Wealth Creation is the Crux
By Ayswarya Murthy
Wealth owners in the Middle East will start to feel the need for a Single Family Offices to manage their assets
T
he wealth in the Middle East, especially Qatar, has seen consistent double-digit growth for several years now. A recent survey stated that high net worth individuals (HNWIs) in the Middle East are more confident about the increasing speed of wealth creation than those in any other market. The latest report in the Barclays Wealth Insights series reveals that the figure of 100% of Qatari HNWIs (UAE – 68%; KSA – 54%) who have accumulated their wealth within that timeframe is the highest of any country surveyed. Most of the wealth has been accumulated through profits from business, personal investments and profits from property. Over half (60%) of respondents in the Middle East agreed that wealth can be created faster today than in the past, in comparison with 43% in Europe and 31% in North America.
The need of the hour A slew of recent studies and research has uncovered just how staggering the growth really is and how the nature of wealth here has been hitherto misunderstood, mainly due to placing “a western template on Middle Eastern reality”, according to Andrei Postelnicu from Campden Wealth, which recently released its first-ever report on the wealth in the Middle East. Entitled, "Beyond Convention", the report, which was sponsored by the Qatar Financial Centre, stated that over 75% of the private businesses in the region are family-run. The report highlighted some other key aspects that stand out and make investment firms and wealth managers sit up and take notice – namely, that a big majority of these businesses actively pursue wealth creation rather than preservation owing largely to qatar today > july 2013 > 67
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Yousuf Al-Jaida (second from left) and Andrei Postelnuci (second from right) presenting Beyond Convention
the fact that even second- and third-generation businesses are still in entrepreneurial mode, with “a certain dynamism which you won’t find in companies elsewhere which are at a similar stage of evolution”, according to Postelnicu. This directly means that demands of double-digit returns are not considered unrealistic. (“These expectations have been realised in the past in Middle Eastern markets,” says Yousuf Mohamed Al-Jaida, Chief Strategic Development Officer at the Qatar Financial Centre Authority.) Businessmen are more handson with their investments than ever before, with many of them less than satisfied with the lack of transparency and accountability of private banks and wealth managers. All these indicators have led the QFC to believe that the time is right to facilitate the growth of family offices in the region, as is apparent from the introduction of Single Family Office (SFO) regulations. “These regulations are designed to streamline and
speed up the procedures for establishing a family office in those centres and are likely to significantly contribute to the growth of these entities in the Middle East. This, as well as the existence of similar regulations at the Dubai International Financial Centre, is likely to boost the trend,” Campden Wealth says in its report. Family offices: Presence and proliferation in the Middle East For the uninitiated, Postelnicu explains: “Family offices provide an infrastructure to manage the personal fortunes of significant wealth owners. It is an institutionalised entity that can deal across jurisdictions with a focus towards investment and capital preservation.” Their services might also include managing assets, trust funds, legacy, philanthropic initiatives and luxury (concierge) services. Campden Wealth, which provides information, news and education for generational family business owners and
reasons to consider setting up a family office
80%
To manage my financial matters
I00%
To manage the overall family wealth
83%
wealth planning To help coordinate concierge services to rely less on external financial groups To help with philanthropic efforts educational, to pass wealth wisdom on the next generation
50% 50% 67% I00% Source: Qfc/Campden Wealth Middle East Wealth Report 2013
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family offices globally, estimates that there are probably just around 60-75 family offices in the Middle East, which is way fewer than there should be given the high density of substantially wealthy individuals. But the high and ultra-high net worth individuals here are waking up to the allure of creating a family office, or rather formalising it. “Families in the Gulf often begin by increasing their investment focus, adding additional staff to oversee that function,” says Angelo J. Robles, Founder and CEO of Family Office Association, a global forum for wealth owners and the professionals who run their single family offices. “Then they gradually professionalise the office, perhaps now calling it their family office.” “Although family offices have yet to take hold among the investment structures of the very wealthy in the Middle East, at least within the region, the potential was compelling,” the Campden Wealth report says. Robles agrees, saying that even though their current membership is “modest” in the Middle East, he anticipates winds of change in the coming years. “I see the most interest in families exploring to create an SFO in the Middle East. The families here are very interested in information about how other SFOs are set up, and have been attending global workshops and conferences on this subject,” he says. The family office edge But why would businesses bother with setting up family offices, the running costs of which are quite substantial, when private banks and wealth managers seem to offer the same services? A family office doesn’t necessary replace, so much as act a buffer between the wealth owner and these entities. When you are dealing with multiple private banks or wealth managers, as is the prevalent practice among wealthy individuals here, a family office focuses resources and streamlines performance information. Robles asks: “Who wouldn’t see the value of privacy, control and customisation, much of which is not guaranteed when trusting this to outside entities?” Campden Wealth suggests that above certain levels, wealth becomes unmanageable as a part-time effort and requires fulltime engagement. “Neglecting this aspect can result in unfortunate outcomes: in the best cases, sub-optimal returns on investments, and in the worst, the deterioration of the liquidity that had been created.” Andrei has another worrying statistic that might shake wealth owners in the Middle East out of their “if it's not broken, why fix
family office investment horizons
dealing with multiple private banks or wealth advisers
I3%
I0 years
43%
4
%
6
%
5 years
four
20 years plus
7%
more thanfour
I8% one
6%
I2 months
25%
three
I9%
24 months
I3
%
46% two
36 months Source UBS/Campden Wealth Middle East Wealth Report 2013
it?” mindset. “We have seen that, due to a variety of reasons, only 38% of the family wealth is transferred from the first generation to the second and only 3% filters down to the third generation,” he says. Conducting these businesses internally, often with the corporation’s financial department also handling the family’s wealth affairs, is also an option when compared with establishing a separate limited-liability concern. “It’s best to separate the legal liability concerns of the family office and the business. In some countries there are also labour and other regulatory concerns over such co-mingling,” says Robles. Additionally, he feels, the SFO is treated as an afterthought in co-mingling employees, as this stretches people too thin. Investing differently Fadi Salibi, Head of Middle East at AXA Investment Managers, says they are actively involved with family offices in the region, and points out how they are more return-driven than corporations. “Investment done for a family can be aggressive, imaginative and long-term,” he says. “Family offices don’t demand cash on short notice like companies do, and have a longer horizon, allowing us to invest in areas in real estate, equities etc.” He warns, however, that if the hierarchy is not properly defined, decision-making can be long and tedious. “SFOs are highly professional investment vehicles with talent focused and exclusive to the SFOs, including often investment banking professionals doing global direct deals. Many SFOs allocate to hedge funds and other alternatives,” suggests Robles. “Distribution needs among the family members also need to be taken into account, and investment policy statements,
Source Qfc/Campden Wealth Middle East Wealth Report 2013
asset allocation and execution issues are also shaped by that. “People don’t know what they don’t know” Most Arab families are reluctant to go down the road of establishing an independent legal entity to deal with their finances. Robles sees this exclusively as a problem of not knowing. “There needs to be better education on the option of a single family office, and then there is the issue of who to go to in obtaining more knowledge and setting one up,” Robles comments. “There are not many in the Middle East yet with such knowledge, and families of substantial wealth here would see the value in a single family office if they were more aware of them.” Campden Wealth, in its report, has also said that wealth in the region is relatively new, and “operating family businesses have yet to experience the type of ‘liquidity events’ (be it an initial public offering, or an acquisition by a larger company) that tend to fuel the emergence of family offices in other markets”. But the very nature of Arab business practices, and where they like their financial advice to come from, means that the growth of family offices here will be more of a bell curve than anything else. “Private bankers and advisers can talk all they want to the wealthy Arabs. They won’t get anywhere. The way you’ll get them to change is to show them the example of other Arabs who have established family offices. Put them at the same table as respected veterans, patriarchs they’ve read about. Let them hear stories about why a family office is a good idea from these people they respect and want to emulate. That, my friend, is what will work,” a family principal from Dubai said in the report
Angelo J. Robles Founder and CEO of Family Office Associations
A closer look at the highlights of QFC’s Single Family Office Regulations For the purposes of the single family office, a family is made up of one individual or group of individuals all of whom share the bloodline of a common ancestor. The family must have a minimum of QR18 million ($5 million) of investable/liquid assets under management. It may not engage in any activity that constitutes a regulated activity as defined by QFC regulations. qatar today > july 2013 > 69