Welcome to the latest episode of Gowling WLG's Listen Up podcast where we look at a range of topics trending in the legal and commercial landscape.
Imran Mufti: Hello and welcome to the latest edition of the Gowling WLG in the Gulf podcast presented by me, Imran Mufti. And today we are going to be speaking about funds, investments and M&A transactions.
I am very pleased today to be joined by two guests. The first is Dr Shuja Ali. Shuja initially qualified and trained a medical doctor in the UK. Following an MBA at Yale and stints as a management consultant in the US and the UK, Shuja settled in the Middle East in 2007 where he played a leading role in the diversification state assets as the chief investment officer at Istithmar World, which is part of the Dubai World Group. His experience includes restructuring, follow on investments, creating operational improvements and divestments.
For the past few years Shuja has been advising Sovereign wealth funds and high-net-worth individuals across the GCC and Europe primarily in the private equity and real estate space.
Together with Shuja, we have Ed Brown. Ed is a senior lawyer in the Dubai office for Gowling WLG. He has been in the region for over ten years and has considerable experience in advising clients on UAE, DIFC and ADGM funds with a particular focus on financial services regulation.
Both of you thank you very much for agreeing to take part in today's podcast. If I can kick off with a question around what seems to be the main talking point of GCC activity which is Saudi. There has been a lot of focus on Saudi in recent years, what are your views around this quote what could be perceived as a "Gold Rush". What are the drivers for this? We had a similar sentiment and activity buzz in Dubai in the noughties 2000s, I'd like to get a sense of what your view is on all of that in Saudi in particular. Shuja if you could kick us off?
Dr Shuja Ali: Well thank you very much Imran for inviting me to this podcast. I think there are similarities between what is happening now with the push with Saudi versus what we saw in Dubai now over 20 years ago and then there are quite a few dramatic differences and I think that is what would be a good kind of area to debate. Firstly, I would say the scale is quite different. The scale of Saudi's potential investments both in country and out of country are significantly more than we have ever seen in the last 20 years in the region and so that poses its own problems. The other big difference is that back in 2000s third party funding mainly from institutional banks was easily available at very good rates and so that dramatically changes investment thesis when you have ability to raise third party debt and another area that I notice is the talent portion of this is that you need to have not only ability to source deals but also to manage them and when this happened in the UAE back in the 2000s onwards, given this scale is quite different talent acquisition and using third parties such as law firms, consulting firms, investment banks seemed easier whereas now we are talking about so many projects, so many deals where there is only that much fungible resource so these are the things that kind of I think differentiate Saudi's approach in the last few years compared to Dubai.
Imran: Ed, would you like to comment?
Ed Brown: Yeah sure thanks Imran. Thanks for having me join today. So obviously Shuja has got a longer experience of the region than myself. I have been here just the last ten years or so and so the early 2000s in Dubai was before my time here. And to a certain extent though having been around and heard the stories of those times, I echo what Shuja has just mentioned. I guess I'm best commenting on what I've seen in my ten years here and there is no doubt that this is an attractive region, not just Saudi but in the wider region there is some £3 trillion in private wealth in the GCC and well over £3 trillion sovereign wealth funds in the GCC. And the big difference that I have seen from ten years ago where it may have been foreign fund asset managers visiting the region, now that the theme is very much there is a migration of managers to the region for it to set up a permanent establishment here. So, whether that is going to affect Shuja's comment about the resource to tap into funds and manage the investments I hope so, but there is certainly over my time a sort of a general theme being an increase of sophistication in the market but also an increasing desire in the desirability to be here. That's probably helped a lot at the moment by the difficulty that managers are finding raising funds in other parts of the world.
Imran: Thanks Ed. That is probably a good follow-on question in terms of what are the kinds of concerns that investors coming to the region have when they are looking to deploy capital here? Obviously, it is a different regulatory regime to what you would find in the US or Europe. Governance is different, ownership around real estate and extraction of capital by investors, all of these are key considerations in any jurisdiction. But are there are any discernible nuances or chinks that you think differentiate the UAE, Saudi and the wider Gulf in terms of attracting that kind of investment?
Shuja: I would say, and this is from my experience of having invested across global markets whether it was China, US, UK even South Africa, every country has its own nuance and you need to understand it as an investor, especially if you are direct investing or if you are trying to take controlling interests, rather than at the equities level or at the debt level. And Saudi is no different, nor was Dubai in the early 2000s. That third party investors need to have a certain level of confidence and that initially is built around the regulatory framework and governance as you mentioned. Then, in terms of currency that you are dealing with, how stable it is and how easy is it to extract funds in and out of the country, not necessarily at zero tax or at any particular benefit, although that always helps in returns, but how easy is the framework to be able to withdraw money? And we've had that issue in our past funds when we were trying to extract dividend income out of mainline China for example. So, we just want to understand what the processes are, how smooth they are, and Saudi has a lot of advantages over Dubai, in that Dubai when it started had to create a lot of the regulatory frameworks from scratch. The idea of a 'free-zone financial district' like DIFC is now common. You hear a lot of countries talk about it and Saudi also is able to set up rules and regulations around those. We have bankruptcy laws now in the UAE that was quite a novel concept at that time and today we are now seeing the implementation of these kind of rules and Saudi has to also create those, but it is much easier to create them off the back of having done something in the region already. And then there is just the strategic aspects of any investment. How big is the market? How many people, for example, if it was in country investments in Saudi, how many people will visit? Is the infrastructure in place? And this is not regulatory but more physical infrastructure – electricity, roads, airports – and we are seeing that Saudi is trying to create all of these simultaneously so they can meet that demand.
Imran: Ed, from your perspective, what do you see as the main concern of investors from a regulatory structuring perspective. Is there a particular preference to domicile funds in a particular jurisdiction, DIFC, ADGM, Offshore, Cayman and Jersey. Is the GCC doing what it would appear it was intending to do which is to attract those funds by way of including legislation and structures in place that will allow the kind of investment that investors are going to feel comfortable with?
Ed: So there are a number of factors that have been at play simultaneously over the last ten years. But let me run through what I have seen as the main factors at play over the last ten years and I'll very much caveat this by stating that I have always really been on the GP side rather than the LP side. Shuja has just got a lot more experience in what LPs are looking for, the concerns they have for extracting value down the line and all the issues go with that. But the factors I have seen applied in my time here, and I appreciate it is relatively limited to the length the market has been developing, is that first of all the market has become more sophisticated. Early days talking of the fund structuring, fund regulation and fund market here for local funds, there was a relatively well-trodden path and a comfort taken in certain industries, i.e. predominantly early funds that were established in let's say the DIFC or the UAE were focused on real estate, it was considered a conservative, steady safe play. There was a move on from there and certainly the global financial crisis changed things for real estate.
The next industry that funds here focused on, it was seemed to be food and beverage funds. There was a sort of flavour for a number of years of real estate and food and beverage. As the market is becoming more sophisticated that is the variety of funds, industries, etc has bloomed and along with that the regulators have become more experienced and sophisticated and have been able to offer regulatory relief for certain industry areas and certain structures to allow certain areas of the market to flourish.
One that we are seeing at the moment or in a recent couple of years is venture capital funds. So that is a, if you had gone back ten years ago I do not think you would have been able to find a local venture capital fund that was raising money here, certainly not to the extent that they are prolific now. And the next one area that is really opening up is hedge funds. Along with that it is not only the regulators that are getting more experience and sophisticated along with the market, it is the LPs themselves. There was, in terms of structuring, there has always been the opportunity here to establish a fund whether it be by a limited partnership structure and business company structure or a trust structure. But typically, in the early days it was an investment company structure because that was what was known and comfortable to the LP market that certainly I was involved with.
Still today trust structures are not really used but because of the increase in the number of VC funds, the limited partnership structure is a lot more common now than it used to be and is probably the most common structure I see. So those things have been developing over ten years, the market, the regulator, the LPs, the opportunities have all been developing alongside each other. So, everything looks very different now to when it was when I first arrived and that is showing, I think, explicitly in the number of funds that are domiciled here in the UAE now, whether that be ADGM, DIFC or onshore with the Securities Commodities Authority. There is certainly in the early days, free zones were working to get traction and create a critical mass of the asset management and funds industry and that certainly happens now.
Imran: Thanks Ed. Shuja, just touching on that, you have a lot of experience in dealing with government entities, advising them, working for them, and in a sense, you are probably uniquely positioned, especially when it comes to the UAE for example, in having relationships with very senior members of the Government. And as well as we all know that Dubai is a very business-friendly environment, so it is often the case that members of the Government are also prominent members of the business community and they will invariably be partners and co-investors and managers to an extent of a lot of the large scale, predominantly back in the early days, real estate projects – infrastructure a little bit later. Can you just relay your experience of how the interplay between these various investors would play out. Was it different to what you experienced in the US and UK? Is there a cultural dimension to it? It would be good to get some insights into that part of deal doing here.
Shuja: I will give you some examples of my experience with Dubai and Abu Dhabi and then more recently with Saudi. In Dubai in the early 2000s, you are quite right, a lot of the major activity was government driven. However, the difference was even in the early 2000s was that it had a very practical private sector view lens. So, it was the leadership of the country that had set that agenda which said that when you look at an investment, look at it as why would someone want to do this investment? What are the roadblocks in those investments? And then we as a government, or as someone who can control some aspects of regulation, some aspects of licensing, can ease that to allow that investment to be made. So it had a very much private sector lens and over the years I saw the improvement in people's attitudes and views especially about making decisions.
In terms of as I have seen that evolve in Abu Dhabi and more recently in Saudi, is that they are going through the same, or they have been or going through the same, life cycle where it is government funding but how do you make it more agile? How do you make sure that decisions are made with limited information? Are they made from a practical investment perspective rather than from a more government like, safety policing of funds, because that is the general tendency that you have. Again, this is an evolution. I think it takes time for that to happen, it does not happen overnight.
From investor point of view, I echo very much what Ed said, that the general investors are local and regional on the LP side. There are now sophisticated institutions and foreign direct investments coming in, significantly more than in the early 2000s. I doubt it was the first deal but one of the very interesting deals was done by Blackstone in Gems Education where they split Propco from Opco, and they invested in the Propco. That was a large transaction for the region, and it was very positive to see a sophisticated investor come in and do local deals, rather than the more typical which is funds leaving the country and going outside to those places. And I think we will see more of that. We have also seen a number of the more risk taking, foreign family groups, so Latin American families, Eastern European or those who have had experiences of high growth and are comfortable with risk of that type. They are willing to put funds into the region which, again, allows that fund to be mixed with local and regional funding.
Imran: OK, I think that is a common theme across most of the jurisdictions. In the UAE it has always been the case that given the nature of the demographic of ex-pats and locals there has been plenty of feet on the ground but I get the impression that Saudi is much more looking to get people on the ground through, for example, its regional HQ programme, it's ways of attracting multi-nationals to try to set up here and really commit resource to Saudi is indicative of where the country is heading.
I want to flip it a bit now and talk about funds going out of the region to places like the US and the UK. Historically the UK, for example, has always been a very attractive proposition, particularly when it comes to real estate. But I know, Shuja, you have seen recently other asset classes that have been quite attractive to investors from this part of the world, especially given, for example, the lull in retail and commercial real estate assets, particularly in the UK for example. Can you give us some insights as to why that is happening? Is there any strategy behind it or is it just a case of investors picking up cheap deals?
Shuja: I can share with you some examples of money that has flown out of the region abroad. I will start with the large r ones that we all hear about. In the press, for example, recently with PIF making an investment or in the process of making an investment into Heathrow Airport, for example, at that level. Now that is a large transaction, it is a private equity transaction. Yes, there is a level and component of real estate, but it is really about a private equity component, the services component of Heathrow Airport. Then the regulation of can a third party own that asset, which I think they need to understand.
There is a lot of talk about what multiples are being paid and this is all public information but you hear noises like 17 x EBITDA, no dividends paid for the last few years, partly because of the effects of COVID. But, one thing is, I do not really pay attention to the numbers. You really need to read the SPA, read the structures, see what is actually written. What is the true valuation? You may well have a valuation but what is the share ownership that comes out of it? What are the more sophisticated parts of that SPA in terms of the terms and conditions rather than just the price, and people just love to, sort of, question the price on its own. So, I put that aside, but it is a very interesting change where Saudi is now also looking out not just in and more formally. I am sure in the past there has been a huge amount of investments by the Saudi Government internationally, that is nothing new. But now they are coming out and they are doing private equity deals and it looks like some sort of control in that particular deal for example. What does that actually mean? Do you have resources, the skill sets to actually manage an entity like that as an investor owner?
The other side of it is family offices that are saying, OK I have got enough exposure in, say, the UAE or Saudi, and I need to get more established market exposure. And that, again, is a relatively sophisticated process where currency, the weakness of the currency of the country that you're investing in helps because your AD or dollar goes further for example. People did tend to focus on assets that they were familiar with. So, it starts with real estate, residential real estate, then it goes into commercial, then into shopping centres for example, not recently just given the move out of physical shopping to a lot of online. And then I think it takes a certain investor who has risk appetite to do other things. For example, we have been busy buying e-retailers out of the UK through bankruptcy and we have used legal advice from Gowling on that. And it has been very helpful because in the restructuring space it is not just about you showing up and saying I want to buy this for 'X' cents off the pound and you just expect to walk in. You need to have evidence that you can close a deal, you need to have evidence of funding, you need to understand the regulatory environment around HR rules around the employees, and if you do not have all that set up you will keep failing. We were lucky that we started this process in November and using legal advisers from your firm as well as going to the administrators and saying, "look – we are real, we understand restructuring, but this is our first foray into the UK market". And so we did one transaction, we were not able to close, then since then we have now bid for five more and closed three of them.
But when I think about it from a UAE investor who was involved in this, it takes quite a bit of risk and sophistication to be able to do that. This is not for your average UAE investor saying "wow it is cheap to buy things off bankruptcy let's go do it". And I would even go as far as to say the same investor we are now looking at the US for similar types of deals, but the environment is completely different. And so, it is not like you can just go around globally gobbling this up because you have money. So, I think a lot of it is driven by the education of the investor, their comfort, getting the right advisers around you, and in the case of pre-bankruptcy, moving very fast. And that is less attuned to the more government‑like funds that cannot move that fast.
Imran: Thanks, Shuja, for that. That makes sense. I mean, I suppose, sector expertise and, like you say, the ability to move fast, are key components in closing these deals. I think the last topic I would like to talk about is legislation and back to you Ed on this. Just in terms of practicalities. I know back in the day probably before you were in Dubai when the real estate market was white hot, everybody and anybody was piling in. There was a lot of concern around funding coming in and the absence of regulation around how these projects were being funded in an investor protection. What is your view of modern-day Dubai and the UAE in terms of regulation around, for example, funds that invest in real estate projects? We obviously have protections like the escrow laws to make sure that projects are delivered against milestones and funding is appropriately dispersed to make sure investors have a tangible asset against which they can mark their investment. But let's broaden the net and speak about regulation generally.
Ed: So, obviously my area of expertise is financial services regulation rather than landlord, property law. But a general comment is crises are always followed by regulation, never the other way round. Before the global financial crisis, and I am talking about the onshore regime under the Securities and Commodities Authority, there was no specific fund regulations or regime to speak of. The first promulgation of rules and regs around funds for protection of investors came out late 2011 early 2012 with the UAE or SCA fund regulations. And that was very much, probably the slowest knee-jerk reaction ever. Certainly there were a number of individuals that were affected by collapses tied up in the global financial crisis with property funds and hence the regulations were brought in to regulate that and effectively control the retail market but leave open the sophisticated, professional investor market to look after themselves and make their own decisions. That was really the beginning of the development of onshore fund regulation in the UAE. It has developed since then. Every couple of years there has been updates, amendments and in the last couple of years there has been an overhaul of the onshore regime to bring it more in line with international standards and expectations.
So, the regime is looking increasingly similar to what one would expect in sophisticated, developed markets. Sitting alongside that, there has been the DIFC and then latterly the ADGM, which always did have a sophisticated regulatory regime based off the UK. But I think, as I mentioned earlier, the traction and the growth of the fund industry has really only taken off in the last five or six years, certainly in the DIFC, and increasingly so now the ADGM. Onshore, there were always funds and banks supplying the various services associated with those. But to go back to answer your question, there has been a development in the increasing sophistication in the onshore regulations, but it started from a pretty near-zero base in terms of regulatory protections around certainly property funds back in those days. Shuja, you were here way earlier than myself and including that time, I would defer to you though on what you saw around that time in terms of investor protection and fallout.
Shuja: Well, that comment you made earlier, Ed, which is that it is a crisis that results in fast change and in '09 when Dubai felt the global financial crisis hitting its shores, the best example I can give you of that is the bankruptcy laws.
We were part of Dubai Government through Dubai World and we had a number of lenders knocking on our doors and investors at the asset level, asking us very directly that we need to hand over assets and we went to the leadership of Dubai and said, "Look, we feel like we are fighting with both hands tied behind our backs because in the UK or the US we have bankruptcy laws and this is the purpose of these laws and we would like to have something like that in the country. And that will allow us to fight on an even playing field. Yes, we are equity holders of assets, but we need time to resolve this crisis because this is not an investor, local, one company issue, this is an industry issue and a global issue". And we were given permission and what came out in months, by the way, this shows you the speed of movement when it is needed, Decree 57 was issued, which was the first bankruptcy law for Dubai and the country. Now, it was a mix mainly of UK law with a little bit of what we had seen from the US law.
Imran: Thanks Shuja. Final minute or two, I would like to each of you just to give me a 30 second or one minute summary of where you see things heading on a more macro level in terms of investment, appetite, sectors. Ed, if I can come to you first, are you optimistic about what is happening in the region? What is your view of activity in the GCC?
Ed: I think the biggest thing I have seen and heard commented on in various circles is that foreign fund, asset managers, they actually rather than feel a need to here, which may have been the case in the last five to ten years to tap into the markets, many of them and their staff want to be here. This is more of a human side of it. The desirability of living here has increased over the years. Dubai was always popular, Abu Dhabi much more so now. Saudi, it seems to be heading in that direction as well, and so it is not just a FOMO for large international asset managers. Many of their staff rather than it being a hardship are throwing up their hands now and want to be in the country, they want to move here, and you see that just in the numbers of people, the activity in the DIFC and the ADGM. And as a result of that I am very optimistic about the region for the future if there is a genuine desire for people to be here and then that is also linked with the financial prosperity and the opportunities here that seems a recipe for success.
Imran: Many thanks, Ed. Shuja? Some final words?
Shuja: I would echo what Ed is saying. I think the region, especially I would say Saudi, Abu Dhabi, Dubai, are just ripe for the picking for the next few years. Typically, in Saudi it is going to be around real estate to start with, as it is happening as we speak, and then it would expand into services. Very similarly to as it happened in Dubai where it goes into hospitality services, then food and beverage, then retail, and it just grows as the consumer market is growing. I think the external investments will continue with the sovereigns and that will be whether it is US or Europe driven. There will be areas that you have to look abroad, for example, healthcare life sciences, technology, that is still coming primarily out of the US. So, if you want exposure to that and the kind of funding required for that sector, you have to go abroad, and the cheque sizes are such that it is going to be the larger sovereign funds or the larger funds that would be going out.
And definitely, I see so many memes online and others about come to Dubai, we are going to see even more of that for Riyadh. Dubai already has the infrastructure for place for housing, schools, healthcare, and I think Saudi will have to rush that through in terms of having more residential real estate, which is very scarce in Riyadh right now because of that growth. It needs to have schools, it needs to have hospitals. Again, a pretty good system in healthcare there, that then allows people to want to physically go and move there. And then we always have the sensitive issue of things like alcohol and the other issues that come culturally, and I think they will move at the pace that is required.
Imran: Shuja Ali, Ed Brown, thank you very much for joining me today. It has been a pleasure getting the benefit of your insights. Until next time, thank you to everybody listening. We will be back for the next edition of our podcast. Goodbye.
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