Saudi Arabia’s economic landscape is dominated by family-run businesses that account for 90% of all private companies. The kingdom’s big business — owned by the likes of the Alsubeaei, Al Rajhi, Al Olayan, Al Rashed, Al Omran and Al Turki family dynasties — has grown its commercial activities along with a booming domestic economy that has more than doubled in size since 2005.
The rising fortunes of Sheikh Mohammed Alsubeaei, founder of Mohammed Alsubeaei & Sons Investments Company (MASIC), are intrinsically entwined with the development of modern Saudi Arabia. The origins of the family business date back to 1933 when Sheikh Alsubeaei formed his first commercial venture, a trading house in Mecca specialising in thawbs — traditional Arabian clothing for men — and cotton goods.
The Hajj pilgrimage to Mecca — Islam’s holiest city and birthplace of the prophet Muhammad — is obligatory for Muslims and naturally, with so many people visiting from all over the world, the city provided budding entrepreneurs with a growing consumer base. As trade blossomed, the Alsubeaei family business became very profitable.
With oil becoming a strategic and high-value commodity, this boosted expansion of the Saudi economy and created a need for commercial banks and public services. This trend helped money exchange to develop as a separate business and after partnering with his brother Abdullah, the Mohammed and Abdullah Ibrahim Alsubeaei Company for Money-Changing and Trade was established in 1938. This eventually converted into Bank Albilad, of which MASIC is a still major shareholder.
Sheikh Mohammed’s pioneering spirit saw the family business diversify into other sectors, especially real estate, and the establishment of a group of different companies that have expanded with the fortunes of Saudi Arabia following the Second World War.
Longevity
As the business empire grew, as well the size of the Alsubeaei family, Sheikh Mohammed turned his attention to what is a major challenge for many family businesses; longevity and succession. Now a centenarian, his role in the firm has diminished over the years and his sons have gradually been given greater control over running the business.
With the realisation that some family offices can fail because of disputes between family members, the Alsubeaei family began working on the transition from founding to second generation at the turn of the 21st century. This resulted in the creation of a professionally-managed investment company in the form of MASIC, which was originally owned by the 12 members of the Alsubeaei family.
However, one problem with such a structure is that as ownership passes to succeeding generations you start to have potentially dozens if not hundreds of shareholders, explains Omar Bassal, head of asset management at MASIC. Moreover, investments were run in silos by a number of different companies and in a disparate manner.
Therefore, limited liability companies (LLC) were set up for each of the 12 family members and it is these LLCs that own MASIC. The family investments shifted to the new holding structure which has managed all of the family’s investments since 2006. “We have optimised our portfolio of investments and unified the investment process by transforming from a traditional family investment business to a professional investment company,” says Bassal. “The reorganisation has led to a separate management and corporate structure to ensure that the company survives for generations to come, Insha’Allah [God willing].”
MASIC examined the reasons why some family offices have survived for so long, especially those situated in London that have preserved their existence for centuries, and came to the conclusion of forming a separate structure, whereby the family is not involved in management of the company. “Members of the family sit on the board of directors and provide oversight but are separated from day-to-day management,” explains Bassal.
Best practice
The firm has worked hard to instil steadfast principles of best practice through robust corporate governance. This has been accomplished by setting up an executive committee, investment committee, audit committee and asset liability committee, with each having its own charter of what it governs and how rules are implemented.
“We are told MASIC is one of the most sophisticated investment companies in the region, in terms of the structure, investment process, experienced personnel and the competitiveness of retaining staff,” says Bassal.
He observes a growing number of family offices trying to emulate their peers by incorporating a more professional structure. “The emergence of sovereign wealth funds and more family offices in Saudi Arabia has improved the sophistication level,” he adds.
To promote dialogue among finance professionals and help raise the profile of family offices, every January the company hosts the MASIC Annual Investment Forum dedicated to corporate social responsibility. The annual conference brings together Saudi Arabian and international economic, business and investment leaders from multinational companies and academia to discuss the market outlook for the forthcoming year. A plethora of influential investors and renowned commentators have spoken at the conferences, including Nouriel Roubini, Kenneth Rogoff, Marc Faber and Jim Rogers.
In addition, MASIC is keen to establish relationships with family offices globally. This is beneficial if the firm targets investment in the UK, Europe or Asia and is able to team up with other family offices that have similar objectives and wish to foster collaboration.
MASIC is one of the most prominent and sought-after co-investors in the region. The company has a strong network within Saudi Arabia, which has allowed access to proprietary deal flow. Moreover, the firm has built positive relationships with the government and the Royal Family, which can also be beneficial, he adds.
“But in general we do not rely on these relationships to source investments; though we might find a good opportunity through the network every now and again. Locally,
it depends on the deal flow from our partners. Internationally, we typically
use managers and are focused on identifying the best-of-breed managers,” says Bassal.
Organisational set-up
MASIC now has 120 personnel with three main divisions: the real estate investments unit; the asset management group and the direct investments group. The investment process starts with each department undertaking due diligence on an investment idea which is then forwarded to the investment committee. Above this, sits the executive committee level, which has the final decision-making authority, while the chief financial officer plays an integral role, understanding the cashflow and financial impact of investments.
Bassal has been MASIC’s head of asset management for nearly five years. His prior experience was in public equities and managing managers and he has previously worked for the National Bank of Kuwait and two investment managers in the US.
“My experience was typically investing in a single market or region and the structuring of products that meet Shariah principles. Now at MASIC, we are looking at the global exposure of different investments and asset classes and using managers from all over the world,” he says.
The real estate division undertakes investments in real estate projects predominately in Saudi Arabia, such as residential, office, retail, hospitality, industrial, logistics and warehousing. Internationally, the unit has invested in the UK and US.
Direct investments also has a home bias with medium- to long-term investments in Saudi Arabian companies across a broad range of sectors, including financial institutions, industrials, consumer/retail, healthcare, education, oil/gas and real estate. MASIC can invest at all levels of a company’s capital structure, including equity, hybrid/mezzanine and debt so long as it is done in a Shariah compliant way.
Asset management, which is effectively the indirect investing division, oversees all fund investments, including public equities, private equity, real estate and income-producing assets. This division has more of an international flavour with investments in Southeast Asia, Greater China, India, the UK, and real estate and leasing funds in the US. Investing is two-pronged: a public side investing in public equity and instruments that are traded, in addition to a private side composed of alternative investments, real estate, private equity, trade finance and leasing, which are typically non-listed investments.
Shariah principles
Bassal stresses that MASIC’s prime aim is to reflect the ideals and values of Sheikh Mohammed and the firm stringently adheres to Shariah principles. This places restrictions on certain investments, such as hedge funds that use short selling and conventional leverage, both of which are prohibited in Shariah investing.
“What we normally have to do is structure instruments differently, for example, in real estate we look at Shariah-compliant financing. Many investors today still invest in fixed income and bonds; however we would replace that exposure with something like leasing and trade finance,” he says.
“Both of those provide for income but more importantly can be easily structured in a Shariah-compliant way because you own the asset and are leasing them for payments. So in the example of trade finance, you are taking goods to sell on with a marked-up price and to make a profit over 60-90 days.”
MASIC is able to invest in sukuk structures — similar in nature to fixed-income bonds but are Shariah-compliant and backed by a portfolio of assets — but has no current sukuk investments due to low yields. “Institutional investors have a higher risk appetite than say a traditional asset management company or pension fund and are looking for better returns than what are offered in fixed-income markets,” he says.
Charitable goals
Adhering to Shariah principles does not only govern the strategy of MASIC’s investments, it also governs the charitable foundation and distributions. Sheikh Mohammed has based his businesses on a rigid foundation of social responsibility and the values of honesty, transparency and integrity. These ethical ideals and the pride of his Saudi Arabian heritage are reflected in Sheikh Mohammed’s keen support of community work across the kingdom.
In 2004, he established the Mohammed & Abdullah Alsubeaei Charity Foundation and allocated assets in excess of billions of Saudi riyals to back up and support the humanitarian, religious, cultural and social goals of the foundation. Along with a vast range of qualified staff, the foundation supports charity institutions and associations to form partnerships in charity-related work across the kingdom. “MASIC has an objective of not only making returns in financial markets but also having a positive impact on society. It is very important for us to give back to our community,” stresses Bassal.
Hiring local nationals is a key policy for the firm, as well as nurturing local talent among a young Saudi population. MASIC has developed strong links with local universities and colleges and offers competitive compensation packages in order to attract high-quality local graduates. The government has been addressing the kingdom’s well-documented skills shortage by investing heavily in education and vocational training, also through a policy of Saudisation of the workforce — the replacement of foreign workers with Saudi nationals in the private sector.
Investments
MASIC maintains a strong bias toward investing in domestic markets and has an impressive asset mix with investments spread across a board range of sectors such as financial services, real estate, agricultural/aquaculture, manufacturing, industrial and retail.
MASIC’s key investment assets include Alargan Projects, Bank Albilad, Fajr Capital, Thakher Real Estate and Jadwa Investment. Earlier this year, the firm invested several hundred million riyals in the construction of the Jeddah Corniche Residential Tower, set to become the tallest luxury apartment building in Jeddah.
Landmark deals include the redevelopment of London’s iconic South Bank Tower and £145 million of funding through the biggest Shariah-compliant mezzanine facility in the world in 2012. While last year, MASIC’s Fajr Capital led a consortium that purchased the Dubai-based oilfield services company National Petroleum Services.
He highlights other transactions, such as investment in a US multi-family housing real estate project. This is through a US manager that utilises a so-called value add strategy whereby a multi-family housing unit is purchased and renovated with the goal to selling it on in a few years.
MASIC has also invested in Indonesian real estate with a manager that purchases plots of lands to sell to developers. The local real estate market is on the rise as many companies are moving their operations from China to Indonesia, he explains.
The firm has recently begun investing in a global and emerging markets public equities minimum risk strategy via a European manager. This strategy is similar to smart beta investing and overweights companies that have low volatility and underweights those with high volatility.
Expert investor
MASIC has a pretty aggressive return target of between 7% and 10% annually. “We have historically been able to exceed that target. We do provide dividends to shareholders once a year, even though we do not need to and can delay that,” he says. “We also have low liquidity needs because there are no major liabilities that have to be matched.”
Admittedly, he adds, these returns should be put into perspective as the period from MASIC’s inception until today has been one of the best economic periods for Saudi Arabia. The early 2000s saw the beginning of the upward trajectory in the oil price, from $10 a barrel up to record highs of $145 in July 2008 and then dropping to the $42 dollar mark by August this year.
“The Saudi economy has performed incredibly well, especially real estate and private equity, and this is one of the reasons we have been able to achieve 12% to 13% annually since this structure was formed. We see more challenging headwinds emerging; crude oil has fallen in price, global interest rates are zero or negative and the market prices of many asset classes are so elevated. So it will be a challenge to see those returns in the future,” he says.
Nonetheless, Bassal is confident of achieving target returns because MASIC has a larger exposure to a higher returning asset class — private equity — than many other family offices. “We achieve targets by investing more in alternative assets that offer value and where valuations are incredibly attractive,” says Bassal.
MASIC focuses on its strengths of being an opportunistic investor and expert in sourcing investments when the price is the most optimal. “We are very particular in the world we invest in, for example I would not buy US equities but I might buy US real estate. Our strategy is to find asset classes that are not correlated with public markets and less prone to problems given the rising probability of a financial crisis. It does not change our thinking but just means that we have to be careful about which asset and which countries to invest in,” he says.
