Daniel Fleming, Head of Wealth Advisory, Middle East at JP Morgan Private Bank, sheds light on the changing trends amongst family offices and their investment behaviours.
Wednesday 19, June 2019 BY ANNUAR NABILAH
What are the key trends involved when family businesses make investments?
Currently, many family businesses across the region have grown to become conglomerates investing in local real estate and many family businesses’ balance sheets are dominated by this asset class.
There is also a growing trend in investing in assets outside of the region and those assets class tend to fall within real estate in the US, the UK as well as Europe, China, Singapore and Hong Kong. Additionally, there is also an increasing interest in investing in areas like healthcare, hospitality and in some cases the automotive sector as well as a liquid cash investment.
How do family offices differ in different parts of this region?
In terms of their approaches, family businesses are all the same, but they do defer from a generational perspective, for example, Kuwait and Saudi Arabia started producing significant oil way before countries such as Qatar and the UAE and thus their wealth is better understood in terms of generations.
In Saudi Arabia and Kuwait, we work with third and fourth generation family members, as opposed to speaking with founders of family businesses who are much older. And as a result, the investment views are different because in businesses were, they are still under the leadership of founders, they are mainly focused on their core businesses, whereas the third or fourth generations are more inclined to diversification.
In addition to that, third and fourth generation investors are bringing in new ideas and new ventures into the family businesses, and this is why they are more diverse. However, family businesses in the first-generation phase are still using the founder’s approach whereas in the subsequent generation they bring in new ideas and end up being huge conglomerates as can be seen with family businesses in Kuwait and Saudi Arabia.
In regards to the transition from one generation to another, what opportunities and challenges do these businesses typically encounter?
Family businesses across the region have endless opportunities, some business owners are thinking more about the voluntary transition of ownership rather than waiting for it to happen naturally. Saudi Arabia and Kuwait are more populated with millennials than anywhere else in the GCC.
This educated group are exceptionally tech-savvy and has a better understanding of technology than their parents, and through the use of technology, millennials are able to implement ideas much faster than
past generations. Similarly, the challenges that family businesses are facing include choosing the best-qualified candidates from nextgeneration family members. There is also the issue of power struggles amongst family members and in some larger families, where both second and fourthgeneration family members are involved in the running of the business at the same time. They almost always work at different stages and having different targets, and that is where we feel that corporate family governance should be practised across different sectors within the business.
From your experience what are main concerns of family businesses?
There are two main concerns in family businesses—succession and geopolitical issues. This has been the issue for the last five years and will remain a challenge for the next 10 years. From a succession point of view, parents in Kuwait and Saudi Arabia have more experience in handling transition of power.
It is evident that they learn from previous mistakes and are doing more to avoid repeating them. Significant transitions are underway in the UAE and Qatar; in these two countries transition is the main challenge. Family businesses in these countries are studying succession and business transition in order to execute smoothly.
On the geopolitical front, family businesses are concerned about tensions within the region involving decades-old rivalry between, Saudi Arabia and Iran, Qatar and the other GCC members, as well as the unrest in Lebanon and Yemen. This situation is prompting family businesses to hedge a lot of liquid wealth outside of the region.
Where do family offices in the Middle East fail when it comes to succession planning?
The main challenge facing family businesses is choosing a competent successor. Often, every member from the next generation is keen to be involved the business. The third and fourth generations also try to push the elders to do something about succession and this tends to put pressure on the founders.
Another changing trend is the active participation of female members in the family businesses, where in some cases they have been chosen as leaders, and this creates more challenges especially for their male counterparts. Family businesses also face the challenge of allocating the right roles to members of the next generation.
Younger family members that are unqualified and lack the sufficient level of education are hired for high-level roles and tasked to make decisive business decisions. This lack of competence has threatened the continuity of some businesses in
Can you define proper family governance?
Family governance depends on the family structure, however there are different types of rules on who comes in and at what level, and who they report to. Some family businesses have well-established protocols as well as procedures.
Therefore, it is very rare for next-generation family members to take decisions that have a negative impact on the future of the business. Similarly, some businesses have structured different rules relating to the position as well as the level of education and experience required for it. In the GCC, around 80 per cent of the private sector belongs to family offices.
What is the future of these businesses here?
Family businesses will maintain the current 80 per cent share of the private sector in the GCC. Regions such as Europe and the US have experienced a significant decrease in IPOs as family owned businesses are not expected to sell shares so long as they remain profitable. On the other hand, there still are instances where family-owned mini-conglomerates sell their go public because parts of their business cease to support the company’s core business.
How do you evaluate a family business’ readiness to invest in wealth management planning?
The readiness of family businesses to invest in wealth management is determined by the type of business and where their business is in its lifecycle. Some of larger family businesses have been operating for years, building large cash reserves both locally and outside the region.
There are several reasons for this; for example, businessmen who live in regions like the Middle East go through the same cycle, making sure that they have enough drive power to invest in new opportunities.
Secondly, family businesses are building liquid wealth to ensure that their future generations are well taken care of in an event the business stops being profitable. As time goes by, family members try to diversify their business portfolios. Thus, having a very good liquid pool is important.