As Arab Market Matures, Dubai Cashes In

High growth and investment opportunities are attracting financial giants like Deutsche Bank and Morgan Stanley to the emirate's glitzy towers

A couple of years ago, the Dubai International Financial Center looked like a white elephant. Now banks have to beg for space in the imposing, gray stone and glass complex built by the Dubai government in an effort to attract financial institutions to the emirate and create a kind of Wall Street of Arabia.

Set off by reflecting pools and flower beds, the Dubai money center lies at the heart of what is becoming perhaps the world's glitziest city. "I used to think this was over the top, but now it is full," says Bruno Daher, head of private banking for the Middle East at Credit Suisse (CS), an early tenant in the complex.

Wall Street's latest gold rush is to the Middle East, and Dubai is the boomtown. Financial services giants such as Morgan Stanley (MS), Deutsche Bank (DB), and Barclays (BCS) are all bulking up to try to capture a portion of the more than 1 trillion petrodollars that have flowed to the region in the last few years (see, 3/13/06, "The New Middle East Oil Bonanza").

The September 11 Effect

Experienced bankers say that their clients in the region have been amassing astonishing wealth, even after the beating the local stock markets have taken over the last year. The Middle East—and especially the countries around the Persian Gulf—have always been attractive places for Western wealth managers to prospect for clients. Now they are becoming even more of a lodestone.

But both local and Western financiers say that the possibility of gathering up big sums of money to take westward is not the region's only attraction anymore. A lot more wealth is now staying in the Mideast than it did in earlier booms. That's in part because of a reluctance to invest in the West after the backlash from the Sept. 11, 2001 terrorist attacks on New York and Washington.

Middle Eastern businesses and governments also have matured. In fact, Arif Naqvi, chief executive of Abraaj Capital, a Dubai-based private equity fund, thinks that the region "is at an inflection point. The Arab private sector is discovering itself; it was never allowed free rein."

Private Equity Could Take Off

Certainly those who manage businesses and governments are more likely than in the past to be familiar with sophisticated financial techniques and products. In turn, that has helped create demand for financial services such as advice on mergers and acquisitions, and initial public offerings. The region is also a huge market for project finance, and there is growing demand for mortgages and other credit products.

Even U.S. private equity firms that used to pay little attention to the Middle East except as a source of funds are now starting to scope it out as a market for deals. On Mar. 19, David Rubenstein, a co-founder of Carlyle Group, told a standing-room audience of suit-wearing local and visiting financiers that the region could become the world's fourth major private equity center, after the U.S., Europe, and Asia.

Until now the Mideast has been small potatoes for private equity, attracting only about $2.5 billion or so in investment money over the last year. But Rubenstein said it could take off, citing signs such as maturing stock markets that make it easier for financiers to sell the companies that they have bought (see, 10/3/05, "A Bourse is Born in Dubai"). He also noted that governments in the region are increasingly turning to privatizations—juicy stuff for buyout firms.

Lots of Growth Potential

"If you can buy something from a government, generally you are going to make a fair amount of money," he told his rapt listeners. Still, it could be some time before a region with such comparatively low market capitalizations becomes a major investment focus for outfits with monster funds, such as Carlyle, Kohlberg Kravis Roberts, or Blackstone.

The potential could be more immediate for other businesses. The Mideast has a fast-growing and demographically youthful population, which in turn helps stoke up the local economies. Even outside the oil sector, economic growth in the six member states of the Gulf Cooperation Council—which includes Saudi Arabia and most of the Gulf emirates—has been 15% per annum since 2002, says Abraaj Capital's Naqvi.

Does that mean that making money in the Mideast will be a no-brainer? Of course not. In fact there is already skepticism about the speed at which some banks are adding people in the region. Western banks also are starting to play in tricky areas such as the local real estate markets, which many people think could be overheated.

"There is a rush to lend," Naqvi says. He thinks standards and rules need to be tightened. But as long as oil remains in the $60 per barrel range, there's plenty of opportunity to make money.

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