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Wealth & Investment Management

Top three challenges for family offices in the Middle East

Posted by on 04 November 2019
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Houssam Nasrawin, CEO, Olam Partners, an expert in family office, discusses the top 3 challenges that are faced by family offices in the Middle East region.

Economies of Gulf countries have been built by some visionary entrepreneurs, supported by country leaders. In less than 50 years, massive family conglomerates have appeared all across the region.

Many of the largest businesses in the Middle East, especially in the GCC, are family run. Some of the most famous names are the Bin Laden Group, Savola, Majid Al Futtaim, Al Ghurair, Kharafi Group or Al Rajhi. They mainly operate in fields such as art industry, services and banking.

The dominance of family-owned businesses is far greater in MENA than in any other part of the world due to a long history of trades and a strong culture based on family ties. Family businesses account for 90% of the companies in the Middle East, generating nearly 80% of the region’s GDP, and employing more than 70% of the workforce.

A family office is a private firm managing the family’s wealth that is mostly generated by the family group. Hence, there is a direct link between a family office and a family group.

Many families are today facing several new challenges forcing them into adopting a new strategy for the future to ensure wealth preservation and growth.

The first challenge is the succession plan

Most of the families in the MENA region are today in the third generation of business and some conflicts may occur as the number of family members has significantly grown. Succession often spans several issues including in business, investments and family.

A survey by PwC in 2019 underlined that 69% of family businesses in the Middle East (and 85% globally) have no formal succession plan in place yet. According to statistics, most families lose their wealth by the third generation.

In the MENA region, more than in any other region, succession planning remains one of the main threats for many family businesses. It is not only due to the high number of heirs who may have different interests, but also to a potential conflicting vision between the family members.

As these challenges can put their business at risk, it is critical for families to establish a corporate governance with a clear strategy aligned to the family’s long-term goals and involve third parties such as advisors or board members to guarantee a transparency and better communication process between decision makers.

Facing the global economic downturn

According to a recent report from UBS, 55% of family offices in the world believe that a market slowdown will occur by 2020. This number is even higher in the Middle East, where HNWIs are cautious about geopolitical tensions, current economic slowdown in some countries and the lack of new sources of growth.

To face this new economic reality, family offices from the MENA region should capitalize on new opportunities and incorporate more diversification in their investment strategies. Historically speaking, real estate and fixed income have been their favourite investment assets.

However, family offices are increasingly concerned about the uncertainty in financial markets, mainly due to a higher volatility and lack of visibility. Equity markets’ performance has been disappointing, not offering as high returns as in the past and a similar trend can now be observed across most of the asset classes.

"In the MENA region, more than in any other region, succession planning remains one of the main threats for many family businesses."

In most of the MENA countries, private investments are driven by family offices rather than private equity firms. Consequently, family offices must increase their contribution in financing SMEs, innovation and jobs creation.

Diversification must consider private equity investments inside the MENA region but also internationally in order to find new sources of growth and benefit from transfers of technology that will be positive to the region. Furthermore, private equity remains today one of the best of all asset classes offering excellent average returns compared to other types of investments.

Access to financial market must also be facilitated to family offices in order to encourage investments, mainly through debt instruments to pave the way to leveraged transactions.

The growing challenge of innovation

Family offices must consider the new reality of our fast-changing world in their strategy. In particular, they must break with the “risk aversion” strategy and consider more disruptive technologies such as blockchain or artificial intelligence.

By investing in innovation, family offices can play a significant role in developing and fostering entrepreneurship in the region. Therefore, with the support of public institutions, and pro-business laws, family offices can contribute to strengthen venture capitalism and create a new generation of entrepreneurs in the MENA region.

Finally, family offices must also take part in the “environment protection” by engaging in sustainable and impact investments, which generate not only high returns but also contribute to fight climate change.

Houssam will be speaking at FundForum Middle East and Emerging Markets on November 5, 2019. He will be discussing his insights into the Family Office.

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