The DIFCâs strategy chief explains the centreâs popularity in the face of high rents, and admits there is a shortage of DIFC-domiciled funds. He meets George Mitton.
“Why is London such a great financial centre? Because everybody’s there. It’s expensive, it’s difficult to hire people outside of the EU, the costs for compliance are high, but it’s still the predominant centre because of the community it attracts.”
Chirag Shah, chief strategy and business development officer of the Dubai International Financial Centre (DIFC) Authority, is using a comparison to explain why so many companies – the total grew a net 14% last year – continue to set up in the DIFC.
Like London, the DIFC is, by Shah’s own admission, rather expensive – more expensive than offices on the ground in the UAE or in nearby jurisdictions such as Bahrain, for instance.
In addition, DIFC-based asset managers have a rather confusing regulatory situation, falling under the remits of both the DIFC’s regulator, the Dubai Financial Services Authority (DFSA), and the UAE-wide Securities and Commodities Authority (SCA). This double whammy has led to confusion that has stalled distribution for some companies.
Yet despite these obstacles, the centre includes more than a thousand companies, 300 of which are financial firms. These include, says Shah, some companies with full-fledged UAE banking licences which nevertheless choose to operate a DIFC branch. Why? Because of the community, he says. Because everyone else is there. Certainly, the growth of the DIFC has been impressive. It was established nearly ten years ago, “on a patch of desert, literally”, and now 16,000 people work in the confines of the centre, which is a designated free zone with its own legal system based on English common law.
That said, not everyone who comes to the DIFC is involved in finance or even works there. The centre is home to a number of bars and restaurants, which led to the centre gaining the pejorative nickname “the Dubai International Food Court”. A different species of critic, perhaps aggrieved at the high rental costs, has claimed the DIFC is primarily a real estate project.
Shah disputes these claims, saying that the centre would not be a good location for restaurants such as Zuma if it wasn’t home to big-name financial services firms and their employees.
The DIFC does include restaurants in its calculation of total companies, but Shah says they account for no more than a fifth. As for the real estate grumble, he shrugs and says the numbers of incoming companies speak for themselves.
These companies have continued coming even during the financial crisis, which slowed but did not stop the growth of the DIFC. Now the global economy is in better shape, the centre is predicting faster growth. In 2012, the then-chief executive of the DIFC Authority, Abdulla Mohammed Al Awar, said the number of firms in the centre should double in five years. Shah says the DIFC is on track to meet this goal in 2018, only one year out.
The real challenge, though, is to get these companies to establish more than the very front end of their businesses in the DIFC.
For asset managers, in particular, it is typical for DIFC offices to be sales channels for funds that are domiciled and managed elsewhere.
The DIFC would like these firms to enlarge their operations, to do the management, fund administration and investment decision-making in the DIFC too. Yet it seems many firms are cautious about committing.
Perhaps they are right to be cautious. Earlier this year, ING Investment Management, one of the few that did have asset management capability in the DIFC, put its unit on review because its asset base was too small to justify the size of its team. The team departed en masse for Lazard Asset Management, which is setting up its own business in the DIFC, while ING will retain a marketing presence in the centre. Yet Shah denies that the ING example reveals a weakness in the DIFC’s business model. Companies restructure their businesses all the time, he says, and Lazard believes it can succeed where ING failed, so what’s the problem?
He prefers to point to companies such as financial analysis firm Bloomberg, which started with two people in the DIFC and now employs a hundred, or to Nomura, which recently set up an office for its asset management division in the DIFC.
“Most of the firms who have come in our first ten-year era have started creating products here,” he says. “When they’re comfortable with their presence, they grow their presence.”
That said, on some measures the DIFC has not achieved what it hoped. One indicator is the number of asset managers who have chosen to launch DIFC-domiciled funds, of which there are about a dozen – a tiny number compared to the hundreds of Cayman Islands or Luxembourg-domiciled funds that are distributed from the DIFC.
Shah says part of the reason is that customs are entrenched. “Many decisions are taken on basis of convenience. My law firm already knows how to do funds in Cayman, so they do it there.”
However, even this understandable desire to stick with what is known seems not to explain quite how few DIFC funds have hit the market, if the proposition really is as good as the DIFC claims. Could the uncertain regulatory status of DIFC-domiciled funds, which are treated by the SCA’s regulations as being offshore products, and therefore with no local legal advantages over Cayman Islands or Luxembourg funds, explain their lack of traction?
Shah says DIFC-domiciled funds do have an advantage – they are “closer to the market” and closer to distributors. However, he accepts that the number of
DIFC-domiciled funds is a “lagging indicator”.
The DFSA is trying to provide more options for asset managers, though, and recently released proposals for a new class of funds, qualified investor exempt funds, which will be lightly regulated and aimed at large, sophisticated investors. Shah says this model suits the Gulf market, in which wealth is so concentrated among a small number of sovereign wealth funds and family offices that asset managers may find 1% of their clients account for 90% of assets under management.
Shah points to other innovations from the regulator, such as creating the first sharia-compliant real estate investment trust (REIT).
“You can do stuff that you can’t in other markets,” he says. “Try creating an Islamic REIT in London. In the current regulatory environment, you won’t be able to do that.”
In short, Shah is adamant that the regulatory system at the DIFC is world class, and that this partly explains the popularity of the centre among financial firms and the various subsidiary industries that supply them.
Of course, for any new companies considering setting up in the centre today, the prospect of regular lunches at Zuma must be part of the appeal too.
©2014 funds global mena