(Bloomberg) — The collapse of Abraaj Group didn’t just kill the private equity firm Arif Naqvi built in Dubai. It ruined the entire market.

Since Abraaj’s swift and spectacular collapse was set in motion almost two years ago when investors like Bill Gates got suspicious, virtually no money has been raised by private equity firms based in the Gulf Cooperation Council despite strong performance almost everywhere else, according to Seattle-based data provider PitchBook and London-based Preqin.

“The collapse of Abraaj has eroded institutional investor confidence built over the past 15 years in emerging market-based private equity firms,” said Alex Gemici, the chairman and chief executive officer of Dubai-based Greenstone Equity Partners, which helps find investors for private equity funds. “We don’t see significant deployment of foreign institutional capital into fund managers based in the Middle East.”

It hasn’t helped that Dubai’s financial center watchdog was slow to respond to the wrongdoing that, in under 10 months, brought down a firm that once managed $14 billion. The Dubai Financial Services Authority slapped a $315 million fine on Abraaj on Tuesday, a move investors said was too little too late considering the U.S. Securities and Exchange Commission started charging Naqvi and several of his inner circle with racketeering and fraud months ago.

International investors are now demanding much more scrutiny of Dubai-based private equity firms, according to multiple people directly involved with fundraising. Several described the Abraaj downfall as the “final nail in the coffin” for regional private equity. In a sign of how bad the reputational damage has been for Dubai, the people said some investors are also thinking twice about putting money in funds primarily regulated by the DFSA.

Just look at the deal flow, which even before the Abraaj shock was under pressure from the regional economic slowdown and geopolitical tensions like the Arab Spring, the war in Yemen and the dispute with Qatar. Private equity investments involving Gulf firms fell to an at least 10-year low of $6 billion so far this year, PitchBook data show.

One of the people said Abraaj’s demise left a “nuclear wasteland” in its wake. The two floors of prime office space the company occupied at the Dubai International Financial Centre, or DIFC, are still vacant more than a year after it stopped paying rent. Gone are the expensive artworks that used to adorn the walls, along with the photos of former executives including Naqvi, the founder, and managing partner Mustafa Abdel-Wadood with the likes of Carlyle founder David Rubenstein.

Representatives for Naqvi weren’t available for comment.

In a statement on Tuesday describing the reasons for its fine, the biggest ever for Dubai, the DFSA acknowledged that Abraaj’s downfall “damaged the reputation and integrity of the DIFC.”

The regulator said it had “responded in a timely and responsible manner” and is “intensifying its review of regulated firms with significant unregulated activities.”

That may not be enough to win back the trust of investors given the scale of the mismanagement at Abraaj, whose investors had included the Bill & Melinda Gates Foundation, the International Finance Corp. and U.S. and U.K. government agencies.

In many ways, Naqvi was the poster child of the initial success of the DIFC. The free zone was set up in 2004 as a financial hub to bridge the gap between London and Hong Kong, luring big banks and hedge funds with offers of tax exemptions, full ownership and Western regulatory standards. The Pakistani entrepreneur started Abraaj in 2002 with $60 million of assets under management and, in just over a decade, was overseeing funds from 18 offices in emerging markets spanning Latin America, Africa and Asia.

Behind the scenes, though, Abraaj’s revenues weren’t covering its operating costs. It borrowed to fill the gaps and, by the time of its collapse a year ago, it owed creditors over $1 billion.

The deceit came to light after foreign investors in one Abraaj fund, including the Bill & Melinda Gates Foundation, grew suspicious about why some of their cash wasn’t being deployed to specific investments. In its statement on Tuesday, the DFSA said the firm moved money between its investment funds to help pay for its operations, while borrowing from banks in order to deceive investors about its financial health—similar to conclusions Abraaj’s liquidators came to a year ago.

“This case has been viewed as an example of regulatory lapses, but it should be seen more as a message about due diligence lapses by investors,” said Sabah Al Binali, chief executive officer of Universal Strategy, an Abu Dhabi-based turnaround specialist and investment manager. Local investors “understand that they missed something big, and it was sophisticated investors in the U.S. that caught Abraaj out.”

Naqvi, who was released from custody in London after paying 15 million-pound ($18 million) bail in May, is one of six former Abraaj executives facing racketeering and securities-fraud charges following an investigation by New York prosecutors. Last month, Abdel-Wadood plead guilty to conspiracy charges, admitting he lied to investors across the globe in an attempt to hide losses and raise more money. Other former executives charged include Sivendran Vettivetpillai, a managing director, Ashish Dave, chief financial officer, and managing directors Rafique Lakhani and Waqar Siddique.

The saga didn’t keep foreign private equity money away from the United Arab Emirates entirely. This year, New York-based KKR & Co. and BlackRock Inc. agreed to invest $4 billion in Abu Dhabi’s oil pipelines, while London-based CVC Capital Partners agreed to buy a 30% stake in private schools operator GEMS Education.

Given the size of the DFSA fine, it will certainly act as a deterrent against future wrongdoing, according to Greenstone’s Gemici. Restoring Dubai’s tarnished image is another matter.

The penalty “does little in the short term to alleviate their concerns related to investing into emerging markets-based managers,” Gemici said.

–With assistance from Archana Narayanan.