What is your definition of a Family Office in the Middle East?
We see the family office very much as a dedicated and comprehensive unit that oversees investments, assets and family businesses, but one which importantly sits separate to the business itself. These units can be used to support a family’s co-investment ambitions as well as define strategies, underpinned by a shared purpose, be it Shari’a compliance or a desire to give back through socially conscious investment.
Although, the family office also extends beyond investment support to support the family’s wider personal affairs. In the Middle East family offices are predominantly focussed on supporting investment strategy and execution, including the family operating businesses from a shareholder perspective, and asset management. With increased regulatory complexities, including tax related issues, family offices provide their families with expertise in this space.
Another key role of the family office is to provide effective governance, including clear succession planning. This is particularly pertinent with the Nextgen coming to the fore, which in turn is pushing responsible investment higher up the agenda.
While there is still a sizeable number of family office function still operating and embedded within family-owned businesses, often benefitting from savings due to economies of scale, the direction of travel though is very much towards standalone offices. With increasing regulatory complexities, greater investment sophistication, and liquidity events such as IPOs, autonomising the family office is becoming the sensible option.
Top tier families will usually already have established family offices operating to a high standard of governance withe a dedicated management team, often utilising experts, independent service providers in a reputable international finance centre (IFC), such as the Dubai International Finance Centre, but also in stable jurisdictions further afield like Jersey or London especially if their shared goals are internationally focussed.
What are the current needs and challenges of family offices operating in the region?
There are a number of challenges facing family offices in today’s market; access to expert practitioners capable of managing the family office and initial set-up costs are currently creating significant barriers. Meanwhile, the regulatory and legal frameworks supporting family offices are still in their infancy with some unwilling to be the first to dip their toes in the water.
Separating family office and business can also require a distinct shift in mindset for those families which have historically been operators but now find themselves adopting an investor position. In addition, some family members may view a move to a standalone office with suspicion, fearing a loss of control over assets and investments.
The increasing complexity of the legal and regulatory framework, both locally in the Middle East but also globally, such as CRS obligations, compliance with economic substance and of course tax, family offices face a constantly evolving landscape which they operate in. Being surrounded by a robust ecosystem of experienced experts, who understand both the local and international challenges, is critical. IFCs like the DIFC, ADGM and Jersey shine in providing this well governed and robustly regulated pool of professional services, fiduciaries and other types of intermediaries who understand the local nuisances in the context of compliance both globally and regionally, and support many family offices in the region.
Setting down values, based on shared beliefs, and placing such impetus at the heart of the family office can mitigate some of these concerns.
Approximately only a quarter of the regions’ HNWIs have adequate succession planning. Are Family offices addressing this concern?
Establishing a family office presents a distinct opportunity to have critical discussions around governance and succession plans.
Alarmingly there are still disproportionate numbers of family office businesses in the Middle East that have no governance or succession plans in place when compared with their counterparts in other regions.
And, while a recent study by HSBC Global Private Banking found that more than half of family offices around the world are training their heirs in business and finance, highlighting a forward-thinking approach, there is still a need to formally set down intentions.
Without plans, such as those built around conflict resolution, family onboarding and founder rights, families can find themselves in a fractured state especially during times of heightened emotion like in the eventuality of divorce or bereavement.
In addition, liquidity events whether it be an IPO or a third-party investment – including those from sovereign wealth funds – can strong arm succession and governance scenarios onto families that are potentially ill-prepared.
Of course, many families rely on a Shari’a interpretation of succession via wills and so it is vital that wealth practitioners create viable family office structure that adhere to faith, values and belief accordingly.
How has the ending of the era of low interest rates affected strategic asset allocations?
As a general rule, Middle Eastern families have high liquidity with few dependent on debt to expand and grow their wealth or business operations. Debt is more commonly used as leverage to increase internal rates of return, especially with investments in countries with tax and related reliefs.
Consequently, the increase in interest rates has created opportunities for Middle Eastern family offices – particularly in the real estate and private equity arenas – with purchasing assets in these classes long being the preferred option for wealthy families in the region.
In addition, many family office businesses – particularly in Saudi Arabia – are also receiving sovereign wealth fund capital to mitigate any cashflow or capital issues stemming from the current economic climate.
Are current geo-political circumstances and climate related concerns changing patterns of investment?
Absolutely. Middle Eastern families are incredibly cognisant of the geo-political environment and the race to halt climate change. Plus, with COP28 being held in the United Arab Emirates, green investment is particularly high on the agenda with governments, sovereign wealth funds and family offices all looking to opportunities in this space.
ESG concerns also particularly resonate with the next generations of millennials who are now rising in prominence. For instance, a recent study found that 72% of nextgens expect to play a role in increasing their family’s focus on investing in sustainability in the future while 76% of nextgens believe their business is actively contributing to the community (PwC, Today and Beyond: The next generation challenges the status quo of family business).
Consequently, when combined with wealthy families’ time-honoured commitment to philanthropy, there is the real potential to enact lasting change for all.
How is the increasing role of technology changing family office services?
Digital assets are a growing area of interest for family offices and with nextgen becoming more involved in operations, there is a visible drive towards a more tech savvy mindset. Interestingly, this trend has been accelerated by the pandemic with 43% stating they feel more committed to the family business and are now more involved (PwC, Today and Beyond: The next generation challenges the status quo of family business).
Added to that is increased encouragement by governments towards greater adoption of fintech and digitalisation to support efficiencies but also to direct investment towards tech focussed investments.
Consequently, digital assets, tokenisation of real assets, crypto and start-up investment are offering distinct appeal, particularly when aligned with Shari’a principles and values.
This article was originally published in MEA Finance’s July 2023 edition: https://mea-finance.com/july-2023/