Family office: Taking care of family business

PWC’S Adnan Zaidi and Bassam Hajhamad talk about the opportunities and challenges of family offices, private organisations established by families to oversee their financial affairs.

How did family business shape the economy in the Middle East?

The contribution of family businesses to the GCC GDP is estimated to be 60 percent. However within the GCC, this number varies from country to country. Obviously, this number is lower in oildependent economies where there is an increased need to boost the private sector and achieve further economic diversification — this is a clear priority on the national agenda of many GCC countries. It should also be noted that family businesses constitute the backbone of the GCC economy, not only as a GDP contributor but also as a key workforce employer.

In fact, ensuring family business continuity is of such significance for the regional economy that we see various governments taking important steps and encouraging initiatives related to this, whether by promoting good governance or enabling peerto-peer as well as public-private collaboration.

What are the challenges facing family offices?

If we look at the purpose of a family office, whilst every family office may differ, their purpose is generally to look after the wealth and affairs of family members effectively and separately from the business. Family offices are as individual in character and format as the families whose interests they serve. Broadly we see two types of family offices:

Single Family Offices (SFO) which look after just one family’s affairs: Those can be virtual, embedded (part of the family’s existing business) or a more established external organisation with its own staff.

Multi Family Offices (MFO) which look after multiple families’ affairs

In past years, running a separate family office in the Middle East was not that typical, as family and business were interwoven and run in a very traditional manner. However, the professionalisation of family businesses has meant that the separation of family and business has become a more common priority in order to enable sustainability throughout generations, meaning we have also noticed a shift towards separate family offices. In our region, an SFO is the more frequently encountered type (whether embedded or as a separate external organisation or simply in the form of an individual looking after the family’s interests). There are also some MFOs, but in large part due to confidentiality, typically, these are less common currently, but that may change.

There are many challenges facing family offices particularly as their asset footprints expand, as well as regulation, discourse and taxes associated with this becoming much more complex. Additionally, asset transfer allocation as the family itself expands in members and the business grows in wealth, also adds complexity that has to be dealt with. This requires suitable resources in the family office, as well as the right wealth preservation vehicles, proper governance, succession planning and robust tax structures to be set up. It also requires the alignment of vision between the family members as to the investment objectives and returns of the managed wealth. We see philanthropy and the desire “to do good” as also being key themes that are important from an overall purpose perspective. The appointment of the heads for such family offices is also crucial, as they need to be individuals of trust to the family but also bring deep family office expertise outside the business. Cost (and capability) is another influencing factor, as this will influence whether certain activities and services will be outsourced or not.

Another challenge is avoiding geopolitical risk, which can potentially be mitigated by relocating the family office operations to a suitable jurisdiction. And, of course, identifying the right investments and conducting the right due diligence to identify suitability, are typically fundamental and almost always form a central part of the family office (although again this might be fundamentally outsourced).

Digital and technology are also hot topics for most family offices. The challenges of data aggregation, transparency and oversight is being increasingly mitigated with the introduction of technology – family offices are turning to digital tools that offer up-to-date information of the portfolio and the families wider assets. Family offices and investment behaviour

Investments have diversified in their nature and family offices are not opting only for traditional assets (e.g. real estate, public equities) within the Middle East anymore. Unencumbered by rigid investment criteria, they are typically looking at more innovative and niche portfolios (e.g. in the technology scene) as well as aiming to diversify their geographical footprint. Impact and green investing is highly topical and has been for a while. This is partly the influence of the NextGens who choose to live and work abroad and also embody the family business’s entrepreneurial spirit. But the globalisation and diversification trends also allow, in general, for more flexibility from regional legal restrictions, and help avoid localised political and financial risk.

What are the trends we can expect to see in the next year?

In the past, we saw two very broad mindsets concerning investments.

One investment mindset is that of “sticking to what you know” and seeking opportunities in areas that the business is already familiar with (e.g. if there are existing and successful businesses in retail franchise, further investments may be identified in the same industry). This enables families to apply already existing expertise and identify synergies across the businesses that will promote growth. Investing in adjacent industries like retail and real estate, which can serve each other’s interests, also falls under similar behaviour.

The other mindset is the reverse of this, with the intention to diversify away from the family business, to balance the portfolio and make it more resistant to external economic impact.

We believe that this latter category is something that we will increasingly see in the months following the COVID-19 economic fallout. The lockdown measures that aimed to prevent the pandemic from spreading have hit specific sectors very hard so we will be seeing investments from family offices in greenfield areas, provided of course that there is the necessary financial foundation to do so (which in many cases there is). Of course, there will likely be acquisition opportunities of businesses which are struggling to operate due to working capital constraints but may have attractive valuations. In this respect, it will also be important to identify those sectors that have managed to withstand the crisis and, of course, those that will offer emerging opportunities, such as well-being (and healthcare), various technology aspects, remote learning and e-commerce.

It’s going to remain a challenging time for family offices in the region, but many are well placed to move forward as the pandemic eases. The key to this is not just the wealth strategy, but also taking stock of the impact of the pandemic and thinking more strategically about the purpose of the family office and how it can truly support the overall continuity of the family and the wealth it looks after for them.