Challenges and Opportunities

Yann Mrazek Managing Partner, M/HQ and Hermione Harrison Head of Corporate Governance, M/HQ provide an overview of the family office landscape, noting the advantages for families that have emerged in the region as well as the challenges that are now current

A SFO is designed for one family by one family to solely manage a family’s financial, legal and personal affairs. The family has the flexibility to adjust the range of services according to its needs. In the GCC, a personalised team of advisors to manage positive cash surplus, and safeguard exponentially growing wealth for future generations and sensibly pass it to heirs is preferred to off the shelf wealth management solutions.

A MFO provides financial and investment services to a group of families or high net worth individuals (“HNWI”). The services of an MFO tend to be less bespoke but come at a lower cost due to economies of scale. Investments from the group of families/individuals are aggregated which provides greater leverage and buying power.

What are the current needs and challenges of family offices operating in the region?

Family offices are at the heart of an unprecedented intergenerational transfer of wealth in the MENA region; in the MENA region alone, USD 1 trillion is predicted to move from one generation to the next in the coming decade. Rapid dislocating geopolitical changes, economic pressures and increasing clarity for business ethics are all driving rapid change in how and where UHNW individuals choose to manage and to growth their wealth, driving increased demand for family offices.

Family office can vary greatly in the Middle East, ranging from founder’s office to full-fledged, and fully staffed standalone units.

A family office is a private entity or arrangement aimed at managing the investments and affairs of one or more families. In the UAE it will increasingly take the form of a standalone corporate structure combined with a foundation. In addition to investment management, family offices typically also provide family management services, e.g., family governance, family assemblies, financial and investment education of family members, concierge services, coordination of charitable and philanthropic activities. Depending on the value and spread of family assets and investments, a family may choose between a single-family office (“SFO”) or a multi-family office (“MFO”). In the UAE, where there is an everincreasing concentration of ultra-high net worth individuals (“UHNW”) and their families, we are seeing a preference for an SFO reflecting the strong desire for privacy, control, continuity and security.

One challenge is persistently high inflation since the pandemic, and rising interest rates. While total wealth has grown strongly over the last three years (estimated increase of 27.5% in total wealth among UHNW individuals, and a jump of 9% in 2021 alone), higher interest rates are affecting legacy investment options and are pushing some families to move away from traditional investment approaches towards more active family office structures.

Families have found it challenging to identify locations where a complete set of wealth structuring tools is available and effective. The UAE stands out in the MENA region for clear, effective and timely policymaking, based on solid fundamentals: security, political stability, high GDP, fiscal advantages and world-class connectivity. Families can choose from a range of domestically available tools and arrangements - family holdings, specific family arrangements, foundations (arguably the go-to legacy planning tool for Muslim families), and trusts. and implement effective succession planning strategies. The capabilities of a family office may not always extend to knowledge of the best tools, structures and understanding of regulatory threats to planned succession (such as the applicability of probate and shariah to the family’s underlying wealth and assets).

Long term asset growth requires predictability in the investment environment. Families increasingly look towards financial centres where clear and consistent regulations have been established, offering stability. The ADGM and the DIFC have succeeded in developing legal systems to provide impartial and transparent recourse to disputes which may affect families’ wealth. Cross-learning and best practice sharing is improving. Access to tools is important but not sufficient for family office success. Family members can benefit from opportunities to gain awareness and to study the application of the right tools for their investment strategies and needs. This challenge has grown as the range of tools and pace of change has increased rapidly. Solutions are emerging, such as the Emirates Family Office Association (EFOA) of the UAE, supporting family offices to grow and to work cohesively with regulators.

Approximately only a quarter of the regions’ HNWIs have adequate succession planning.

We see effective succession planning achieved where:

Family assets and wealth have been organised under a secure holding structure, located in a stable and predictable regulatory environment and organised in perpetuity according to clear, agreed and documented wishes of the key family members. Unquestionably, the go to tool in the UAE and greater GCC is a foundation.

Family members are educated and in volved in the process of identifying a successor at each level of the family wealth structure and the successor is provided with adequat e time, resources and mentoring to learn and prepare for future responsibilities.

The coming of higher interest rates may therefore be an opportunity as families are well positioned to extend into new asset classes and to enter high growth areas they may have previously avoided: angel investing, private debt or convertible lending.

Many families have found that higher interest rates are impacting performance of their core businesses, leading to increased pressure for short term performance on their traditional longer-term investments. This need to simultaneously deliver short term performance and long-term returns is another factor driving rising expectations for the management and outcomes from family offices.

Emerging technologies are affecting both the investment opportunities and service delivery options for family offices. Families are responding in a variety of ways, but one interesting development is the Virtual Family Office (“VFO”). VFOs are also appearing as platforms, combining financial and legal service providers for a family through one point of contact - and may be suitable for some families’ needs.

Are Family

addressing this concern?

Succession planning is one the biggest challenges we see facing families. We work daily with families and their family offices to guide them to identify, select

Every family is different but there are some recognisable patterns. Families from the MENA region have tended to heavily concentrate their investments in real estate and traditional financial products and favoured direct investments over funds.

The majority are not leveraged in their private investments, meaning those separate from the core family business.

While new technologies are increasing the pace at which family offices can operate and adjust their investment strategy, they are also creating new vulnerabilities to information leakage or theft. Family offices must keep cyber security front of mind, and carefully choose service providers to develop and maintain effective defences, without isolating themselves from new options for automation or other tools to improve performance