Family Growth and Development

The Middle East is witnessing a record emergence in family offices as the region evolves into an emerging global economic powerhouse, with trends and instruments changing as succeeding generations take grasp of the reins

Family offices are a fast-growing segment of the GCC region’s wealth management industry. They are increasingly becoming the preferred instrument vehicle for ultrahigh-net-worth individuals (UHNWIs) and wealthy families due to the greater deal of control and flexibility that they provide as compared to traditional wealth management firms.

“The growth of family offices in the Middle East is evidenced by an increase in the creation of formalised family office structures and governance activities where informal structures such as

‘embedded family offices’ and ‘virtual family offices’ are evolving into more formal, staffed family office entities,” Shadi AlNasr, Principle, Senior Client Strategist, Global Family Office, BNY Mellon Wealth Management.

Family offices go wherever wealth goes. HSBC said in emerging markets, especially Asia and the Middle East, the family office is a relatively new structure that is gaining traction among the first-generation founders of successful businesses.

Events of the past three years –the economic impact of COVID-19, geopolitical tensions and a slowing global economy – have seen their emergence in GCC as the region transforms into a global economic powerhouse.

The GCC, one of the world’s hotbeds of wealth creation, has seen an acceleration in trends relating to succession planning, alternate investment vehicles, wealth preservation, digitisation in wealth management and growing interest in sustainable investing.

Enterprising families in the Gulf region understand the importance of succession planning and wealth transfer. According to Lombard Odier, HNWIs in the Middle East have a strong desire to leave a lasting legacy to the next generation and society more broadly.

However, a survey of 300 established HNWIs in the Middle East revealed that almost 90% believe that their family business is set up for an efficient wealth transfer to the next generation whilst 24% have a full estate plan in place.

As the UAE is gearing up to host the Middle East’s consecutive climate change conference (COP28) in November, wealthy families – and their family offices – are among the prominent investors who are now showing much greater awareness and interest in social investment.

Digitalisation in family offices is not a one size fits all approach, but a common theme is better information for decision-making and more proactive management to reduce surprises. “As the shift to digital and virtual accelerates, family offices can seize this moment in time and modernise and futureproof their operations,” said EY.

With many family-owned businesses in the region transforming into multinational conglomerates with diverse portfolios, family offices have emerged as the engines of growth and a driving force behind economic diversification.

With a staggering $15.4 trillion set to exchange hands within families with a net worth of more than $5 million by 2030, according to Altrata, succession is a top priority for wealthy families and their offices.

Succession is a true test of the degree or extent to which the transition from one generation of a family to another is managed successfully. It involves the transition of ownership of businesses, property and other assets along with the broader financial concerns of wealthy families, such as philanthropic foundations and art collections.

“Succession planning is one of the biggest challenges we see facing wealthy families,” said Yann Mrazek, Managing Partner at M/HQ.

BNY Mellon said three challenges that emerge as wealthy families and their offices attempt succession planning include the inherent nature of the subject, the perceived dichotomy of values between current and future generations and a lack of expertise needed to effectively carry out succession planning.

“Family is the cornerstone of traditional Middle Eastern culture, while family-run businesses are the lifeblood of the economy in the region,” Arnaud Leclercq, Partner Holding Privé and Head of New Markets at Lombard Odier said in a report last November.

HNWIs in the region are adopting protocols to regulate succession, conflict resolution, business valuations and other key issues to preserve wealth and ensure a smooth transition between generations. However, these policies and procedures do not necessarily include key documents such as family constitutions or conflict resolution mechanisms, hence there is still much work to be done.

The country’s milestone in putting in place tools to govern wealth transfer has seen several global offices flocking to the UAE in the past two years including The Dalio Family Office, which opened its regional offices in Abu Dhabi.

Over the years, life insurance and foundations have also emerged as a new asset class for planning succession among wealthy families.

Enterprising families make up a sizeable proportion of the Middle East

Rajiv Garg, Co-Founder and Managing Director of Farro Capital, said, “Ideally, family offices should possess the necessary resources and expertise to effectively handle succession planning for HNWIs. But ironically, not all family offices have the depth of understanding regarding this complex process.” non-oil economy and in these challenging times, the need for adaptability and action to ensure that potential is not wasted and the future is secured has never been more paramount.

Abu Dhabi issued a new family business ownership governance law in January 2022 that prevents selling shares or dividends of family-owned businesses to individuals or companies outside the family. The law requires prior approval from family partners before a shareholder sells an equity stake to a non-family member.

Dubai Centre for Family Businesses opened its doors for business in June 2023 to provide technical and administrative support to ensure smooth generational succession. The Centre, which is under the umbrella of Dubai Chambers, aims to support effective succession planning and contribute to the growth and sustainability of family businesses in the emirate.

Wealth transfer and succession planning are two sides of the same coin. Without enough of the latter, there is too little of the former.

The family office concept dates back to the 1800s. In 1838, the family of J.P. Morgan founded the House of Morgan, which managed the family’s assets and in 1882, John D. Rockefeller Sr. founded the family office, which continues today.

Centuries later, the Rockefeller Foundation coined the term impact investing in 2007 to encourage a greater focus on – and the building of a community of investors around – the high-impact end of the sustainable investing spectrum.

Since then, family offices and the impact investment sector have grown in terms of both assets and sophistication.

Wealthy families and their family offices are ideally suited to the kind of approach that impact investing requires owing to the group’s large pools of capital and multi-generational objectives that support a long-term strategy.

Compared to institutional investors that may be subject to commercial policies or have limited decision-making due to mandated trusts, enterprising families and HNWIs can be flexible in how they approach investments in terms of size, geographies and asset classes.

Socially responsible investment, rather than simply donating money, is becoming a prominent way for wealthy families and HNWIs to execute philanthropic goals.

The investment theme is increasingly attracting attention among family offices in the Middle East due to the strategy’s promise of utilising a range of non-financial information to better align finance with long-term value and societal values. A survey conducted by Lombard Odier in 2022 revealed that 81% of younger investors in the Middle East are already taking sustainability/ ESG into account when making investment decisions.

Similarly, almost 73% believe that sustainability factors can contribute to strong investment performance while 74% believe that new business opportunities will be found in sustainable sectors in the region.

Meanwhile, family offices in the GCC region are already playing a key role in helping enterprising families transition to more responsible investment.

Sustainable or impact investing is not slowing down anytime soon. The investment theme involves avoiding certain companies, sectors or countries owing to conflicts with environmental, social and governance (ESG) principles. ESG investing has become a respected strategy in its own right and one which family offices and major asset managers have embraced.

“ESG concerns particularly resonate with the next generations of millennials who are now rising in prominence,” said

Faizal Bhana, Director of Middle East, Africa and India at Jersey Finance.

The increasing discourse and awareness of sustainable investments as well as the growing availability of sustainability-related data is expected to further support the adoption of impact investing across the Middle East

However, Swiss banking giant UBS Group said wealthy families and HNWIs appear to be re-evaluating how to invest sustainably. The pause comes partner’s most coveted asset. With the shifting demographics in client segments and the ongoing wealth transfer in the Middle East, next-gen HNWIs are not satisfied by the traditional periodic face-to-face meetings and hefty printed reports.

The younger clientele, instead, expect a proposition that is more reliant on innovative technologies including access to real-time information and transactional capability. EY said owing to the complex

– Yann Mrazek

at a time of debate about how to define sustainable investments and how to assess their contribution to social and environmental impact amid a changing regulatory landscape.

Globally, the family office is evolving, and the Middle East market is no exception. It is worth noting that as with all businesses, there is a need for more transparency and a growing expectation of better real-time data to drive decision-making among wealthy families and their families.

Wealthy families across the Middle East are fast approaching a major transition. The shift to the next-generation operating model has increased the use of modern innovative technologies by family office partners, offering a chance to future-proof operations.

“Digitalisation can provide operational and administrative efficiencies which will either lower costs of hiring additional staff or repurpose professionals within the office to higher and better uses,” said AlNasr.

Building and strengthening client relationships is every family office nature of their work, family offices must aggregate and analyse huge amounts of research, data and analytics.

Artificial intelligence can help build these capabilities in such areas as managing the daily flood of unstructured data, investment decision-making and protecting the office from cybersecurity attacks.

Industry experts say family offices stand to benefit from the adoption of advanced technologies, however, the degree will vary from each family office.

Enterprising families and their family offices have a major opportunity to modernise processes by leveraging the artificial intelligence investments of their professional and financial services firm partners.

Family offices - personal investment vehicles for wealthy families - and UHNWI are a growing force in the global financial market. As the number of wealthy families in the UAE continues to swell, with 4,500 millionaires expected to arrive in 2023, so will the count and assets of their associated family offices – along with their clout too.