Feature
Surge of family offices in the Middle East brings opportunity
The Middle East, and the UAE in particular, is set to become a family office hub. Anika Sidhika writes.
As family offices and ultra-high-net-worth individuals (UHNWIs) prepare to inject $500bn into the UAE’s economy over the next three years, the country is poised for a significant financial boost. Family offices in the Middle East are set to become a huge talking point.
According to a joint KPMG and Agreus study, a substantial part of family office executives in the UAE are actively formulating plans to increase their wealth and status.
Middle Eastern family offices embarked 2023 with a better understanding of the market, which is a big change from past practices.
In the past, investments received the majority of attention, overshadowing the significance of a solid operational foundation. The regulatory environment in the UAE is very hospitable, which has encouraged family offices to set up shop there.
The report additionally emphasised how UHNW families are leading corporate-wide initiatives.
In order to retain and motivate employees, this includes schemes that encourage their participation, such as profit-sharing and employee ownership trusts, as well as the development of structured compensation packages.
Portfolio positions
Mohamed observed that when examining family office portfolio positions, people have shifted their investments away from public markets and toward private equity or the private markets. However, given the current high interest rates and lower-than-expected returns, it is being questioned.
“The markets are very uncertain right now. Inflation is kind of coming to, control and it is still not there. Interest rates are pretty high still. Allocations to private markets, whether it is private equity or private credit, has slowed down recently, especially within private equity. And I think it is because of the market conditions. Most family offices are being wary of what is going on. And they just want to wait and watch and deploy capital in a sensible way when the time is right,” added Mohamed.
In essence, they are sacrificing liquidity to pursue reasonable returns. In an illiquid market where listed securities are still viewed as being overpriced, families are searching for alternatives diversifiers.
Created from more than 13 years of primary data from Agreus and utilising the voluntary responses of more than 650 family office professionals, KPMG and Agreus jointly have presented a benchmark report in which family office can standardise compensation.
The survey indicates that most family offices manage assets under $500m, and public and private equity allocations continue to make up the majority of their portfolios.
Looking at family office portfolio positions, Mohamed stated how individuals have nearly pulled out entirely from the public markets and allocated more into the private markets or private equity. Nonetheless it is being questioned now because of the high interest rates and returns are not what they would have hoped for.
The 3 Rs
The goal of 2022 was to rebuild and give back through recovery, retention, and regulation in family offices.
Family offices are reportedly attempting to notify regulators of the ultimate beneficial owner and the types of investment positions they are taking in light of the recent financial scandals in the US.
However, that might negate the purpose of establishing a family office because the main reasons family offices operate are control and privacy.
‘‘They do not want to be known and do not want to be in under the flashlight of what they are doing, but a regulation such as that will just prevent or discourage family offices from being set up, you can’t over regulate the market, after a certain extent,’’ said Mohamed.
This highlights the regulations that have a significant impact on family offices, whether they are national or international. Family offices started to focus more on reviewing the affairs of the families they work with and putting the necessary plans and procedures in place to safeguard their wealth in light of future regulations and reputation management, rather than on macroeconomic factors.
Future focused investments
Speaking to PBI, Raajeev Batra, who oversees KPMG’s family office and private enterprise in the United Arab Emirates, also discussed how wealthy families from all over the world have found the UAE to be a desirable place to locate their offices because of its favourable tax environment, strategic location, solid financial services sector, and first-rate lifestyle amenities.
One of the primary obstacles now confronting family businesses is balancing business goals such as growth with family goals as well as retaining the family’s values and preserving its wealth.
The globalisation of the financial sector has made it easier to access other forms of financing and created avenues for expansion for family businesses, but it also amplifies this barrier.
Families are long-term investors; when they decide to make an investment, they frequently look ahead ten years, according to Batra.
For strategic investments, this makes families and family offices ideal partners.
These days, many family offices are favourably positioned on fixed income due to the more then ideal rate increase. Moreover, the study discovers that 50% of family offices in the Middle East have a succession plan in place.
Batra outlined: “For the first time, family offices are able to achieve yields in the portfolio without adding significant risk assets. That said, families have also used the opportunity to aggressively build private equity exposure as there are distressed assets that are now available at attractive validation. In addition, we have also seen families adding uncorrelated assets and mainly hedge funds.
“Hedge funds are extremely useful because they provide downside protection in this environment but with alternative assets, you need to be careful and deploy with the right managers for this process, often families rely on OCIO managers, and those family offices who have the resources have staffed teams in-house which has been beneficial.”
Emerging trends in the UAE
Furthermore, emerging trends in the region are currently influencing family offices throughout the Middle East.
Batra explained: “In recent months alone, the UAE has rolled out numerous programs, initiatives, and regulations, all designed to support the evolution and growth of the family business and their family offices. A new set of governance guidelines issued by the UAE aims to assist family businesses in establishing effective governance and facilitate a smooth succession, ensuring business continuity. Growing number of international family offices are setting up shop in the Middle East. Like outbound, the UAE is also the most popular inbound place for setting up.”
Based on data from Agreus Group, family-owned enterprises in the Gulf Cooperation Council (GCC) of Arab states make up more than 60% of the GDP; as a result, it is impossible to overstate their value to the region’s economic expansion. They remain an essential component of the economy. Family offices have long been a major presence in hubs like the United Arab Emirates and Saudi Arabia. When compared to family offices in Australia, they are not in the early stages, despite not being as developed and professionalised as those in western Europe and the US.
Family offices in the Middle East typically range from those of an institutional standard to those that are still integrated into their operating businesses and have not yet reached full professionalisation.
As with any other business, there is a growing need for increased transparency and better real-time data to aid in decision-making. A significant factor also driving the family office market in the Middle East is technology.
Batra described how family offices have traditionally taken on an embedded form in the area, becoming integrated into the family business itself. Nonetheless, embedded structures have given way to single family offices (SFOs) during the past two to three years. A deliberate effort to provide family offices more institutionalisation and governance is the driving force behind this change.
“This transformative trend is steering a collective embrace of technology within family offices, aimed at elevating operational efficiency, refining investment management practices, and enhancing client services. Consequently, cybersecurity has emerged as a paramount concern, standing prominently among the key risks that family offices are conscientiously addressing. In recognition of the critical significance of data security, family offices in the Middle East are proactively investing in cybersecurity measures to safeguard sensitive client information and financial data,” he said.
Bolstering the board
One of the key findings of the report is that 75% of CEOs in the Middle East are male.
Women’s roles in family businesses have historically been significant but informal.
However, Batra mentioned that there has been a noticeable change in the last few years, with women not only becoming formal participants in these businesses but also rising to important leadership positions.
The rise in women-owned family businesses is indicative of a growing understanding of the enormous benefits that gender diversity provides to the corporate environment.
“This transformative shift not only reflects changing attitudes but also opens up opportunities for mentoring and sponsoring women in family enterprises. It is important to distinguish between securing a seat at the table and genuinely being heard. Hence, the importance of having mentors for women who could provide them with constructive feedback and sponsors capable of actively amplifying their voices and propelling their careers forward. Furthermore, updated regulations and policy changes in many ME countries are mandating gender diversity on the boards of companies,” he stated.
As the Middle East’s UHNW population continues to rise, the family office market is seeing substantial changes.
Batra observed that UHNW families and individuals frequently discuss many topics, including the shift in outlook & diversification of assets, cybersecurity, governance & processes, succession planning, reputation, and ESG.
A multitude of factors, such as the expanding and evolving role of women, growing investment strategies, the need for efficient succession planning, and regulations, are shaping the Middle Eastern family office market. The region will become increasingly interesting as these trends develop and new challenges emerge.