18 minute read
Family Values
Family-run businesses are the engines of growth globally and a driving force behind economic diversification in the GCC region, responsible for 60% of the private sector. The outbreak of COVID-19 drastically changed the operating environment, creating significant challenges for family offices in the Middle East region, but for some, the pandemic created unique opportunities across the entire family ecosystem – the family, the operating businesses and investments, and private wealth.
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PwC defined family offices as organizations that are created to serve several purposes but normally to oversee and manage the financial needs of a family including effectively transfer wealth from one generation to the other.
These trusted groups of financial and legal professionals are helping family Ultra High Net Worth (UHNW) investors effectively manage their fortunes. Family offices can potentially be briefed to follow specific environmental, social, and governance (ESG) goals as investors look to boost their legacy as well as their bottom line.
The outbreak of pandemic is making the technology and innovation industry, real estate, healthcare and hospitality sectors, key investment areas for family offices as part of their broader strategy to diversify their portfolios. “Family-run businesses play a valuable role in the Middle East region’s private sector economy, where they contribute 60% to GDP and employ over 80% of the workforce,” said EY.
It is worth noting that family businesses in the Middle East differ from a generational perspective. Most family-run businesses under the leadership of successors are taking a fresh look at their portfolios and operating structures, finding ways to become leaner and more competitive.
Deloitte said that in response to the changing operating environment, family offices had to quickly adapt business models and strategies to ensure continuity and provide a platform to thrive. The double whammy of the coronavirus and plunging oil prices together with the evolving tax environment and ongoing liquidity issues forced several family-run businesses to revisit and calibrate their strategies.
Many family businesses in the Middle East region have grown into conglomerates with diverse portfolios, well-defined governance structures and cash flow management making them resilient to changes in the market. Some of these businesses have been operating for years, building huge cash reserves that are allowing them to invest in diversified assets classes and sometimes out of the region too.
Investment trends
The economic impact of the prolonged pandemic together with regulatory and
geopolitical tensions across the Middle East have prompted several key trends in family offices. Just like any other sector, family offices are being confronted by the changing market dynamics which are calling for new business models, digitalization—which is disrupting whole industries with new skillsets as well as global trade tensions and successionrelated issues.
BNP Paribas said that family offices are aware of the need to be able to withstand periodic economic or financial crises and thus they deploy investment strategies based on a longer-term horizon and are more balanced in terms of risks.
From an impact and investment perspective, technology and digital are undeniably a fundamental part of the business landscape in the post-pandemic era. Digital is also expected to be both an investment strategy and operational setup in the future.
“Within the last five years, the technology marketplace in the GCC, and the UAE in particular, has grown and evolved from a highly fragmented market of resellers, consulting and systems integration service firms, to an ecosystem of product, service and solution providers offering artificial intelligence, data analytics and smart solutions, to name a few,” said Delloite.
The place of private equity and venture capital in Middle East family offices strategies has significantly increased in importance over the past years. UAEbased MAGNiTT, a platform that connects entrepreneurs directly with ecosystem stakeholders such as funders, works with more than 21 GCC-based family offices and out of these, 10 have invested in at least one regional startup in the past 12 months.
Saudi-based Kingdom Holding Company, which is controlled by Prince Alwaleed Bin Talal Al Saud, is the hallmark of family investment groups in the region. The Saudi Exchange-listed conglomerate owns stakes in French music streaming app Deezer, ride-hailing giant Uber and Chinese e-commerce firm JD.com.
In terms of investment strategies, several regional family businesses have been building liquid wealth to ensure that their future generations are well taken care of in the event the business stops being profitable. The building of liquid wealth in family-run businesses is also allowing successors to diversify their business portfolios in a bid to mitigate risks and maximize returns by allocating investment funds across different vehicles, industries, companies and markets.
A study that was conducted by Deloitte showed that the appetite to invest is strong among family offices over the next 12-18 months. Opportunities in distressed and digital businesses are among the most sort after, together
with investment opportunities that offer greater portfolio diversification.
– PwC
Championing sustainability
Sustainability, which incorporates ESGs and conscious investing, has gained significant traction among Middle East family offices in recent years as nextgeneration (NextGen) wealth owners are leveraging their capital to advance their social and environmental returns.
Bahrain-based The Family Office said socially responsible investing is positively correlated with longterm investment returns and family offices endeavour to make impactful investment decisions that agree with investors’ values and are resilient to social and political fluctuations. The Family Office has more than $2 billion in assets under management. “As the post-pandemic world is starting to take shape, family offices are pivoting to themes that will dominate the economy in the 2020s including healthcare technology, digital transformation, automation and robotics, smart mobility, and green tech,” Swiss investment bank UBS said in its Global Family Office Report.
Globally, family offices are seeking out investments that not only earn positive returns but also benefit society. The outbreak of coronavirus has heightened anxiety about environmental and social issues.
“Sustainable investing is firmly entrenched in portfolios, as more than
half (56%) globally have allocations, with family offices in Western Europe and Asia leading the way,” said UBS.
Family-owned businesses also believe in giving back to the communities they serve and society as a whole—a commitment that was shown at the height of the pandemic when several regional family-run businesses were active in supporting those affected by COVID-19.
A study that was conducted by PwC in 2021 showed that 93% of Middle East family businesses engage in some form of social responsibility activities. UAE’s Al Ghurair family founded the Abdulla Al Ghurair Foundation for Education in 2016 and it provides scholarships under its open scholars learning program and STEM
scholars program which have benefited over 1,000 students in 17 Arab countries.
Succession planning
Family businesses differ from a generational perspective and in most businesses, successors are taking a fresh look at their portfolios and operating structures, figuring out ways to become leaner and more competitive. For example, in Saudi Arabia and Kuwait, the countries that discovered oil well before their Gulf allies, family businesses are under the leadership of third and fourthgeneration investors who are leading diversification of the enterprises they inherited from founders.
However, succession planning continues to be a massive challenge for family businesses across the globe, but this is particularly problematic in the Middle East where large families are more common and many of these relatively younger businesses face succession issues for the first time. However, parents in Kuwait and Saudi Arabia have become more experienced in handling the transition of power, it is evident that they learn from previous mistakes and are doing more to avoid repeating them.
Establishing family protocols to regulate succession, conflict resolution, business valuations and key issues, is vital in preserving wealth and ensuring a smooth transition between generations. The succession issue has been around for the last five years and is expected to continue dominating the challenges that are confronting family offices for decades.
Family businesses in the region are increasingly adopting policies and procedures that enhance the smooth transition between generations. However, these do not necessarily include key documents such as family constitutions or conflict resolution mechanisms, therefore there is still much work to be done.
Moreover, some family offices have also been looking at setting common values amongst family members, the establishment of family councils and involvement of non-family members within the company corporate structure as ways to lessen succession disputes. Values and mission are the glue that holds family offices together and they are particularly in large families once responsibility is passed down from the founder to the next generation.
“Many family businesses in the Middle East are reaching a critical stage of succession – second-generation family members are already majority shareholders in 56% of businesses and 42% expect that this will be the case in five years,” said PwC.
Family firms in the Middle East are also turning to foundations owing to how they provide a dynamic option that can accommodate a family’s transformation priorities and values. Nina Auchoybur, the Managing Director at Ocorian said that
foundations were first introduced in the UAE in 2017 and they have since grown to become an integral part of the Gulf state’s wealth management offering. There are currently more than 170 foundations registered in the UAE.
PwC stressed that harmony within family offices should never be taken for granted—it requires work and planning and should be approached with the same level of professionalism that is applied to operational decisions and business strategy. Family governance depends on the family structure, but there are different types of rules on who comes in and at what level, and who they report to. When it comes to family governance, Middle East family businesses have well-established protocols as well as procedures compared to other parts of the world.
Enabling environment
GCC countries are implementing new initiatives to drive economic growth and enhance family offices’ contribution to non-oil GDP as part of their broader strategies to diversify their economies away from heavy reliance on oil revenues. The UAE, home to three stock markets, approved a draft law “Agency Law” allowing family-owned businesses to list on the country’s financial markets in January 2020.
Meanwhile, ahead of the inclusion of Boursa Kuwait into the MSCI emerging market index in 2020, Kuwait’s Minister
of Commerce and Industry Khaled Al-Roudhan called on family-owned businesses to list on the country’s fledgling stock market—which highlights the importance of family offices to regional economies.
Family businesses in the Middle East are the engines of growth and a driving force behind economic diversification across the region. The changing times require adaptability and action to ensure that potential is not wasted and that the future is secured. It is increasingly clear that a simple continuation of the traditional ways of working is not enough for family businesses to succeed in a digital and increasingly competitive age.
– BNP Paribas
Ahmed Mohamed Al Naqbi CEO of Emirates Development Bank
Building the Future
Ahmed Mohamed Al Naqbi CEO of Emirates Development Bank explains the motivations for their new strategy and how they will be playing an integral role in the strengthening and diversification of the UAE’s economy
Tell us a little bit about EDB and what prompted the strategy refresh?
Emirates Development Bank [EDB] was established under a Federal Law issued by UAE President His Highness Sheikh Khalifa bin Zayed Al Nahyan and became operational in June 2015. Over the years, EDB has evolved from being a home finance provider to UAE Nationals to becoming the financial enabler of the country’s economic diversification and industrial transformation agenda.
The Bank unveiled its new strategy in early 2021 reinforcing its identity as one of the key drivers of the UAE’s economic growth. As part of this, EDB is a key engine of growth for the Ministry of Industry & Advanced Technology’s [MOIAT] strategy within the UAE Government’s ‘Operation 300bn’ mandate, providing funding options for UAE’s industrial sector.
The launch of the strategy was driven by various factors and challenges faced by the SMEs, including:
Limited access to finance for SMEs:
Nearly 33% of SMEs have financing needs
Limited financial products in the market: Shortage of products offered by banks to SMEs (for example, startup financing and working capital financing)
Capital investment: 90% investments in venture capital are not made in priority sectors in the country
Financing factories and large companies: Limited long-term lending, as the financing period in most commercial banks does not exceed a tenor of seven years
Implications of COVID-19 pandemic:
Changing consumption trends, redesigning business models globally The objective behind the launch of this strategy was to empower and enable the UAE’s industrial sector and support the country’s non-oil GDP by offering flexible financial and non-financial solutions to five priority sectors – manufacturing, healthcare, infrastructure, food security and technology.
Through this, EDB supports startups, small and medium-sized enterprises and large corporates operating in priority sectors.
Please provide details of the new strategy and how it fits into the UAE growth story?
With its new strategy, EDB targets to support more than 13,500 SMEs by 2025. Today, SMEs represent more than 94% of total number of companies operating in the UAE and provide jobs for more than 86% of private sector’s workforce while contributing 60% of the country’s
GDP. To this end, EDB has allocated AED 30 billion as direct and indirect lending to finance SMEs and companies in the priority sectors.
Moreover, with the new strategy, EDB not only aims to address the future challenges facing the UAE’s industrial sector but also ensure sustainable growth, while meeting the needs of the country’s accelerated development journey over the next 50 years. It also aims to diversify the country’s industrial base and support local industrial products, besides creating more than 25,000 jobs in the next five years.
The overall GDP contribution of EDB and its clients is targeted to increase from AED 950 million [2020] to over AED 10 billion in the next 5 years. EDB also plans to establish a fund in 2022 to address equity gaps in key segments of the economy that would serve SMEs and startups.
Within the ambit of this strategy, EDB recently also announced two initiatives – with a total value of AED 10 billion, which are part of the framework of UAE’s ‘Projects of the 50’ campaign to prepare the UAE for the next 50 years.
The first initiative involves AED 5 billion fund for Emirati businesses. Through this initiative, EDB aims to mobilise funds to boost the contribution of Emiratis to the economy and support their growth across local, regional and global platforms, besides helping them
enhance their performance, diversify their resources and give them a boost in their careers through financial and nonfinancial solutions.
The second initiative involves AED 5 billion Advanced Technology financing for companies operating in key priority sectors. Through this financing, EDB aims to support new and existing UAE-based companies to upgrade their assets to be ready for the 4th Industrial Revolution.
What is your vision as the CEO of EDB? How are you seeing this vision come to life?
As the CEO, my vision is interlinked with EDB’s strategy. Operational efficiencies and cost effectiveness are the new buzzwords for us at EDB. As a team,
we are committed to being an effective engine supporting economic growth in the country and working together to achieve the defined goals and objectives.
I bring to my current role a diverse banking experience in the UAE across multiple disciplines with a strong focus on innovation and digitisation. My goal is to drive EDB’s products and service development, along with adoption of advanced technology solutions, while delivering best-in-class customer experience. The aim is to offer ease of access to financing for individuals, SMEs, startups as well as corporates in priority industry sectors.
This is a critical growth phase for EDB. The team is committed to executing our strategy and expanding its role as the financial driver of the UAE’s economic diversification agenda. I am delighted to help drive the bank’s ambitious growth and development plans.
Already EDB has taken strong strides in its strategic roadmap to support the country’s economic diversification efforts in line with the vision of the country’s wise leadership. The phenomenal achievements in such a short span of time, since the launch of our new strategy, promises well for our long-term plans as a key contributor to the achievement of our leadership’s objectives.
We have made considerable progress in H1’2021. Our partnerships with government entities, partner banks and anchor buyers are significant milestones in our journey as it highlights our commitment to provide an allencompassing business ecosystem to SMEs and unlock immense potential for them.
As we progress through the rest of the year, our immediate priority is to ramp up digitisation efforts so that can deliver best-in-class solutions to a wider customer base.
As part of its efforts to create a digital ecosystem, and enable SMEs in the country, EDB has recently launched the EDB Business Banking App to support SMEs. The EDB Business Banking App
offers SMEs access to 24x7 secure, convenient, on-the-go digital banking services. EDB’s Business Banking App will offer a comprehensive suite of banking facilities including a fully operational business bank account, bill payments, invoicing, budgeting, and analytics.
Tell us about your key partnerships, announcements, and initiatives?
EDB has achieved considerable milestones in the past six months, which include the launch of its credit guarantee and co-lending program with various partner banks, partnership activation with the MOIAT, and the successful issuance of its second AED 750 million bond.
EDB aims to build important partnerships to ensure continuous development. These partnerships include private and government entities to ensure that opportunities are identified for economic expansion, diversification and integration of the bank’s products and services to support the government’s economic priorities.
Among the partner banks that EDB has signed the credit guarantee and co-lending programs for SMEs in the UAE, which includes Commercial Bank of Dubai, RAKBANK, National Bank of Umm Al Qaiwain [NBQ], Mashreq Bank, First Abu Dhabi Bank [FAB] and Emirates NBD. As part of the MoUs, the partner banks can offer up to AED 10 million financing to a SME, and 50% of the facility amount will be either guaranteed or co-lent by EDB.
EDB has also signed MoU with the Sharjah Chamber of Commerce and Industry [SCCI] to foster the development and growth of UAE-based manufacturers, exporters, and SMEs through financial support. Similarly, EDB has signed a strategic agreement with Dubai Industrial City to provide innovative financing and banking solutions to SMEs and support the growth of vital national industries such as advanced manufacturing and logistics.
Other agreements to boost the SMEs and supply finance chain ecosystem include MoUs with Zoho Corporation, a global technology company with a broad portfolio of cloud-based business solutions, to promote the growth of SMEs; a partnership with Beehive, UAE’s first peer-to-peer [P2P] lending platform to assign AED 30 million funding to qualifying SMEs, among others.
Moreover, EDB, in partnership with YAP, a leading UAE-based fintech, launched the EDB Business Banking
App to support small and medium-sized enterprises in the UAE. The EDB Business Banking App offers SMEs access to 24x7 secure, convenient, on-the-go digital banking services.
With the App, business account IBAN is issued in a matter of minutes and account activation completed in 48 hours. The launch of the Business Banking App underlines EDB’s commitment to create a digital ecosystem enabling SMEs to plug and play, anywhere in the UAE.
What is EDB’s future roadmap?
For EDB, the primary objectives are to support the UAE’s non-oil GDP by offering flexible financial and non-financial solutions to priority industry sectors.
The bank aims to play an influential role in collaborating with MOIAT that will lead the development process, to enable the country’s industrial sector and raise the competitiveness of UAE products, which will ultimately enhance the UAE’s position on the international industrial map, leading to what the bank calls a strategic transformation for the future.
EDB aims to be a key partner in the next growth stage by empowering and enabling the UAE’s industrial sector and enhancing the competitiveness of its domestic productivity locally, regionally, and internationally. The bank is working towards strengthening and diversifying the country’s economy through several pillars stated in its
new refresh strategy, which focused on initiatives to promote industrial growth and industries of the future.
These pillars include ‘Accelerating the country’s industrial development and supporting the adoption of advanced technology’, ‘Enhancing the role of SMEs in the economy’, ‘Promoting entrepreneurship and innovation’ and ‘Providing home finance to Emiratis’. This strategy will significantly boost the industrial sector’s contribution to the country’s non-oil GDP, support the In-Country Value proposition and create highly skilled employment opportunities.
The bank is perfectly positioned to achieve its objectives by developing the economic infrastructure to have advanced industrial and technological foundation in the country, thus improving the overall productivity and competitiveness locally, which offers UAE companies a competitive advantage globally.
