking a single-source solution.  

Are there any distribution challenges that are specific to the Middle East?
The ME is at a disadvantage because it’s still fragmented. There’s no GCC or MENA passport. In Europe, you’ve got the Undertakings for Collective Investment in Transferable Securities Directive (UCITS) passports and in APAC you’ve got different abilities to passport funds through different jurisdictions. But a Kuwaiti manager can’t passport their fund directly to UAE investors.  

Even within the UAE, there are three different jurisdictions. The ESCA, the Securities and Commodities Authority, governs the ‘onshore’ jurisdiction, and there are two financial freezones: the Dubai International Financial Centre and the Abu Dhabi Global Market. These entities have recently adopted a passporting regime and registration process where funds can be passported inside the UAE, but funds still don’t benefit from external passporting into the region. That’s a strong disadvantage for the region. Participants have to navigate that to effectively distribute across different jurisdictions. It will change, but that’s not on the horizon currently.

How is the regulatory environment in the Middle East creating new expectations from GPs for distribution?
The regulatory environments in some of the financial centers are now allowing entities to develop themselves as distribution partners. Before, it was primarily private banks and retail banks that undertook the distribution of funds, and now we’re seeing more promotional and distribution-type licenses being made available in some jurisdictions. But it’s still proving very difficult to navigate this process and commit to the investment, costs, and management involved to get this done.

Are there any specific (regulatory) ESG trends that are developing in the Middle East?
It’s a hot topic. ESG-adherence in the ME has enormous potential benefits. The ME has a very high hydrocarbon reliance and is also addressing human rights issues, diversity in the boardrooms, financial inclusion and empowerment, and strengthening corporate governance at all levels. The advantages for the ME are significant, allowing the region to scale and develop sustainably while tapping into the potential that exists in the region, whether this be the petrodollar financial resources or the increased mobility of a well-educated and motivated workforce.

While many corporates are taking a proactive stance, they are still looking for guidance. We’re seeing that the stock exchanges throughout the region are asking listed firms to disclose their ESG policies and record their process and progress towards that. Regulators and funds are looking at what is happening globally, and are putting a framework together where they can go back and measure benchmark ESG compliance and status at any point in time.

How are Sharia-compliant funds positioning themselves within ESG?
Islamic finance principles and ESG work very well together. They share the same common principles, of taking an approach where you basically do good, and to ensure that everyone participates in a fair situation. It isn’t so much about creating a niche, but more that there are very transferable aspects of ESG reporting and compliance that Sharia funds are able to benefit from. Processes that are being developed to screen companies for ESG compliance can add further value to screening requirements for Sharia funds.

Are there any unique challenges with ESG investing in the Middle East and how could they be addressed from a fund admin perspective?
A major problem globally with ESG reporting is there is no single defined set of standards or consistency and approach that people are able to follow. In Europe, you’ve got the Sustainable Finance Disclosure Regulation (SFDR), in the US, regulatory disclosure requirements, and among members of different jurisdictions there’s not that same sense of commonality.

In the ME, parties want to see prescriptive standards and get guidance, whether it’s from the regulators, from the GP community, or from other global players. The UAE, with its regulatory framework and the standards the regulators are looking to create, is a front-runner, as well as Saudi Arabia, where there are highly visible, increasing diversity requirements. There’s a long way to go, but they are making good progress, led by the government, by regulators, and by managers working together to improve this.

About
Craig Roberts is Regional Managing Director – MENA at Apex Group, with over 30 years’ experience in the financial services industry globally, having held senior management positions in fund management firms, investment banking, and fund administration. He is keenly involved in the development of best practices and the evolving landscape of the financial services sector.

Apex Group is a global financial services provider delivering an extensive range of services to asset managers, capital markets, private clients, and family offices. The Group offers a single-source solution, including fund services, digital onboarding and bank accounts, depositary, custody, super ManCo services, corporate services including HR and Payroll, and a pioneering ESG Ratings and Advisory solution.