Transcript
Speaker: Welcome to HSBC Global Viewpoint, the podcast series that brings together business leaders and industry experts to explore the latest global insights, trends, and opportunities.
Speaker: Make sure you're subscribed to stay up to date with new episodes.
Speaker: Thanks for listening.
Speaker: And now onto today's show.
Speaker: Welcome to the latest in our MENAT Talks podcast series.
Speaker: We are featuring a variety of different topics that are currently trending in the MENAT region, and we now explore investing in the UAE with a focus on the DIFC.
Speaker: Introducing the topic is HSBC's Global Co-Head of Platform Solutions and Head of ESG Sales Americas, Matthew Corrali.
Speaker: Matt, over to you.
Speaker: Thank you, Gabrielle.
Speaker: To explore this topic further, I'm delighted and very excited to welcome Salman Joffrey, Chief Business Development Officer at the Dubai International Financial Center Authority, or better known as the DIFC.
Speaker: Thank you for joining me today, Salman.
Speaker: Great to speak with you again.
Speaker: Salman, maybe to kick things off, can you please describe the current hedge fund landscape and how it has evolved in Dubai over the last few years?
Speaker: Well, first of all, thank you, Matt.
Speaker: Thank you, HSBC, for making this happen.
Speaker: It's great to be here.
Speaker: The hedge fund landscape in Dubai and DIFC is a 19-year story of the evolution of a financial market.
Speaker: We were established about 19 years ago.
Speaker: And for the first maybe five or seven years, there was a lot of focus on establishing global universal banks such as HSBC.
Speaker: The purpose of that was to give the financials of
Speaker: center some credibility.
Speaker: And over time, that business, which leveraged or relied heavily on balance sheet financing for regional businesses, gave way to a lot of off-balance sheet financing.
Speaker: And we saw a pretty significant inflow of asset managers, of course, including all the global asset managers, including HSBC's asset management business.
Speaker: Over time, that got deeper and deeper.
Speaker: And obviously, the latest version of that story is really amazing inflow of hedge funds.
Speaker: So
Speaker: I think today we have a hedge fund business that is growing very rapidly.
Speaker: It's approximately 30 or so currently.
Speaker: And these include kind of pure plays as well as platforms and managers that have a little bit more of a hedge fund product focus.
Speaker: But the great news is that pipeline of inbound business from around the world into this already pretty significant asset management business that we have at DIFC is north of 60.
Speaker: And that number refers to a number of
Speaker: of alts and hedge funds that are actually in the process of being authorized or registered, but also those who are in the process of learning about the DIFC and are very keen to come here.
Speaker: So yeah, it's a pretty exciting time.
Speaker: Salman, that's an incredible story and very exciting for many of our hedge fund managers.
Speaker: Can you maybe share with us some of the investment that DIFC has made and what your mission is and where you would like to take the growth of the DIFC?
Speaker: Yeah, Matt.
Speaker: So look, DIFC's mission has always been about driving economic growth and creating growth.
Speaker: high value jobs.
Speaker: Originally, this mission, which came into existence almost 20 years ago, was a direct consequence of wanting to diversify the wise economy or hyper-parallels.
Speaker: And so the idea was to create a center of excellence in market where financial institutions originally from all over the world would come
Speaker: to Dubai and the IFC and we would be a global center for finance.
Speaker: Now, over time, that's evolved.
Speaker: In the beginning, it was all about banking.
Speaker: It then became substantially about off-balanceary financing and asset management.
Speaker: We then digitized it with the fintech.
Speaker: And of course, today we're seeing incredible inflows into the hedge fund space.
Speaker: The way in which we created this kind of growth over time was to invest pretty consistently in soft and hard infrastructure.
Speaker: Soft infrastructure refers to the very important kind of secret sauce of our jurisdiction with an English common law base, legal and regulatory environment, including our court system, which enable financial services and institutions from all over the world to feel comfortable transacting financial services, which, of course, is all about enforcement of contracts, the certainty and recourse that things well have played with right.
Speaker: And when I say hard infrastructure, I'm referring to the actual physical buildings, which here in Dubai are
Speaker: of the highest quality.
Speaker: We are a beautiful kind of campus with all the top buildings as well as top restaurants, cafes.
Speaker: But all of this makes the process of conducting business meeting with clients very, very easy.
Speaker: Along the way, we've had to enhance this soft and hard infrastructure.
Speaker: So we've continued to upgrade and sharpen things like our employment law,
Speaker: our intellectual property law, our trust law, our nation's law, SPVs that we call prescribed companies.
Speaker: Along the way, we also reacted to changing demand globally by introducing new regulations such as crowdfunding, payments, and many services, and digital assets, and crypto.
Speaker: So all of this, over time, was designed to, again, make the DIFC a very attractive place to conduct financial services and, of course, innovation.
Speaker: The result of all this
Speaker: almost 20 years later is that we have almost 38,000 people here working at nearly 4,500 companies in this beautiful physical complex, which is over 110 acres.
Speaker: And it's really the heart of Dubai in terms of being a business hub and financial market.
Speaker: Thanks, Salman.
Speaker: I think you touched on a few of these points, but what do you see as the main benefits of setting up an office in the DIFC?
Speaker: Why should managers want to move to this location and establish a presence locally?
Speaker: Look, full disclosure, I mean, Dubai is a super dynamic global city now, but Dubai and the UAE by themselves are actually pretty small markets, right?
Speaker: Population of the UAE is circa 11, 12 million.
Speaker: So the real promise here for banks, asset managers, insurance companies, hedge funds, financial services companies, all the other lawyers and consultants,
Speaker: is really the promise of scale from this place.
Speaker: And so the acronym that we use for our market, as I mentioned, is MIASA, Middle East Africa, South Asia.
Speaker: And if you start drawing a circle within a four-hour flight time from Dubai, you start talking about a market that starts to touch over 70 countries with close to two and a half to three billion people with significant economic growth.
Speaker: growth.
Speaker: So $8-9 trillion of GDP, young demographic population growing, and also with lots of significant needs in financial services and other markets.
Speaker: So that's the promise.
Speaker: And then the question is, how do you take advantage of it?
Speaker: I talked about the platform.
Speaker: It's worth mentioning that again.
Speaker: The platform really helps, right?
Speaker: Because when international leading
Speaker: institutions like HSBC come here, the operating environment, the rules, the regulations, the contracts sound familiar to you.
Speaker: You have offices in the UK, in North America, in Asia.
Speaker: So you're familiar with the standards that we provide, the global standards for corporate governance, et cetera.
Speaker: There's also some other things that many of your listeners may not know about.
Speaker: Even though we are about to institute a corporate tax onshore of about 9%, there is no personal income tax here whatsoever.
Speaker: So that makes it very attractive to compete for labor.
Speaker: The last thing I'll say is the way in which you access these massive markets is that you're able to attract the very best people.
Speaker: You know, I'll come back to that later in the conversation.
Speaker: But really, getting financial services right, getting the market right is all about tapping into the right people who can come to the Middle East, DIFC, Dubai, and then work from here and access the markets that I refer to.
Speaker: Salman, I know that one of the reasons managers are setting up locally is to be closer to the large pools of capital in the region.
Speaker: How do you see setting up a presence in the DFC help hedge fund managers unlock access to this investable capital in the region?
Speaker: Matt, I think it's important to provide some context about this.
Speaker: Up until recently, let's say 18 months ago, I'd say a significant majority, not all of them, but a majority of our asset managers would come here to invest.
Speaker: gather assets, raise assets, or manage capital relationships.
Speaker: And that's obviously important because this region is well known for having a lot of sovereign capital, which is very well known.
Speaker: There's also the story of private capital, which I think is super important and often gets less noticed overseas.
Speaker: I think that story is super important because I think what's happening in this region is that, you know, you might have three, three and a half trillion dollars of sovereign capital, but you have an equal quantum of private capital
Speaker: And it's undergoing intergenerational wealth transfer.
Speaker: Now, what that means for your business is that Gen 1 is aging, Gen 2 is starting to retire, and Gen 3 is coming of age.
Speaker: And these are individuals who have a very cosmopolitan view, have often grown up in the West, have a different approach to risk and investing.
Speaker: And
Speaker: their capital and their approach to investing is fundamentally changing.
Speaker: It's pushing capital into venture capital, growth capital, and of course, hedge funds.
Speaker: I think the DIFC's role has been to institutionalize, as it were, private capital over these 15 or 19 years.
Speaker: And I think
Speaker: Being here provides you with structured access to hundreds of families and family businesses and structures that deploy capital and manage business assets from the DIFC.
Speaker: So that's really, really important.
Speaker: I think the other piece for hedge funds for some of your clients, which is super important, is financial services right now, post-COVID, is really about a war for talent, okay?
Speaker: There is a fundamental restructuring of talent.
Speaker: And the reason is very simple.
Speaker: Post-COVID, COVID broke the conceptual relationship between what you do and where you do it.
Speaker: And once that happened,
Speaker: The labor markets are very pure.
Speaker: Labor markets started to seek places that were safe, that were secure, that were tax friendly, that met people's needs for lifestyle.
Speaker: And I think the DIFC being firmly in the middle of Dubai serves that need very, very well for senior people who want to come here with their families, the schooling, entertainment, lifestyle, obviously the access to markets.
Speaker: You can travel just about anywhere from here, right?
Speaker: I think the third piece, which is super important also,
Speaker: is all of the reasons that I gave you earlier
Speaker: point to a current need.
Speaker: So in other words, your clients can come here and they can immediately take advantage of the private capital and the sovereign capital.
Speaker: They can immediately compete for talent.
Speaker: The other piece is a little bit more of a short to medium term investment.
Speaker: So what do I mean by that?
Speaker: The UAE and KSA in Saudi Arabia are two of the biggest markets in the GCC.
Speaker: Both have publicly articulated plans to develop very deep capital markets.
Speaker: Saudi is a very large economy adjacent to us.
Speaker: we will probably play a role not dissimilar to what Hong Kong and Singapore played to China.
Speaker: We will play to Saudi.
Speaker: It's a big market.
Speaker: When our public markets, our equity markets in particular, start to become deeper over the next three to five years, the hedge funds that are here will have already been here for a few years, developing the muscle memory, the institutional relationships, the coverage skills, and those corporate relationships to be able to then be ready
Speaker: to deploy capital into our local markets.
Speaker: So you put those three things together and it's a very, very interesting and compelling story for hedge funds here.
Speaker: Salman touched on great infrastructure, strong lifestyle, lots of capital locally in the region and available talent.
Speaker: Once managers are beyond that and start looking in a little bit more detail in terms of what's required to set up, one of the key considerations is always the local regulatory environment.
Speaker: What are the key pieces of regulation fund managers should be aware of when operating in the DIFC?
Speaker: We could spend a lot of time talking about the nuts and bolts of our regulations, which are obviously deep and cover all major aspects of financial services.
Speaker: But I think what's most important for your listeners is to understand that if you come to the DIFC, what you will see in terms of regulations and rules will be very, very familiar to you.
Speaker: They will be
Speaker: virtually no different than the rules and regs that you would encounter in North America, say New York, in London, in any of the European capitals or European markets in places like Hong Kong or Singapore.
Speaker: So that is the key difference.
Speaker: And what that basically means is that there is transparency, there's the rule of law, there is a market-friendly, clear approach to
Speaker: The licensing, the level of scrutiny is serious.
Speaker: The review of business plans is serious.
Speaker: The attention to detail on things like KYC and AML is world-class.
Speaker: All of that should give your listeners and clients comfort that it is top-notch and global standard.
Speaker: Salman, thank you for that.
Speaker: What are the different licensing options available for local managers to consider when establishing a presence?
Speaker: How does the application process differ for the different licenses?
Speaker: I think the way to think about it intuitively is to kind of break up your thinking into kind of three buckets.
Speaker: The first would be essentially marketing.
Speaker: Now, if you are not familiar with this region in terms of the sources of capital or
Speaker: regulations or the culture or the climate even some people will choose just to have a very light touch presence here and just be comfortable at least in the beginning being able to market their institution and for that purpose you would probably want to look at a rep office it's a very light touch license it's very quick to do but it also limits the scope of what you can do to essentially generic marketing of products and services
Speaker: which basically means that you can hand out brochures on a reverse solicitation basis.
Speaker: You can't sell, you can't fundraise, okay?
Speaker: But for some institutions, that has value, particularly in the beginning as they get to become familiar with this market.
Speaker: The second bucket, I think, can loosely be referred to as kind of fundraising or capital raising.
Speaker: The category license, broadly speaking, for that would be called a Cat4 license.
Speaker: And this is what enables you to run a P&L rather than a cost center.
Speaker: You can have full relationship management.
Speaker: You can onboard clients locally.
Speaker: You can go talk to any kind of investor.
Speaker: You can talk to sovereigns, talk to families.
Speaker: You can market.
Speaker: It's really very, very flexible.
Speaker: The only difference is you're not going to be able to manage money from here specifically.
Speaker: So you can sell, but you can't portfolio manage, which brings me to the third bucket.
Speaker: The third bucket is really about making investment decisions or portfolio managing.
Speaker: And that activity corresponds nicely with our CAT 3C license.
Speaker: And this refers to companies setting up portfolio, you know, bringing the portfolio managers here and building teams with research and investor relations.
Speaker: But the key thing is it's portfolio management.
Speaker: So that's the way to think about it.
Speaker: And the other key feature is that each license is additive.
Speaker: So when you go from a rep office to Cat4, you can market and you can relationship manage.
Speaker: If you go from Cat4 to Cat3C, you can do all of the above or everything below it, including portfolio management.
Speaker: Let me close by giving you a sense of how long it takes.
Speaker: Naturally, rep offices are light touch, so they can be done in anywhere from one to three months.
Speaker: A Cat 4 license requires a little bit more scrutiny, but it's still considered a relatively low risk business.
Speaker: And that can take anywhere from, you know, two to four months, sometimes five months.
Speaker: The CAD3C license requires the most scrutiny, obviously, because capital is being deployed, it's being portfolio managed, and that can take anywhere from three to four to five, sometimes six months.
Speaker: Thanks, Salman.
Speaker: After a manager has made the decision which license to pursue, what are some of the other considerations they should bear in mind in terms of office space, office setup, legal and regulatory compliance?
Speaker: Yeah, so one of the reasons why office space is particularly important, other than, of course, to house your amazing talent, is that the DIFC is a jurisdiction of substance, which means we are not an offshore jurisdiction such as Cayman or BVI or Panama.
Speaker: So the office space has operational significance, but also regulatory significance.
Speaker: We are quite flexible here.
Speaker: We have a very large selection of DIFC owned assets or buildings that give our clients significant choice.
Speaker: But we also have non-DIFC assets in the event that clients wish to choose other places.
Speaker: So there's lots of variety.
Speaker: So that's really, really good.
Speaker: Sometimes there is a mismatch in timing where client will have people come in or they'll need people to come in or move to Dubai to get kids into school or get their house ready.
Speaker: In those situations, sometimes the office space may take some time before it's ready.
Speaker: So to address that need, we have clients.
Speaker: service offices in place.
Speaker: So you can go month to month, you can set up shop, get your business going.
Speaker: And then when you're ready to move to your full time space, when it's prepared, and you can move.
Speaker: So I think that's really important.
Speaker: The other thing to keep in mind is that we have lots of options in our ecosystem for the purposes of helping people apply for licenses and also comply with the requirements.
Speaker: So for example, if an applicant needs help, we have a large ecosystem of advisory firms that can help you
Speaker: with your DFSA application.
Speaker: And it's not a requirement, but those advisory companies have experience.
Speaker: And sometimes for some of our clients, they find that very, very useful.
Speaker: Other examples of solutions are that you as a client may want to come in with a very light touch presence, which means that you don't necessarily want compliance people here on the ground.
Speaker: particularly in the beginning.
Speaker: So we have a large selection of advisory firms that can help you outsource a compliance function again.
Speaker: So it depends on your license status, but those things are super important.
Speaker: One last thing which catches people off guard is that it is always advisable to do the legwork for bank accounts earlier rather than later.
Speaker: In general, if you
Speaker: have a few months of advance warning, it's probably a good idea to either port your global relationship here.
Speaker: I mean, all the global banks are already here in Dubai and DIFC.
Speaker: Or if you choose to go with a local bank, start the process early.
Speaker: And of course, the DIFC is here to help you in all those requirements.
Speaker: Salman, thanks so much for taking the time.
Speaker: We really enjoyed the conversation.
Speaker: It's been absolutely fascinating to get your insights and investing in the UAE and gain benefit from your expertise on the subject.
Speaker: It's absolutely an incredible story.
Speaker: Very exciting to hear.
Speaker: If HSBC clients have any questions on the subject, please raise with your representative.
Speaker: Gabriella, back to you and thank you.
Speaker: Yeah, thanks so much, Salman and Matt.
Speaker: It has been also super fascinating for me getting all these insights, specifically in the hedge fund space.
Speaker: I would like to thank you for listening to this edition in our series of MeNotTalks podcasts.
Speaker: We hope that you enjoyed learning more about investing in the UAE.
Speaker: Stay tuned for more from our podcasts as we explore more trends in the coming weeks.
Speaker: Thank you for joining us at HSBC Global Viewpoint.
Speaker: We hope you enjoyed the discussion.
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