Family Values

Spurred by a growing focus on deployment of assets and transition of wealth, the increasingly important role that family businesses play in regional economies and the changing values of newer generations, family offices are experiencing a greater need for their services

Despite the economic impact of the pandemic and rising interest rates to tame soaring inflation, family office popularity is at an all-time high. Over the years, family offices have adapted and transformed their strategy and operations to address a series of disruptions brought on by global economic, social, regulatory geopolitical and technological changes.

Recent global events, digital disruption and global geopolitical tensions are all driving profound change for global businesses and financial markets. However, for family offices in the Middle East, the current operating environment is creating unique opportunities as their role in global capital flows has grown enormously with much of that activity in the private markets.

“Traditionally focused on balanced, longer-term financial assets, today’s singlefamily office is a multifaceted operation offering many of the same services as a top-tier private bank or investment firm while remaining a bespoke institution reflecting the attributes and ambitions of the family it serves,” said Deloitte.

There is a growing demand for top talent among the Middle East’s family offices as the newly professionalised institutions are hunting leaders for their boards and highly skilled investment professionals to manage their balanced portfolios.

A projected 53% of Ultra High Net Worth (UHNW) families in the world have intensified their due diligence processes when considering investments as they seek to avoid greenwashing, measure impact and define their approach. Though many family offices are already playing a key role in helping families transition to more responsible investment, wealthy families in the region are demanding increased focus on environmental, social and governance (ESG) across their portfolios as they translate their commitments into concrete actions.

Family-owned businesses are the engines of growth globally and a driving force behind economic diversification in the GCC region. The UAE and Saudi Arabia have been encouraging family businesses to list on local stock markets to help grow their enterprises, decentralise their assets and enable easier succession, creating great opportunities for family offices.

Modern family offices have their origins in the 1800s when the JP Morgan and Rockefeller families established their own family offices in 1838 and 1882, respectively, to cater to their financial as well as asset management needs.

A global perspective

Over the years, family offices—the organisations that support the purpose, legacy and ambitions of the world’s most wealthy families—have become increasingly active and prominent players in the Middle East and global deals landscape, getting involved in investments across both direct investments and funds. The pandemic and geopolitical tensions combined with high inflation and soaring interest rates have brought with them unanticipated risks as well as opportunities to improve connectivity, take stock of

legacy infrastructure and ask some fundamental questions. “With inflation high, central bank liquidity flagging and interest rates rising, family offices are reviewing their strategic asset allocation,” UBS said in its latest edition of the Global Family Office Report.

Family offices plan in generations and they are setting their sights on the themes that will remain at the forefront throughout the 2020s including sustainable and impact investing, governance, transparency and surviving an economic downturn.

Like any other sector, family offices are being confronted by the changing market dynamics that are calling for new business models, digitalisation—which is disrupting whole industries with new skillsets—and succession-related issues.

BNP Paribas said that family offices are aware of the need to be able to withstand periodic economic or financial crises and thus they deploy investment strategies based on a longer-term horizon and are more balanced in terms of risks.

Family offices invest directly where they have an edge often as an extension of ultra-high-net-worth individuals (UHNIs) or families’ business interests. As the tailwinds that supported asset prices through the pandemic are fading, family offices are seeking both additional sources of return and alternative diversifiers. UBS said that private equity stands out as an asset class with high expected returns and is the only asset class that has attracted higher allocations year after year.

Ethical investing, which incorporates ESG and conscious investing, is gaining traction among family offices as nextgeneration (NextGen) wealth owners are leveraging their capital to advance social and environmental returns. BlackRock, the world’s biggest asset manager, said sustainable investing is more prominent in EMEA with an average of 22% invested in sustainable strategies, 14% in the US, 7% in Asia and a mere 3% in Latin America.

The focus on sustainable, green and impact investments has significantly intensified, and families are increasingly wishing to hardwire the consideration of sustainable and green investments directly into the structure.

Meanwhile, family offices’ primary diversification concerns relate to traditional asset classes and geographical diversification. To cope with the current operating environment, which is characterized by high-interest rates, inflation and central bank liquidity flagging, family offices are reviewing their strategic asset allocation.

The trend has seen most family offices reducing their fixed-income allocations and sacrificing liquidity for returns as they

increase investments in private equity, real estate and private debt. Deloitte said that the appetite to invest over the next 12-18 months is strong among family offices with opportunities in distressed and digital businesses being among the most sort after.

Family offices are aware of the need to be able to withstand periodic economic or financial crises and thus they deploy investment strategies based on a longer-term horizon and are more balanced in terms of risks

– BNP Paribas

Family-owned businesses

Family businesses in the Middle East make up a sizeable proportion of the region’s non-oil economy and in these challenging times, the need for adaptability and action to ensure that potential isn’t wasted, and the future is secured has never been as paramount.

The pandemic crisis dramatically shifted the operating environment, creating major challenges and for some, unique opportunities across the entire family offices ecosystem. PwC said that sustainable growth depends on how well these HWNI navigate these treacherous waters and many wealth managers in the Middle East intended to adjust to this new normal.

A survey that was conducted by Deloitte last September also showed that the focus on developing talent within regional family offices while preparing the Next Generation appears to have been effective with a total of 14% believing their NextGen was ready to take the reins now and a further 50% deemed ready within the next five years.

Having said that families which held diverse portfolios and were well prepared in areas such as governance, and cash flow management seemed to be weathering the economic downturn storm well. The arrival of the pandemic, high interest and inflation have exposed some family businesses to strategic and operational deficiencies.

PwC said that many family office leaders in the Middle East intend to adjust to this next normal while others are taking stock of their business portfolios and operating structures to figure out ways to become leaner and maintain a competitive edge.

Given the sheer size of regional family offices, whose size is reportedly on average double that of their UK and US counterparts, their businesses need to grow by double digits for future generations to maintain the wealth and

the same standard of living, which pose a colossal challenge for them.

Succession planning continues to be a challenge for family offices globally. However, this is particularly problematic in the Middle East where large families are more common and many of these relatively younger businesses face succession issues for the first time.

Proper estate and succession planning is key to Middle East families’ long-term financial security. “Given the outsized economic contribution of family-run businesses in the Middle East, strong family governance is critical for the region’s continued economic success,” said Lombard Odier.

Wealth managers believe that founders of family offices in Kuwait and Saudi Arabia are more experienced in handling the transition of power, it is evident that they learn from previous mistakes and are doing more to avoid repeating them.

The succession problems have been around for the last five years and are expected to remain a challenge for the next 10 years. However, familyowned businesses and UHNW families are adopting protocols to regulate succession, conflict resolution, business valuations and other key issues to preserve wealth and ensure a smooth transition between generations.

“Wealth managers are recognising the importance of liquidity planning that is attached to a strong succession and estate planning proposition,” Rahul Chopra, Head of Dubai, Senior Executive Officer & Managing Director at Charles Monat Associates at the MEA Finance Wealth Summit. There is a massive generational wealth transfer happening in the Middle East as many families in the region have amassed enormous fortunes over the past 50 years.

An enabling environment

There is a growing trend for UHNW families in the Middle East to turn to family offices to help them manage their wealth effectively. Family offices continue to be a driving force behind growth in the region and Capgemini World Wealth Report 2022 highlighted that the size of the HNWI population in the Middle East grew by 5.5% in 2021 while their wealth expanded by 6.3% with the growth led by Israel and the UAE.

GCC countries are implementing new initiatives to drive economic growth and enhance family offices’ contribution to nonoil GDP as part of their broader strategies to diversify their economies away from heavy reliance on oil revenues.

Family-owned companies in the UAE, Saudi Arabia and Kuwait, are lining up to list stakes on local stock markets to create robust corporate governance structures as the region is experiencing one of its best

years for initial public offerings. Speaking at the MEA Finance Wealth Summit, Ismael Hajjar, Partner, Entrepreneurial Private Business, Family Office Services at PwC Middle East said that one other way to achieve more disclosure or incentivize family businesses is through public listings on local stock markets.

Saudi Arabia’s family-owned companies that have listed last year include Theeb Rent a Car, Alkhorayef Water and Power Technologies and BinDawood Holding Company and Kuwait’s Ali Alghanim and Sons Automotive Company raised $321 million in June. The UAE is also encouraging more family businesses to list shares on the country’s stock markets to enable easier succession.

The Dubai International Financial Centre’s Authority Board approved the opening of a Global Family Business and Private Wealth Centre in August, a move that is set to attract more family offices to the Gulf state. Henley & Partners projected in June that the UAE will lead the world in attracting private wealth to its economy this year as Russian and Ukrainian millionaires seek new homes.

“There’s a high concentration of private wealth in the Middle East as well as large family businesses that are very important to local and regional economies which had created a lot of pent-up demand for more international structures such as trusts and foundations,” Damien Morgan, Senior Wealth Planner, Private Banking at HSBC UAE during the MEA Finance Wealth Summit in September.

The UAE is poised to welcome 4,000 millionaires as Russia and Ukraine are likely to suffer a net outflow of 15,000 and 2,800 HNWIs, respectively, in 2022.

The changing economic landscape requires adaptability and action to ensure that potential is not wasted and that the future is secured as family-run businesses are an integral part of Middle Eastern economies.

While it is often said that each family office is unique, they do share many common attributes in respect to operational practices and service delivery models. Wealthy families, HNWIs and inheritors in the Middle East are setting up or turning to family offices as they face numerous decisions when stewarding assets for future generations and serving the present-day needs of extended family members.

With inflation high, central bank liquidity flagging and interest rates rising, family offices are reviewing their strategic asset allocation

– UBS Group