Creating a sustainable future for family offices in the Middle East

Opinion: Even the most enigmatic and private investment group, the family office, needs structure to provide flexibility and sustainable returns for generations to come.
Changing of the guard GCC family-run enterprises often face the difficult task of transitioning from the old leadership to the next generation.
By John Benfield
Wed 19 Jul 2017 09:59 AM

Families have always been at the centre of business and wealth creation in the Middle East, as family businesses make up 90 percent of the MENA region’s private sector in addition to employing over 60 percent of the region’s workforce.

However, as the business environment in the Middle East continues to mature and diversify, family offices must embrace new and complex strategies that match the pace of change in the region. Increasingly, the same issues which affect the global business community, whether governance, transparency, investment returns or succession planning, also impact family offices across the GCC and therefore need to be front of mind for developing a sustainable long-term strategy that can foster successful growth for both families and family businesses.

Over the past 60 years in the GCC, oil revenues have supported significant and transformative nation-building. These revenues began to flow inwards and resulted in large infrastructure projects and demand for consumption goods, which in turn translated into wealth creation for the entrepreneurial-minded families. As this family wealth passes from second to third to fourth generations, there is much to think about in terms of creating the right investment and staffing structures that play a crucial part in preserving and growing wealth.

We’ve been on the ground in the Middle East for the last ten years and have partnered with a number of sovereign wealth funds, pension funds and family offices, advising on and designing investment portfolios. What we’ve found is every family office has distinct ambitions and objectives — one size does not fit all.

Regardless of size or ambitions, adopting a top-down approach to structure and governance is a must for sustainable strategies for future growth from an investment point of view.

And, we believe there are three key pillars that help achieve this: strong governance, clear objectives and knowledge structures.

Strong governance: In order to grow and compete both regionally and internationally, family offices must truly embrace the concept of governance, particularly in the area of succession planning. A recent survey by the Family Office Review revealed that nearly 70 percent of family offices considered succession planning a major issue. Institutionalising a family office better serves the business in the future, and results in better planning and structure to help lay the groundwork for better decision making. The right governance structure should define the rights and obligation of the family members across generations, and ensures that generational growth is planned and executed properly and amicably, creating a more sustainable future for the business.

Clear objectives: Visionary family offices know that to sustain growth over the generations, the business needs to outline its values and strategic objectives. These aims clearly define the needs of the office and help navigate the business through good and bad times.

Carefully selected asset allocations should then be intrinsically linked to their investment aims and aspirations. Partially as a result of external influences, whether the collapse in oil prices, political turmoil or general global uncertainty,  family offices, like any other business, understand the need for better diversification across asset classes and geographies. However, this is not enough. We need to dig deep and better understand the sources of risk in investment portfolios to ensure appropriate cushioning in the event of more future uncertainty.

Structure: Due to the very nature of family businesses, emotion can run high. Families need systems in place in the event of differing views. They need to have a constitution, investment charter and a delegation of authority and autonomy for their investment team, as well as transparency in the investment process, which all family members buy in to.

Getting these processes and structures right will help abate any future disputes. Evidence dictates that having the right investment structure in place will typically lead to amicable resolutions.

Many options exist for family offices to implement governance, set up investment operations and structure key strategic functions. Partnering with external advisors can go a long way in ensuring a smoother journey in the long run and can also help maximise investment results.

Family offices often work with trusted advisors with global expertise to improve governance and portfolio management. An external advisor can also become instrumental in their investment processes. For example, a family office can outsource or ‘upskill’ some key functions to an external advisor, and in turn, benefit from a consultancy approach to investing, which brings expertise into the organisation. A rigorous approach, steeped in local understanding with global reach, are key ingredients towards ensuring more sustainable futures for family offices in the region for generations to come.

John Benfield, partner and head of the IMETA region at Mercer Wealth.

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