Those are the options in a time of political turmoil for some Middle East and North Africa fund managers facing muted inflows, miniscule assets under management and high operating costs.
Conditions have worsened amidst a spate of redemption requests after a popular uprising closed Egypt’s bourse for a month and a lower risk appetite from institutional investors.
"When you speak to fund managers in the region, you don’t get the impression that there is any serious money coming in," said Roberto Demartini, a fund analyst at Standard & Poors in London. Small players without the backing of strong shareholders will find it hard to survive. Targets in a consolidation wave will likely include funds with tiny amounts of assets under management or funds of foreign firms which could be merged into a larger and more broad-based fund.
Local and international firms flocked to the Gulf Arab region during the boom years before the global financial crisis, lured by the region’s prospects of strong economic growth driven by windfalls from its large hydrocarbon reserves.
Fund managers have fought to attract overseas institutional interest in markets historically dominated by retail investors. But political upheaval now overhangs the region’s outlook and investors are demanding higher risk premium for MENA investments.
The region, which spans the six Gulf states and includes North African countries like Egypt, Tunisia and Morocco, has been buffeted by pro-democracy unrest, prompting risk-savvy institutional investors to stay on the sidelines.
"This is a very vicious cycle business," said M.R. Raghu, senior vice president for research at investment firm Markaz in Kuwait.
"When things are good you tend to see people pour in money but when things go wrong, your assets will shrink and you will be hit by redemptions. It’s a double whammy on the negative side," he said.
A few firms were forced to stop repaying clients following a month-long closure of Egypt’s bourse and a slump in stock market values.
Funds generally block redemption requests when they do not have enough liquid assets available to pay investors.
Markaz estimated that there were about 150 funds operating in the region with total assets of around $12.5 billion at the end of 2010.
Most of the funds have not seen any inflows so far this year and with stock markets tepid, the outlook for the rest of 2011 is not encouraging.
"It is reasonable to assume that there will be some consolidation in the MENA fund management industry going forward," said S&P’s Demartini. "The main reason being that assets under management are so low that it becomes difficult to operate them in a feasible manner."
Emerging Signs
Signs of changes in the industry are becoming increasingly evident.
Credit Suisse recently brought its MENA equity fund under the broader umbrella of its emerging markets fund after realizing that investors would prefer to gain exposure to emerging markets through more established global funds, a person familiar with the matter said.
"There is a break-even threshold for most asset managers. In the case of the foreign funds, the threshold is very low and hence they do not hesitate to make tough decisions," Markaz’s Raghu said on the move.
"For the domestic funds, they have relationships to maintain in the region and they will continue to hang on even if the assets have shrunk significantly and inflows are limited."
Earlier in the year, Dubai-based investment boutique Algebra Capital said it had become a fully-owned subsidiary of asset management firm Franklin Templeton. Franklin Templeton is part of US-listed Franklin Resources.
Franklin already had a 40 percent stake in Algebra and both the firms operate MENA equity funds.
"There will be no changes to the investment philosophy, process or management of any of the Algebra Capital funds and you can continue to buy the funds in the same way as before the change of ownership," the company said in its website. Going forward, the smaller funds with no significant support from shareholders will find it difficult to survive the downfall in the industry, experts say.
"If you are part of a bank with a relatively large balance sheet, you are pretty well off. For the others, it may not be that easy going forward," said Eric Swats, head of asset management at Rasmala Investments in Dubai.
