NEW YORK (Reuters) – Wall Street bankers are flocking to the Middle East, and it’s not for oil or the balmy weather.
Years of raging energy prices have made the states surrounding the Persian Gulf one of the fastest-growing regions and a source of immense wealth seeking investments at home and around the world.
The sovereign investment arms of Saudi Arabia, Bahrain, Qatar, United Arab Emirates, Oman and Kuwait have an estimated $1.5 trillion at their disposal.
So it’s little surprise that Goldman Sachs Group, Morgan Stanley and other investment banks have secured banking licenses and opened offices to develop a local presence in the Gulf, same as they have in the so-called BRIC markets of Brazil, Russia, India and China.
“There is a second wave of other interesting growth spots in the world. The Middle East comes to the forefront for many of the international players,” said Sven-Olaf Vathje, a Boston Consulting Group partner and director of its Dubai office. “It’s a new gold rush.”
Wall Street’s banks have expanded overseas in pursuit of new high-growth markets that can boost their revenue and offset the ups and downs of their U.S. businesses.
The six Gulf states, with a population of about 35 million, have a GDP roughly equivalent to that of the Netherlands, the world’s 16th-largest economy. Last year the region generated $3 billion of corporate and investment banking fees.
But the Gulf markets are growing much faster than Europe and the U.S. BCG projects that banking fees from the region will rise by 20 to 25 percent a year, driven by bond issuance, derivatives, leasing and M&A.
JPMorgan’s securities services division on Tuesday hired an executive in Dubai as part of its efforts to draw in more business from the region. JPMorgan opened an office in the UAE city of Dubai in April and one in Riyadh last year.
Earlier this year Morgan Stanley announced plans to form a Saudi Arabia banking venture with Saudi firm The Capital Group. It opened its Dubai office in March 2006 and secured a license in Qatar last October. Lazard Ltd also has set up shop in Dubai.
Goldman opened its Dubai office in March and is forming an investment banking venture with state-owned National Commercial Bank in Saudi Arabia, by far the largest economy of the region. Lehman Brothers launched its Middle East business in May, with bank licenses in Qatar and Dubai.
“It’s a very hot market,” Vathje said.
The scope of Wall Street’s Middle East may also grow for these firms, leading to expansion in markets stretching from Morocco to Turkey.
At the same time, deep-pocketed Gulf investors are making a splash on the global M&A stage, comprising an important new source of deal activity at a time U.S. buyout shops have had to pull in their horns.
On Tuesday, Dubai International Capital, owned by Dubai’s ruler, agreed to invest $1 billion into hedge fund company Och-Ziff Capital Management Group. Borse Dubai battled with Nasdaq before joining the U.S. exchange to buy Nordic stock market company OMX.
Saudi Basic Industries Corp’s $11.6 billion purchase of General Electric Co’s plastics business was the largest ever made by Gulf investors.
There are risks. These nascent markets don’t offer the same level of transparency, and the broader region remains volatile, particularly for U.S. firms. The Gulf’s fortunes also could change quickly if oil prices fall.
BCG’s Vathje said a shortage of banking professionals in the region also has given rise to serious poaching, with as much as 25 percent of a bank’s staff switching jobs each year.
Still, Wall Street firms are putting themselves in a position to benefit from an expected surge in bond issuance, Islam-compliant transactions, initial public stock offerings and mergers.
“This is simply good business. Firms are identifying new opportunity and insuring they won’t lose pace internationally,” said Dany Assaf, a partner with law firm Ogilvy Renault, which advises companies doing business in the Gulf.
“You really have reached a tipping point,” said Assaf.