Institutional investors in Gulf lead in leveraging their resources

HNWIs in the Middle East have a stronger preference for private market assets, study shows

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Published: Thu 26 Sep 2024, 4:57 PM

As the investment world evolves, individual investors — whose combined capital now represents nearly half of the world’s net worth — are becoming increasingly influential.

Lombard Odier, in a recent report, notes that younger HNWIs in the Middle East have a stronger preference for private market assets, such as private equity, real estate and infrastructure, compared to older generations. Additionally, they value investments aligned with their beliefs, such as Islamic finance and sustainability. Most (91%) already invest in Islamic finance, and 88% plan to increase their sustainable investments.

The Chartered Alternative Investment Analyst (CAIA) Association, the global professional body for the alternative investment industry, has released a report titled “Crossing the Threshold: Mapping a Journey Towards Alternative Investments in Wealth Management”.

This report serves as a roadmap for asset and wealth management professionals, guiding them into what CAIA refers to as the “second phase of democratization” of alternative investments.

“Traditionally, institutional investors in the Gulf have led the way, leveraging their resources to invest in areas such as private equity, real estate, and hedge funds. These investments have enabled them to achieve attractive risk- adjusted returns across various economic cycles,” said Laura Merlini, CAIA, CIFD, Managing Director EMEA CAIA Association. “Now, private wealth is gaining ground. With individuals holding a large share of the region’s wealth, the focus is shifting towards providing them with the same investment opportunities as institutions. By 2024, many GCC investors are showing a strong preference for alternative investments, particularly in private equity and real estate. Nearly half of the institutions surveyed by Preqin have allocated 20% or more of their assets to real estate, while private equity continues to be a significant part of their portfolios," she added.

Merlini pointed out that this trend underscores a growing interest in diversifying investments.

“In particular, the number of UHNWIs (those with a net worth of $30 million or more) has been steadily rising across the GCC, with the United Arab Emirates (UAE) and Saudi Arabia leading the way.”

Laura Merlini, Managing Director EMEA CAIA Association

“And these trends are here to stay. Historically, the push to make alternative investments more accessible began in the 2010s. Early products, such as ‘liquid alternatives,’ brought hedge fund strategies to a wider audience, but the results were mixed due to regulatory constraints that limited what managers could do. Since then, private markets in the region have matured.”

New approaches to product development have created more opportunities for investors to access diverse assets. Although private wealth is still behind institutions in alternative investments, there are significant opportunities for growth. For those looking to invest more in alternatives, three key points are essential:

Keep it strategic and long-term: Alternative investments require a long- term perspective. These strategies may take years to fully benefit a portfolio, so it is important to be patient.

Prioritize purpose over product labels. The label of a certain product or strategy becomes less relevant in a total portfolio context, especially the more heterogeneous the underlying strategies become.

Embrace an ‘alteratives culture’. Successful institutional investors often commit fully to alternatives. While not everyone can replicate their exact model, understanding and carefully integrating these investments into a strategy is key.

“Education is crucial for these efforts. Without the right knowledge and resources, building a long-term plan that includes alternatives is challenging. The investment case is just one part: investors need to take practical steps to turn ideas into action. “Crossing the Threshold” continues CAIA’s core mission of promoting education, transparency, and putting the investor first.” Merlini concluded.