Wealthy Middle Easterners are becoming increasingly sophisticated about money, and as part of this, they are becoming increasingly aware of the distinction between their personal assets, and those of their companies, people in the business of looking after such clients say. As a result, they say, growing numbers of these HNWIs are looking to family offices, rather than banks, to help them manage their money. International Investment‘s family office correspondent Paul Golden investigates.
The family office is a relatively recent concept in the Middle East. The Dubai International Financial Center (DIFC) was the first jurisdiction in the region to define a family office in legal terms; but legislation recognising the unique requirements and limited public liability of single family offices has only been in place in Dubai since 2008.
As a result, in 2014 EY suggested there were as few as 60 single-family offices in the Middle East, and a much smaller number of multi-family offices.
However, Invesco’s 2015 Middle East Asset Management Study refers to an apparent emergence of more formalised family office structures.
“Families continue to manage family wealth centrally, through either an individual at a holding company level, or a team that works with the family principal,” explains Invesco head of EMEA sovereigns & Middle East and Africa institutional sales, Alexander Millar.
“Over time some of these structures have become more formalised, and we anticipate that family offices will grow, in line with wealth, in the region.”
Emile Salawi, head of family offices at BNP Paribas, the Paris-based banking group, says the vast majority of the family offices operating in the Middle East today are situated in Saudi Arabia, Kuwait, Qatar and Dubai.
The typical family office structure in the Middle East starts with the hiring of a chief investment officer, followed by experts in private equity and real estate, as the entity develops into a fully-fledged advisory firm.
‘Significant’ wealth still held in businesses
But the distinction between private wealth and that of the family’s main business in many cases has yet to be made, according to Northern Trust’s head of global family office & private investment offices group EMEA, Lesley Hodgson (pictured). She says a significant proportion of family wealth within the region remains held in the families’ operating businesses.
Some of these families are looking to diversify their wealth, she says, but a lack of liquidity within the market has meant limited opportunities to do this via an IPO.
“For many of the more established family offices, where the family wealth is less tied to an operating business, we have seen a change in attitude toward new investment opportunities,” she says.
“Appetite for risk has reduced, and families are taking an interest in the investment returns their existing assets provide.”
Michael Giraud, director and head of new business development at Salamanca Group Trust & Fiduciary, agrees that many Middle Eastern families – even those with significant wealth – are still failing to acknowledge a differentiation between a business asset and a personal asset, even though it is important for them to do so.
“With any estate plan, it is important to separate business assets and personal assets, so as to ensure that recourse – for example, to the business asset – is restricted to that pot of assets,” he adds.
“We have not seen any specific reduction in spending by families, but this is not saying that such a trend exists for family assets held outside of fiduciary structures.”
‘Secure’ asset classes favoured
For large numbers of Middle Eastern HNWIs, meanwhile – as for high-net-worth individuals in many other parts of the world at the moment – ‘secure’ asset classes are heavily favoured, with the result that their portfolios currently are tending to bristle with real estate and private equity holdings.
For this reason, Salawi is not convinced that as the family office market in the Middle East further matures, the range of asset classes these families will be interested in holding down the line will change significantly.
“Since the beginning of this year, we have seen an acceleration of real estate transactions undertaken by wealthy Middle Eastern families in the UK and in France, driven by low interest rates and a willingness to diversify away from the region,” he says.
Millar also highlights a preference for direct investing through a variety of instruments and asset classes.
“Typically there is an absolute return target for these clients, and a best-ideas approach rather than a formal asset allocation strategy, so while there will be some long term allocations to asset classes, there will also be a significant tactical trading element to the portfolio that will have a time horizon of less than one year.”
He says there is increasing interest in private equity-style investments for longer term (three- to five-year) investments, which often fall within niche industries or segments, where the family will typically have an interest or an awareness of the investment rationale.
Salawi describes Middle Eastern family offices as more cautious investors than their counterparts in the US or Europe, suggesting that they are comparable to pension funds in that they have a long term investment horizon, and that, like pension funds, tend to favour non-cyclical investments.
Walid Chiniara, leader of Deloitte’s private family enterprise consulting practice in the region, is also said to be the founder of the first “virtual” multi-family office in the Middle East.
A virtual family office is, as its name implies, an entity that exists only via internet connections, yet is “staffed” by a full range of expert consultants. Because of its virtual nature, such an office can make use of the skills of a range of people who probably wouldn’t, for various reasons, come together as a family office housed in a traditional bricks-and-mortar type of establishment.
Chiniara says he, too, is seeing an increased demand on the part of Middle Eastern families for greater diversity in their investments, and more international exposure.
“At one time, family offices looked east for investment. Now many are looking for opportunities in Europe and the US, markets they and their peers are familiar with from study, holidays and/or work abroad,” he says.
At the same time, though, Chiniara notes that the “risk appetite” of the next generation entrepreneurs, who are new to the family office concept, is very low.
‘More realistic about int’l assets’
Hodgson, however, says the family office concept has received a further boost from Middle Eastern HNW families’ more realistic expectations about the returns they are likely to see from their international assets, compared with what they would look for locally.
She says they’re also accepting potentially lower returns as the price they must pay for necessary diversification.
“They see lower returns as a fair trade-off for greater asset security, both from a sector and geographical perspective,” she explains.
“This lower risk/return can also be viewed by families as a hedge against their exposure to local market volatilities.”
Still first-generational wealth
In its 2015 Middle East Asset Management Study, Invesco, which has had a significant presence in the Middle East for a while and which has therefore researched the market extensively, points out that even now, most of that region’s wealth is still in the hands of the first generation to amass it.
This means that new inheritance structures need to be developed within local legal frameworks to cater for the large HNW families, as they come to the point where this wealth needs to be passed on, the company points out.
Salamanca Group Trust & Fiduciary’s Giraud, meanwhile, says that for now, at least, few family offices in the Middle East are equipped to deal with succession planning issues in-house.
“They will almost always need to [work with] an expert adviser, and an experienced professional fiduciary,” he says.
“Bespoke trusts and foundations provide a tried and tested mechanism, which can be run alongside a family constitution, hold[ing] an array of assets and ensur[ing] dynastic planning, and the passing of assets in a controlled manner to younger generations.”
Another element that Gulf wealth managers say has to be taken into account is the fact that a popular structure used by Western wealth managers for ensuring family wealth succession, the trust, is alien to many countries in the Middle East, which have a civil law tradition that favours foundations. A desire to accommodate such preferences has been behind the introduction of foundation-enabling legislation in such jurisdictions as Guernsey, Jersey and the Isle of Man.
In the meantime, for now, at least, Chiniara says, even though understanding of succession planning and family governance in the Middle East has advanced, many family offices are still just looking for a quick fix rather than undertaking what, for many, is a needed root-and-branch review.