Opportunities for Asset Managers Looking to Set up in the United Arab Emirates

Background information

The UAE is an increasingly common jurisdiction for global asset management businesses seeking to capitalize on the benefits of the Gulf region. These include being strategically located between European and Asian time zones, a low-tax environment, and close proximity to investment opportunities across the Middle East region, in particular the countries within the Gulf Cooperation Council (GCC), comprising Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the UAE.

Attention on the UAE has been focused on the two financial free zones, starting with the Dubai International Finance Centre (DIFC), which opened in 2004, and more recently the Abu Dhabi Global Market (ADGM) in 2015. These free zones are distinct jurisdictions within the UAE and have their own financial services regulatory regimes and regulatory authorities: the Dubai Financial Services Authority (DFSA) for the DIFC, and the Financial Services Regulatory Authority (FSRA) for the ADGM.

While the DIFC is the more established of the two in terms of its tenure and scale, the ADGM is rapidly growing in popularity. As of the date of this Update, there are approximately 700 authorized firms on the DFSA register¹, while the FSRA, despite being more than a decade younger, has approximately 250 authorized firms on its register². Further, since the ADGM’s introduction, there has been a significant year-over-year increase in the number of firms seeking authorization with the FSRA, with the FSRA reporting a growth of 90% in the number of financial services licenses granted in the first half of 2024 vs. the first half of 2023³, compared with the DFSA’s reported 25% increase in licenses issued in 2023 as compared with 2022⁴.

Recently, both the ADGM and the DIFC have taken steps to further attract overseas asset managers, including by signing memoranda of understanding (MoUs) with other jurisdictions to facilitate cross-border business. In addition, there have been various further incentives in recent years such as decreased licensing fees and in certain cases lighter regulatory capital requirements.

Global asset management firms can establish a variety of funds and investment/co-investment vehicles (including most recently the addition of a credit funds framework in each of the DIFC and ADGM in 2022 and 2023 respectively to go along with the existing private equity fund, venture capital fund, hedge fund, real estate investment trust, listed fund, mutual fund, and other fund regimes available), with different options including cross-border structures in both the DIFC and the ADGM, with sophisticated and flexible regimes to suit the requirements of their clients and investors.

Trend of financial sponsors setting up in the Middle East

In recent years, there has been a notable increase in the number of financial sponsors, including asset managers, choosing to register in the DIFC, the ADGM, or both (with an increasing trend being managers opting to register in both). The ADGM recently reported that it had seen an increase of 226% in assets under management reported by firms in the ADGM between the first half of 2024 and the first half of 2023, with a total of 112 authorized fund and asset managers operating in the ADGM as of the end of the first half of 2024.

The UAE is home to some of the largest sovereign wealth funds in the world (including the Abu Dhabi Investment Authority, Mubadala, ADQ, the Abu Dhabi Investment Council, the Emirates Investment Authority, and the Investment Corporation of Dubai, among others), with over $1.5 trillion in institutional capital managed between them. Further, the nation boasts a large pool of private wealth, with 5,200 high-net-worth individuals (HNWIs) relocating to the UAE in 2023, adding to the 109,900 HNWIs, 298 ultra-HNWIs (with over $100 million in assets), and 20 billionaires already living in the UAE⁵.

In addition, the UAE and the GCC more broadly have committed to a number of mega-infrastructure projects, which have offered, and will continue to offer, significant investment opportunities. These projects, in combination with increased oil prices and strong post-pandemic recovery, have created a significant demand for capital in the GCC. Saudi Arabia alone is expected to require $1 trillion to $2.5 trillion to meet its infrastructure investment needs over the coming years⁶.

This environment creates ample investment opportunity for overseas asset management firms seeking exposure to these mega-infrastructure projects, as well as the adjacent industries that support such projects.

Legal environment

Broadly speaking, before providing financial services such as investment advice, arranging deals, and portfolio management from an entity within the UAE, an entity must ensure that it is licensed by the relevant regulator or able to rely on an exemption in relation to such activity. The licensing process varies depending on the exact regulatory permissions being applied for, but for a typical investment adviser/manager can be expected to take six to nine months.

Financial services may be provided in the UAE from three hubs, namely within the two free zones (DIFC or ADGM) or onshore (i.e., outside a designated free zone), each of which has its own rules and regulations. The DIFC and ADGM were created to encourage foreign investment by offering foreign businesses attractive concessions and a number of investment incentives, including a 0% income tax rate and the ability to wholly own an ADGM-domiciled subsidiary, which is significant as foreign ownership restrictions apply outside the free zones⁷.

As such, global asset managers and financial sponsors seeking to do deals in the region typically make use of the favorable treatment within the two free zones. The free zones’ 0% income tax rate is a strong incentive for portfolio managers and other staff that are open to international relocation, allowing firms that are set up in these zones to attract and retain top talent.

With respect to marketing funds, domestic funds in the UAE may benefit from passporting arrangements among the above-mentioned UAE jurisdictions (onshore, DIFC, and ADGM). With respect to marketing foreign funds, there are separate rules, and exemptions, that exist and require specific consideration based on the circumstances.

Furthermore, there are two key features in relation to the ADGM specifically that may benefit international asset managers:

• First, the ADGM courts are modelled broadly on the English judicial system, in a similar manner to the courts of Singapore and Hong Kong. English common law (including the rules and principles of equity) is directly applicable in the ADGM and may be relied on in the ADGM courts. In addition, a wide-ranging set of well-established English statutes on civil matters has been made applicable in the ADGM. The regulations on procedure for the ADGM courts are also drawn from other common law jurisdictions, notably Scots and Australian federal law, tailored specifically to meet the requirements of the ADGM courts⁸.
• Second, the FSRA’s regulatory authorization regime is derived, in significant part, from the UK Financial Services and Markets Act 2000 (FSMA) framework⁹. In particular, the FSRA framework mirrors FSMA in providing two base restrictions:
  • carrying out a “regulated activity” by way of business without the necessary authorization or exemption, referred to as the “general prohibition” in the ADGM
  • in the course of business, communicating an invitation or inducement to engage in investment activity unless authorized or unless the content has been approved by an authorized person, the “financial promotion restriction” in the ADGM.

There is a substantial overlap in the treatment and classification of regulated activities between the UK and the ADGM. Accordingly, in concert with the ADGM courts’ reliance on English common law, this allows asset managers in the ADGM, particularly those also already authorized within the UK, to conduct business within a familiar legal framework, leveraging existing resources and know-how to operate in an efficient manner.

Given the relative maturity of the UK’s regulatory framework, asset managers in the ADGM can benefit from UK’s reputation for high-quality regulatory standards and wealth of established common law precedent with the investment opportunities in the UAE.

Key takeaways

• The ADGM is becoming an increasingly popular jurisdiction for asset managers looking to do deals in the Middle East.
• One reason foreign asset managers are particularly interested in setting up a presence in the ADGM is the close alignment between the ADGM and UK legal/regulatory regimes.
• Sidley has advised a number of clients in connection with the structuring of investment opportunities in the Middle East. Sidley’s breadth of experience in mergers and acquisitions, investment funds, and financial services regulation makes it particularly well placed to assist clients looking at UAE investment opportunities and efficient ways to set up local operations.

¹ https://www.dfsa.ae/public-register/firms
² https://www.adgm.com/public-registers/fsra
³ https://www.adgm.com/media/announcements/adgm-continues-rapid-growth
⁴ https://www.dfsa.ae/news/dfsa-2023-annual-report-chronicles-year-growth-innovation-and-collaboration
⁵ https://www.adgm.com/spotlight/asset-management
⁶ https://www.infrastructureinvestor.com/time-to-set-up-shop-in-the-middle-east/
⁷ https://www.adgm.com/spotlight/asset-management
⁸ https://www.adgm.com/adgm-courts/english-common-law
⁹ https://en.adgm.thomsonreuters.com/rulebook/financial-services-and-markets-regulations-2015-0