PEI Compliance Forum: MENA clamping down

Firms should be thinking more about regulations in the Middle East, and whether compliance with them is worth the increased cost, according to Simon Witney, partner at law firm SJ Berwin.

Speaking at Private Equity International's Private Fund Compliance Forum in London on Wednesday, Witney highlighted the need for greater attention when trying to raise money from the region – most notably from large sovereign wealth funds.

In the past, managers promoting funds in the Middle East – with the exception of Saudi Arabia – could fly in, meet with clients, sign subscription agreements, and fly out a few days later without worrying too much about local securities laws, often relying on “reverse solicitation” or “passive marketing” practices, without regulator interference.

However those days seem to be over.

Kuwait's National Industries Group recently made a claim against the Carlyle Group, alleging the firm sold it a fixed income fund in 2006 without the necessary license. The fund collapsed in 2008 after defaulting on its debt obligations. Carlyle, which was unable to respond to a request for comment by press time, is defending the case which is still ongoing.

Private equity firms marketing in Kuwait must obtain a licence from the Kuwait Capital Markets Authority (KCMA), which can only be offered through a KCMA licensed local promoter. Furthermore, the fund must meet Kuwait's domestic fund requirements, including a heavily criticised requirement for LPs to pay their entire subscription upfront rather than having capital called down when needed.

Meanwhile Saudi regulators have issued a warning that anyone promoting funds in breach of its rules would have sanctions brought against them.

Likewise the United Arab Emirates (UAE) issued rules earlier this year, mostly affecting how funds are marketed in the country. Despite having a private offering concept the regime is subject to many restrictions which seriously hamper its value in practice, according to legal sources. The fund offering must be approved by UAE regulators and be be conducted through a local bank or an investment company licensed by the UAE Central Bank. However this requirement is relaxed for funds targeting institutional investors (investors with more than €2.1 million) as they can promote the fund themselves by setting up a local representative office in the UAE.