EUROPEAN REGULATION: Following the caravan

CaravanWill the onset of the AIFMD in Europe push hedge funds and other alternative fund managers to set up in the MENA region? Dave Waller reports.

Here’s an interesting  game: introduce sweeping financial regulations, then sit back and observe the ensuing caravan of capital. In the wake of the global financial crisis, changes in UK regulation had many hedge funds swapping London for Switzerland. Soon the wagons were again being loaded, this time in a banking exodus from Switzerland, as its secrecy laws were changed and increased compliance costs began driving financial players away. 

Next stop on this magical monetary tour? All roads lead to Singapore, apparently.  

This, at least, was the headline version, but there are many who now believe the MENA region may benefit from increased regulation elsewhere too. 

With the onset of the Alternative Investment Fund Managers Directive (AIFMD) in Europe, hedge funds, private equity funds and their ilk who wish to domicile, fund-raise or market their wares in Europe now have to register their products, appoint custodians and meet annual reporting and disclosure requirements, just like traditional funds have to. 

And for many of those wishing to avoid the extra costs and administrative burden this entails, MENA provides another option.

Law firm Dechert has set up a presence in Dubai and worked extensively on setting up funds in the region. “If you want an EU-based fund because you’re seeking European investment, then you’ll have to bite the bullet with AIFMD,” says Chris Harran, national partner at Dechert in Dubai. “But for established managers in Europe, who may have outposts in the Middle East, there are some AIFMD arbitrage points they’re looking into to mitigate some issues around fundraising for investment funds in the Middle East. That may have been done previously via a Luxembourg or Dublin platform. Now they must look outside the EU to avoid AIFMD.”

Yet it’s unlikely we’ll see alternative fund managers suddenly flocking to the region in droves, and the AIFMD won’t close the gap between Dubai and more established centres, such as Luxembourg and Dublin. “The differences will be in the subtleties, not a sea change,” says Kevin Gundle, chief executive of Aurum, an asset manager specialising in hedge funds. “Fund managers who don’t use Europe won’t be affected by AIFMD, and those who want to promote their products in Europe, which remains a huge market that will, of course, contain their core clients and infrastructure, won’t be able to avoid it. I haven’t seen any moves yet.”

Indeed, the ink is still drying on AIFMD, and it’s hard to tell exactly what the affect will be. Yet to focus on the flight from regulation is to miss the point. Anyone hoping to avoid regulation in Europe will only run into regulation in MENA too. Dubai, for example, is positioning itself not as an equivalent jurisdiction to the likes of the Cayman or British Virgin Islands when it comes to regulatory standards, but to Luxembourg or Dublin. For many of the funds which do use the region, regulation will become a badge of respectability to be coveted not avoided. 

The trick, however, is to not be saddled with regulation that’s not necessary. “If you have a US fund manager with investors in the Middle East, you have to question why you’d domicile in, say, Dublin,” says Ali Hassan, senior representative for Europe and North America at the Dubai International Financial Centre Authority. “This would mean subjecting yourself to another block of questions from the EU regulator that don’t even serve your investors at all, as no part of the process is in the EU. With the DIFC you can manage a fund in a well-regulated environment, but with regulation that’s relevant to your business, not irrelevant.”

Inspired by such considerations in the wake of AIFMD, the Dubai Financial Services Authority has reformed its regulations to allow the creation of a new class of fund. Due to be launched by early 2015, the qualified investor exempt fund (QIEF) is designed to ease the regulatory requirements by setting a minimum subscription of $1 million, and 50 or fewer investors. 

“We’re looking to develop regulations that are appropriate for the type of investors involved,” says Hassan.“We put QIEF forward to say: ‘This is here – it matches the sophistication of your investors and gives access to a growth market’.”

Indeed, those funds who do come to the MENA region are likely to be drawn by its own strengths as much as escaping the regulation of Europe. “I do have lots of interaction with European and US players, but it’s not AIFMD that’s somehow making the region more attractive,” says Hassan. 

He cites factors such as access to the region’s rapidly expanding markets, wealth and investment opportunities, as well as the attractive low-tax environment. 

MENA may not be about to benefit from an epic flight from EU regulation, but there’s no reason why, with suitable adjustments to its own fund classes and a good job of marketing, it can’t benefit from a growing appetite for regulation that’s not only strong but suitable. 

“We need to give ourselves a competitive advantage or it will come down to the same thing: why use a DIFC vehicle?” says Harran of Dechert. “We’ve worked on sharia-compliant funds for investment into Saudi and a real estate fund into India from the DIFC – because they have a clear advantage to raising here, with double-tax agreements etc. And if you’re raising funds locally it makes sense: investors can see it, the regulator is here, it’s robust, and it’s safe.”

©2014 funds global mena

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