For much of history, the Middle East has been a prominent centre of concentrated wealth and affluence, whether it is oil, gold or empires. The rise of business moguls and regional growth in gross domestic product (GDP) in more recent times has kept alive its reputation of riches and prosperity.
The region has seen the rate of wealth accumulation accelerate in the past five years, with Saudi Arabia and the United Arab Emirates (UAE) now controlling almost three-quarters of the Gulf Cooperation Council’s (GCC) wealth.
The Gulf ’s liquid wealth market doubled from $1.1 trillion to $2.2 trillion between 2010 and 2014, growing at an average rate of 17.5% per annum, says Daniel Diemers, partner with consultancy firm Strategy& in Dubai. At 41%, high-net-worth individuals (HNWIs) account for the largest share of the region’s wealth, followed by ultra-high-net-worth individuals (UHNWIs) with 34%. Wealth creation for HNWIs increased 76% and UHNWIs by 94%over the past five years.
The consultancy estimates there are roughly 1.6 million wealthy households in the GCC, comprising 240,000 to 275,000 households that have more than $1 million in assets. Throughout the whole of the Middle Eastern region, Knight Frank estimates circa 7,000 ultra-high-net-worth individuals and forecasts this to rise to 9,500 by 2023.
Rising prosperity
Strategy&’s Diemers explains the exponential rise in wealth is partly due to the global rebound in equities and to GCC-specific drivers, particularly the impact of a high oil price. In addition, increasing government spending on megaprojects, infrastructure, further economic diversification and job creation has helped to increase the income for wealthy individuals and create a generation of newly-affluent citizens.
He states that the rally in stock markets — global equities saw 50% gains from 2009 to 2013 — accounts for roughly 40% of the $1.1 trillion increase in wealth. The other 60%gain is attributed to growth in GDP of the GCC, which rose steadily at an average rate of 10% per annum, on the back of a rising oil price that was sustained at near-record levels through 2014.
Geopolitical events, such as the Arab Spring and its aftermath, have intensified the migration of new wealth to the region. “With deterioration in the security and economic situation in countries — such as Egypt, Iraq, Libya, Syria and Tunisia — many wealthy households migrated to the more stable UAE, Kuwait and Qatar,” adds Diemers.
In addition, some degree of capital is being reallocated to its countries of origin, including the GCC due to sluggish macroeconomic growth in developed markets and turmoil in the international financial services industry, such as operating failure scandals, regulatory fines, compliance issues and strategic retrenchments. “Many locals also repatriated funds in pursuit of more dynamic, tangible, local investment opportunities,” he says. “Many of these funds have been invested locally or regionally, mostly in real estate and equities.”
Family set-up
Long familiar, powerful and renowned across Europe and other parts of the world, the Middle East also has its own share of very well-run and extremely sophisticated family offices — Alsubeaei, Al Touq Group and Manafea Holdings in Riyadh, the Future Group and Majid Al Futtaim Group in Dubai — which serve as good role models.
The potential for a thriving family office market is high, given that family businesses — which form the basis of most family offices — control as much as 75% of the private sector’s economic activity in the GCC and the considerable and fast-growing wealth. However, the lack of central register or official lists and the fact that many families are discreet and shy away from public attention, means the size of the market is hard to judge. Nonetheless, it is understood that there are many more families that could run a family office than currently do so.
There are probably hundreds of family offices in the Gulf that have a formalised approach to investing where a family pools its money and institutionalises the management of the wealth, says Akber Khan, director of asset management at Al Rayan Investment in Doha, Qatar. He observes the majority to be in Saudi Arabia, with a dozen to 20 in Qatar. “Some have grown so large that families have combined their holdings and listed the companies,” he adds, citing examples as Aamal founded by Sheikh Faisal Bin Qassim Al Thani and Kingdom Holdings led by chairman Prince Alwaleed Bin Talal Bin Abdul-Aziz Alsaud of Saudi Arabia, which is the investment arm of his family wealth and effectively a family office.
Even though Khan describes Qatar as “having more money than you can imagine for two hundred and fifty thousand people”, the country has the least sophisticated governance structures for family offices relative to the rest of the region. A dearth of family offices is simply because wealth origination has been the most recent and hence it is the least organised institutionally.
“Clearly there are rich families that invest but not necessarily in the form of a formalised family office with professionals managing their money,” he says. “It could be that the accountant that has been with a family for 20 years becomes the manager. Not because he is a professional but because the family trusts him with their money.”
Rising sophistication
The Middle East has a predominance of single family offices (SFO), which is different to Europe that favours a multi-family office model, explains Nick Tolchard, head of Invesco Middle East in Dubai. One notable development during the past 12 months is an increase in the separation of tasks between the corporate and personal duties within SFOs, he says.
During the course of the financial crisis, he notes that SFOs were more focused on investing in the business than in wider asset management. This was because bank financing was harder to attain and therefore the family office became a proxy for the administrative office for the corporate structure.
“Often, SFOs have a general practitioner that looks after a number of affairs,” he says. “Now there is a splitting of responsibility between the parts of the family office that focus on the corporate affairs and the investment affairs. This is a reflection of more sophistication by the business owners and will be key for family offices that want to develop a separate investment focus and strategy.”
Al Rayan’s Khan believes that investors with very significant amounts of capital require dedicated and professional investment teams. It is certainly beneficial for families to have an investment process with principles and guidelines for efficient management of
their wealth and also to monitor and manage the returns.
“It is clearly possible to make money without that structure but adhering to processes offers consistency to decision making,” he says.
Wasatah Capital this year onboarded a Saudi family office client and took over management of some of its local public equities mandate, says Husain Thaker, the firm’s Riyadh-based senior fund manager. He explains that the internal management were undertaking a multitude of tasks in-house, which led to bad investments on their books. “They outsourced a part of their local investment book to us because they needed professional help,” he says. “Generally, family offices undertake asset allocation and risk management rather than hunting for investment opportunities in the market.”
Anecdotal evidence suggests that the Saudi family office market has more than doubled in the past five years, he says and forecasts the number to continue growing, given a concomitant rise in the wealth of Saudi Arabian nationals. “Family offices have accumulated a lot of wealth from many different business operations and are looking to invest and manage that excess money via a separate investment platform that is professionally run,” he adds.
Regulatory support
Unlike the majority of jurisdictions across the world, the region may seem fortunate to have several countries that have implemented regulation specifically for the establishment of single family offices. Local expertise and legal frameworks now exist in the Dubai International Financial Centre (see p66), Dubai Multi-Commodity Centre and the Qatar Financial Centre and are expected in the newly-established Abu Dhabi Global Market (see p60).
These centres have enacted regulations to aid the development of SFOs and multi-family offices and help professionalise the management of wealth. Qatar introduced dedicated SFO regulations in 2012, Dubai passed similar legislation a year earlier, while the DMCC launched a new licence structure for SFOs in February this year.
These regulations are generally designed to streamline the procedures for establishing a family office in the financial centres and promote the healthy growth of family offices and the services they require in the Middle East. Importantly, the centres have developed a world-class legal, regulatory and tax environment for local and foreign firms.
Invesco’s Tolchard says that financial centres provide invaluable access to the insights and thought leadership of many global investment firms. However, while supporting the introduction of robust regulations to protect investors, he believes there is a limit to the number of good competing financial centres that could serve the whole of the Gulf.
Real estate in vogue
Many family offices aim to achieve very high target returns of 15% per annum, which Tolchard notes is in line with the type of financial returns that HNWIs expect in their business operations. In the past 12-18 months, he observes family offices starting to take on more risk and focus on investing in a broader portfolio to maximise returns.
“Investors are favouring equity structures and alternatives have really picked up in the past year or two,” he says.
“Families are comfortable with real assets and are investing in real estate or infrastructure on a local or more global level.”
Indeed, investing in property remains a mainstay of investment for family offices and high-net-worth individuals and it is estimated that around one-fifth of their portfolios are allocated to real estate in the Middle Eastern region. Saudi family offices place greater emphasis on yield than specific opportunities in commercial or residential real estate markets, Wasatah Thaker adds. Currently, the inclination is to invest more in retail assets, which are booming in Saudi.
Tolchard also observes rising interest in private equity driven by the opportunity for higher returns and also greater management control of businesses that family offices may invest in. He views this trend as representing a reduction in negative sentiment to higher risk investing and investors perceiving an improvement in the market cycle.
“Investment horizons have lengthened, partly due to the market environment and partly because there are more investment opportunities by staying invested in the market long-term,” he says.
According to Invesco’s Middle East Asset Management Study, more than half of family office respondents believed that leverage would increase in the future, which Tolchard believes will lead to greater use of vehicles like structured products, as well direct mutual funds. “Even though many investors are comfortable with the concept of leverage, as asset managers we would caution against leveraging too excessively in portfolios,” he says.
Home bias
Equities, real estate and direct investments are the most popular strategies for Qatari family offices, which have a strong home bias, although parts of Europe are also targeted like UK real estate, says Al Rayan’s Khan.
He sees a tendency among family offices to favour direct investments in their infancy and start to consider fund structures as entities mature. “As these family offices grow and the level of financial sophistication improves, and considerations such as risk management and diversification come into the picture, they will move to a wider asset and geographical mix,” he says.
Investing locally is finding particular favour among Saudi family offices that have been established in the past few years. These entities prefer to invest closer to home and in familiar asset classes, such as local public equities, real estate, private equity, and more recently fixed income.
“Family offices have retrenched from the wider region due to geopolitical risks. They are comfortable with the local market and sentiment and know which business and sectors are performing well,” says Wasatah’s Thaker.
Fixed income is also seeing interest, with sukuk now being considered by some family offices that envisage an increase in equity market risk. “In previous years, fixed income did not feature as part of family offices’ investment strategy, but now it is being more widely seen in their books,” he says.
Oil effect
The growing non-oil economy has been rising in the mid-to high-single digits in GDP terms for much of the Gulf during the past five to 10 years and has been a fillip for boosting overall growth in the region, as well as the wealth of HNWIs and family offices, says Al Rayan’s Khan.
Government spending has also improved economic fortunes through commitments to invest in both human capital — social infrastructure, like schools, hospitals, housing, colleges and universities — and physical capital, such as infrastructure, roads, bridges, ports, desalinisation, electricity generation and sewage.
Regardless of their exposure to oil, countries with either large or rising populations, or large and well-developed service industries will continue to prosper, he argues. Many family offices have exposure to construction, and although the low oil price may curtail some activity, he notes there will still be hundreds of structures being built across the region
“A lot of the wealth that a family office has is a derivative of the construction industry, which is being supported by governments’ commitments to keep spending,” he says. “Don’t be fixated about a low oil price when thinking of prospects for wealthy local families, the outlook for most family offices in the region remains extremely bright, regardless.”