The Middle East: After the gold rush
05 May 2015 09:00
by Chris Crowe
No longer a boom economy, advisers have shifted their tactics to covering the region even as oil prices fall. Is Dubai reasserting itself as the key hub?
Latham & Watkins doesn’t make strategic missteps. Or at least that appeared to be the case until March, when the firm announced that it will close both its Abu Dhabi and Qatar offices later this year, relocating staff to its Dubai operation. Bill Voge, chair and managing partner of the firm that has been by most yardsticks the standout success story of the last 20 years, said the firm had been wrong in assuming there were four distinct hubs that the firm needed to service clients in the Middle East – Abu Dhabi, Dubai, Qatar and Saudi Arabia – and so after seven years in the region, the firm was consolidating its Middle East presence into Dubai and Riyadh.
For international firms, finding the appropriate business model and strategy for the Middle East has been a puzzle. The region was never more alluring than at the height of the pre-financial crisis period of 2007 and 2008. Intoxicated by crude oil prices at nearly $150 a barrel in the summer of 2008, the Middle East could hardly have felt more prosperous. As ostentation gripped the region, Dubai powered ahead with ambitious projects such as the man-made archipelago Palm Jumeirah and the Burj Khalifa, the world’s tallest building. Naturally, the legal profession sought to capitalise.
Background and market factors - Richard McLerie, JLegal
Campbell Steedman, a Dubai-based M&A partner at White & Case, who moved to Dubai with Norton Rose in 2007, says that local sentiment was too single-minded at the time. ‘When I first arrived here, the market was about buying everything, there were no thoughts about a rainy day,’ he says. ‘People were buying and building silly things without full consideration, while some law firms were opening here with the perception that the Middle East was a honey pot.’
But it wasn’t long before the market turned sour. While the Palm Jumeirah and Burj Khalifa remain conspicuous features of the Dubai landscape, two larger and more ambitious artificial island developments, Palm Jebel Ali and Palm Deira, have remained unfinished since being put on hold in 2008. Dubai entered into a period of severe fiscal distress during the global financial crisis and was bailed out by its neighbour, Abu Dhabi.
A more subdued atmosphere exists today, particularly following the effects of the Arab Spring in 2010 and 2011, and law firms have retuned to a soberer market. ‘In our case, we have focused on getting the right level of resource into the right products, such as infrastructure, oil and gas and financial institutions, and we have focused on demonstrating the right level of commitment of resources and in working hard on building relationships,’ says Steedman.
Recruitment in the Middle East: the long-term view
While some international firms are still unsure where to place themselves strategically in the region and where to have a presence, furnishing Middle East offices with legal talent has also become difficult. In 2007 and 2008, ambitious lawyers were queuing up to be part of a dynamic scene. Now, with western economies in ruder health and with the onset of further globalisation, and firms entering new markets, the Middle East is no longer so in vogue.
Richard McLerie, JLegal’s UAE general manager, remarks: ‘Since the GFC [global financial crisis], I would say that law firms in this region have taken a much more cautious approach. In the mid-2000s, we perhaps saw many international firms take on lawyers that were not up to their usual standards and salaries were getting out of control. Post-GFC, on the whole, firms will not compromise on quality and with the market picking up in London, in particular, it means good-quality candidates have more options, which does make it hard to attract good talent.’
As such, the pool of expatriate talent willing to move to the region is seemingly diminishing. Added to that, the geopolitical problems associated with the Arab Spring and the ongoing conflict in states such as Yemen and Syria have not enhanced the region’s appeal.
‘Recruitment is harder than it was a few years ago,’ admits Robin Abraham, Clifford Chance (CC)’s Middle East managing partner. ‘If you are an Australian lawyer or an English lawyer, you have lots of opportunities to move to other places in the world. The geopolitical challenges in the Middle East may also put some people off.’
‘It is common sense that when the market is busy in places like the UK, there will be [fewer] people that are unhappy with their salaries and bonuses,’ says Shane Morton, a Dubai-based partner at legal recruiter Taylor Root. ‘On the other hand, the Australian dollar has weakened so it is more lucrative for people to go abroad, including the Middle East, although London still tends to be the location of choice, now that firms are hiring there again,’ he says.
Dubai-based White & Case partner Campbell Steedman says that firms have had to readdress their recruitment strategies and not view the Middle East as a revolving market for expatriate lawyers seeking a pleasant stint overseas: ‘When I first came out here, people wanted to be here because it was fun and it gave them two years out of the drudgery of London. We do not see this as a rotational market. It is hard to find good quality people that fit in technical and cultural terms for the longer term, but we are seeing young lawyers that are returning to the region. There are Iraqi, Lebanese, Egyptian and Emirati lawyers coming back to the region with the advantage that they happen to be Arabic speakers who are technically well qualified.’
CC has also addressed this issue by developing its own more localised recruitment strategy. It launched its Dubai graduate scheme in 2014, a two-year Dubai-based training contract to advance its internal resources in its regional offices.
CC has also launched the Saudi Arabian graduate scheme. ‘Saudi Arabia is a difficult place to attract people to,’ Abraham comments. ‘The way we deal with this is to hire junior Saudi lawyers. We are building a sustainable business that ultimately does not rely on expats to fill the gaps and the resource.’
All that glitters
That said, opulence never really disappeared from the Middle East and large projects and transactions have been (and remain) relatively plentiful. However, Gamal Abouali, an Abu Dhabi partner at Cleary Gottlieb Steen & Hamilton, says that this doesn’t necessarily translate to easy riches for law firms. ‘A lot of firms expected the Middle East to be an El Dorado,’ he comments. ‘It was easy to get fooled by the big-ticket projects and investments that were announced in the Middle East without realising they don’t always come with significant legal budgets. Some underestimated the amount of competition in a region where contacts and client relations are critical to generate work.’
Abu Dhabi, the oil-rich emirate, has posed a particular test for law firms. Furnished by its wealth, it launched a series of major infrastructure projects, sought to position itself as a key commercial and financial centre, and made a number of ambitious overseas investments. The Sovereign Wealth Fund Institute says that the Abu Dhabi Investment Authority has some $773bn in global assets.
Back in 2008, as Dubai was positioning itself for international influence, Abu Dhabi and nearby Qatar threatened to overtake it. But the global financial crisis appeared to relegate their ambitions more so than Dubai, even though the latter experienced graver fiscal problems.
Around the time the crisis kicked off, a cohort of international law firms established operations in Abu Dhabi in the hope of becoming part of an investment and transaction windfall. With Dubai struggling in the wake of the economic downturn and compelled to seek financial aid from Abu Dhabi, this only reinforced the view that Abu Dhabi was the place to be. However, many have since discovered that while Abu Dhabi has a huge amount of wealth, the riches are actually concentrated in a small number of institutions and sovereign wealth funds.
‘Abu Dhabi has a number of very important and high-profile clients but I would say that they are limited in number and they tend to develop close relationships with a small number of firms,’ Abouali comments.
Recently, firms such as Hogan Lovells, Holland & Knight and now Latham have decided to shut down their presences there. Shane Morton, a Dubai-based partner at legal recruiter Taylor Root understands why firms were fixated on being present in locations such as Abu Dhabi and Doha, but believes that the market fundamentals are no longer as compelling. ‘A lot of firms rushed in to jump on the Abu Dhabi boat in 2007/08 as it was about to sail, but then it didn’t really sail. Only a handful of firms dominate there. It is not really a diverse enough market for firms to put big numbers on the ground,’ he says.
Many within the region believe Abu Dhabi and Qatar require firms to demonstrate commitment and a willingness to help develop the professional services industry there. A Dubai business card has little currency in Abu Dhabi, according to Martin Amison, a London-based energy partner at Trowers & Hamlins who spent eight years in the Middle East. ‘Turning up in Abu Dhabi with a Dubai business card is a no-no,’ he says. ‘They want someone who is based locally and they are affronted by being serviced from down the road.’
Even so, Villiers Terblanche, Latham’s managing partner for Abu Dhabi, Dubai and Doha – at least until Abu Dhabi and Doha close – says attitudes are changing. ‘In the last five or six years there has been quite a change in the market. Users of legal services are more quick to hire the best lawyer for that particular mandate as opposed to the one that is particularly close to them.’
Terblanche also believes that the relationship between Abu Dhabi and Dubai has gradually become more co-operative rather than competitive: ‘There is a symbiotic relationship between Dubai and Abu Dhabi, which is akin to the connection between New York and Washington DC. They spin on slightly different axes, but they work together pretty well.’
Morton agrees that Abu Dhabi institutions are now more relaxed about working with Dubai-based lawyers. ‘Maybe politics has also changed the dynamics a little,’ he comments. ‘Many Abu Dhabi institutions still want firms to have an office there, but they are not so concerned about lawyers driving down the Sheikh Zayed Road from Dubai to help out.’
Angela Calnan, head of Collas Crill’s fiduciary practice and the firm’s MENA group, agrees. ‘In my experience, regional clients do tend to gravitate towards Dubai and the DIFC [Dubai International Financial Centre], in particular, when meeting with advisers. There are several reasons for this; first, clients from the wider region such as Saudi, Bahrain and Qatar are comforted by the fact that their paperwork is stored away from home and is, therefore, at least psychologically more private; second, clients can see multiple advisers in one consolidated location, including their lawyer, banker and investment manager. They are all likely to be within walking distance of the DIFC.’
Latham appears at ease with its decision to close its offices in Abu Dhabi and Doha. But the strategy does appear surprising, given its sizeable Qatari client base, which includes the State of Qatar, the Qatar Investment Authority, Qatar Petroleum, Qatar Chemical Company and Qatar Gas Transport Company. With such a portfolio of clients, why would it move away from them?
Voge recognises that some smaller clients and smaller mandates may be lost to firms that have a physical presence in Doha, but he expects the premium work to remain with Latham. ‘We have been active in the market for more than two decades and for most of our clients in Doha we have had this discussion and they have made it clear that they will continue to use Latham,’ he says.
He is adamant that a Dubai presence is perfectly suitable to service Abu Dhabi, Qatar and the surrounding region, apart from Saudi Arabia, which is viewed as a distinct market. ‘The rationale was simple. We surveyed our clients that we were serving in the Middle East as well as our clients with business interests in the region and they were indifferent as to whether we were in Doha, Abu Dhabi or Dubai,’ he comments. Flights between Doha and Dubai take just over an hour.
Voge’s analysis gives credence to the position of Dubai as a hub for the region. Husam Hourani, the managing partner at Al Tamimi & Co, a Middle East law firm headquartered in the UAE, says that he is surprised that more firms haven’t identified Dubai as a base for the vicinity and that many have been so quick to expand into other centres. ‘The way we see the Middle East is that if you want to do the big work – the privatisations, the capital markets offerings and the infrastructure projects – then you have to be close to the banking community that advises on this,’ he says, arguing that the DIFC is where much of the region’s financial power and influence is wielded.
Sam Habbas, senior partner at Kuwaiti firm ASAR - Al Ruwayeh & Partners, concedes that Dubai is the recognised commercial and financial centre for the GCC, but believes that firms still have to invest considerable time and effort into each local jurisdiction: ‘Each GCC market has its own particular way of doing business and also has its own unique set of business and cultural sensitivities and expectations that need to be considered. A firm based in Dubai might be successful in targeting Kuwait-based clients and transactions, but we believe such success would be driven by having successfully developed relationships in Kuwait and forging those relationships with local market knowledge and practice.’
Georges Racine, a partner at Swiss law firm LALIVE, which has an office in Doha, admits that Dubai is certainly some distance ahead of other financial centres in the region, but it is not out of sight. ‘Despite Dubai’s earlier start and current lead, Doha is definitely building a reputation for itself,’ he comments.
‘We have found that local Qatari clients, notably public institutions and state enterprises, like to deal with firms that have an office in Qatar,’ he adds.
And at Dentons, which has decades-long experience of practising in the Middle East, Michael Kerr, managing partner for the region, warns against lumping jurisdictions together. ‘There is a danger of viewing the Middle East as one block,’ he says. ‘There are very different legal systems even in the Gulf. Some markets are moving to the stage where you have to be on the ground and be part of the DNA to win the decent projects.’
The macro view: plunging oil price heightens need for economic diversification
Despite many Middle East states’ attempts to diversify their economies into sectors such as financial services and tourism, the region’s fiscal health is still innately linked to the price of oil. Almost half of the world’s oil reserves are located in the Middle East, according to the US Energy Information Administration. The recent plunge in prices has created further uncertainty. ‘I’m afraid I am expecting another mini-recession,’ remarks Trowers & Hamlins’ Martin Amison. ‘I can’t see how these countries can continue to spend at the rate they are spending.’
Developing a more varied economy has been at the heart of initiatives in key Middle Eastern states such as Saudi Arabia, the UAE and Qatar, but White & Case’s Campbell Steedman says that few would have expected the extent to which oil values have dived. In March, the firm co-hosted a breakfast briefing with the M&A Research Centre at Cass Business School, which highlighted the need for further economic remodelling. ‘The panel unanimously felt that the oil price depression had focused the region on one thing; the absolute need to diversify the economy away from a purely oil-based economy,’ he says. ‘We have seen increased activity on the M&A side. There is still an appetite and a strength in the investor base.’
Erik Scheer, an Amsterdam partner and Baker & McKenzie’s executive committee liaison for the Middle East, believes that low oil prices shouldn’t necessarily have a significant effect on the regional economy. Furthermore, he believes it can only bolster transactional activity as the region seeks to develop other industry sectors. He adds that the maturity of the oil and gas sector means that the viability of new projects shouldn’t necessarily be jeopardised, as they are in more nascent and remote markets. ‘The GCC nations have such large budget surpluses that they can handle lower oil prices for a long time. In the meantime, it puts the spotlight on the need for economic diversification, which in some areas is driving deals, particularly in Saudi Arabia, which is opening its stock market to foreign investors shortly,’ he says.
One recent example of those deals saw Baker & McKenzie’s Saudi affiliate, Abdulaziz I Al-Ajlan & Partners, advise Saudi Mechanical Industries on its $200m sale of a majority stake to private equity house Jadwa Investment and Arab Petroleum Investments Corporation.
Saudi Arabia represents a specific test to international law firms, given the size of its economy and its unique characteristics. Latham’s decision to maintain its presence in Dubai and Riyadh recognises that while Dubai may be a viable operational hub for the Middle East, it cannot cover the distinctive demands of Saudi Arabia and its ample economy. ‘One market where not being present there is a definite disadvantage is Saudi Arabia,’ Abouali says.
While many of the international banks have centred their Middle East presences in Dubai, these have limited influence in Saudi Arabia, where the local banks, including Arab National Bank, Al Bilad Bank and Al-Rajhi Bank, are fundamental to financing transactions and projects in the state.
Further still, domestic regulations demand that law firms be owned and run by Saudi nationals and, as such, the local operations of global firms have historically been associated to the international practice with no direct financial connection. This changed in January 2014, when Clifford Chance launched the first joint foreign and Saudi-owned practice in the jurisdiction, building on its co-operation with local firm Al-Jadaan & Partners Law Firm since 1998. Clyde & Co was the second international firm to receive approval from the Saudi authorities in September 2014 to establish a jointly-owned Saudi Arabian practice in partnership with its long-term associated firm Abdulaziz A Al-Bosaily Law Office.
But the continuing restrictions on foreign law firms still prevent them from exploiting opportunities in the world’s 19th largest economy, a nation that has ambitious plans to diversify its market and boost employment for the local population. According to Forbes, Saudi Arabia has 16% of the world’s proven petroleum reserves and despite the reduction in oil prices, it still has the financial firepower to push through its many economic initiatives.
Since the accession of King Salman earlier this year, there have been a number of initiatives to improve the decision-making process in government. It has merged the two education ministries, and King Salman has appointed new ministers for justice, Islamic affairs, agriculture, municipal affairs, health and information. The king also appointed Mohammed Jadaan as the new head of its capital markets authority. Saudi Arabia’s stock markets are expected to be opened to foreign investors later this year, signalling the nation’s increasing enthusiasm for overseas capital.
Such is Saudi Arabia’s economic growth, infrastructure plans and new willingness to engage with foreign investors, it has made the jurisdiction more compelling to the global legal community. Baker & McKenzie’s associated Saudi practice, Legal Advisors, Abdulaziz I Al-Ajlan & Partners, opened an office in Jeddah in October 2014, adding to its existing presence in Riyadh.
In April, DLA Piper announced the launch of a Jeddah office, its second in Saudi Arabia after Riyadh, with plans to open a third office in the eastern province of the country later this year. However, Saudi Arabia’s airstrikes on neighbouring Yemen and its Shia Houthi rebels demonstrates the volatile nature of the region. While places such as Dubai, Abu Dhabi and Doha are considered safe and stable, the same cannot be said for the rest of the Middle East. Even Bahrain, a key global financial centre for many decades, has made headlines with its own civil uprising that has persisted sporadically since 2011.
Egypt was at the heart of the Arab Spring and has experienced two revolutions since 2010. But despite the unstable nature of the political environment, it is a market that still captivates the attention of the regional and international legal profession. Al Tamimi established an association with Egyptian firm Nour & Taha in January this year. Led by Al Tamimi partner Mohamed Khodeir, it is branded as Khodeir Nour & Taha (in association with Al Tamimi & Company).
Egypt is undeniably an attractive market for international firms but is not without casualties. Trowers & Hamlins closed its Cairo office in 2014 and terminated its association with Nour Law Office. ‘No-one could have foreseen the Arab Spring and its effect on Egypt,’ Amison remarks. Alongside Baker & McKenzie, Dentons is currently the only international firm to have a presence in the North African state, while local firm Matouk Bassiouny is a member of the alliance DLA Piper Africa.
Pervez Akhtar, managing partner of Freshfields Bruckhaus Deringer’s Middle East operations, still views Egypt as a key market for the firm, despite the uncertain outlook: ‘The revolution in Egypt had a very big impact because it is a big market for us, but it has gone back to some level of normality.’ The firm is advising a series of private equity and strategic investors on transactions involving the nation. Last year the firm represented Egypt-listed private equity firm EFG Hermes on the $150m sale of its 19% stake in Damas International.
Akhtar says that despite all the challenges associated with being present in the Middle East, it is still possible to achieve impressive financial performance. Even though big legal mandates don’t necessarily translate to significant fees, he believes firms can be successful through a conservative approach: ‘Year on year, we are one of the most profitable regions in the Freshfields network. We are careful in not wanting to grow too fast. We run a very compact model, which enables client delivery, but at the same time also allows for cost control and we are very focused in terms of the types of clients we want to partner with and the work we do.’
It would appear that in this new-found era of restraint, there are opportunities for focused practices to generate profitable income. This brings us back to Latham: while even the smartest outfits can sometimes make the wrong decisions, the astute acknowledge errors and rectify them in time. LB
Dubai: a new hub for Africa
Deutsche Bank announced in March that its Dubai office would become its regional hub for the Middle East and Africa. According to Bloomberg, the German financial institution had developed such a critical mass of resources and products in Dubai that it had chosen to offer these services directly to the African continent.
Given its proximity to Africa and the travel connections that it supports, Dubai is positioning itself as an integral centre for African transactions. Dubai International Airport recently overtook London Heathrow as the world’s top airport for international travel, handling 69.9 million international passengers in 2014 according to Airports Council International.
While many international advisers have typically led Africa-related transactions from London or Paris, there is now a recognition that Dubai is gaining in influence.
‘We see an increased focus on Dubai as a hub for the Gulf and for Africa work. Many clients are setting up a regional function in Dubai. It has good access to these countries and is an easy place to work,’ comments Erik Scheer, Baker & McKenzie’s executive committee liaison for the Middle East. ‘You see a concentration of companies and clients setting up in Dubai. It has, to some extent, a self-reinforcing effect. If companies are moving into Dubai, then others are likely to follow.’
It is testament to Dubai’s resolve and willingness to embrace multi-culturalism and economic diversification, even in the face of the economic downturn in 2008.
Margaret Cole, head of White & Case’s Abu Dhabi office, has noticed an expanding portion of work in Dubai relating to Africa: ‘The Africa business has traditionally been run out of London and Paris, depending on what part of Africa we are talking about. To a large extent that still remains true, but some transactions are coming through Dubai. There are clients out of Asia that are investing into Africa and they are less bound by the tradition of going through London and a number of them are coming through Dubai in particular.’ In 2013, Cole led the team that advised the lenders on the $1.2bn financing of Indorama’s nitrogenous fertiliser complex in Rivers State, Nigeria.
Pervez Akhtar, Freshfields Bruckhaus Deringer’s Middle East and North Africa managing partner, says that many private equity houses are choosing Dubai ‘as a hub for investment into Africa’. A report by the firm reveals that the value of private equity deals targeting Africa rose by 137% in the first half of 2014 compared to the same period in 2013. Last year, the firm advised The Abraaj Group on its acquisition of a majority stake in Polyclinique Taoufik, a private hospital in Tunisia that is part of the nation’s initiative to modernise its healthcare system.
Dubai will of course continue to compete with London and Paris for Africa business, as it will with other centres. Previously, Standard Chartered and Barclays relocated their Africa desks to Johannesburg from Dubai.
And it is not just transactional work in Dubai that is attracting African interest. A popular alternative disputes hub for international investors in Africa is now the Dubai International Financial Centre (DIFC) (pictured), which has worked hard to position itself as a credible seat for arbitrating parties. In November 2014 the DIFC courts and the High Court of Kenya signed a memorandum of guidance as to both the criteria and procedure for the recognition and enforcement of money judgments of the Kenyan High Court in the DIFC and vice versa. In short, it is an officially sanctioned guide by each court for how cross-border enforcement can be conducted.