According to the RBC Capgemini World Wealth Report, the high net worth individuals population in the Middle East rose by 7.7% between 2013 and 2014 and their wealth rose 8.2%. The regional family office sector has some catching up to do quantitatively and qualitatively, writes Paul Golden
In 2014, EY suggested there were as few as 60 single family offices and a much smaller number of multi-family offices in the Middle East. However, they are becoming an increasingly significant customer base for regional asset managers – Invesco’s 2015 Middle East Asset Management Study found that outsourcing of asset management by family offices is increasing.
The vast majority of Middle Eastern family offices are situated in Saudi Arabia, Kuwait, Qatar and Dubai, explains Emile Salawi, head of family offices at BNP Paribas Switzerland.
“The DIFC has been a crucial component in the development of the family office ‘industry’ in the region, attracting private banking and asset management expertise. However, there is a need for more people with the skills to help wealthy families diversify.”
The favoured mechanism for this diversification is investment in ‘secure’ asset classes, with many families favouring real estate and private equity. The World Wealth Report 2015 found that the region had the highest percentage of wealthy individuals holding cash for investment in real estate and Salawi believes the range of asset classes these families are interested in is unlikely to expand significantly.
Family offices in the Middle East are as much a target for funds trying to sell products as their peers in North America or Europe, says Salawi, who observes that since much of the wealth concentrated in the family office segment is second generation, there is enough of it to justify the cost of running a single family office – for now.
“Unless there is further wealth generation, it becomes uneconomical to run an office for just one family,” he adds. “As the third and subsequent generations take control of the wealth, we expect more of them will be attracted to the multi-family office model.”
Salawi describes Middle Eastern family offices as comparable to pension funds in that they have a long term investment horizon and favour non-cyclical investments. Demand for concierge and other ‘soft’ services is stronger in the Middle East than anywhere else in the world, he says.
Alexander Millar, head of EMEA sovereigns & Middle East and Africa institutional sales at Invesco Asset Management, is confident that family offices will grow in line with wealth in the region and refers to a continuing preference for direct investing through a variety of instruments and asset classes, particularly via three to five year private equity-style investments within niche industries or segments where the family has an interest or sees the investment rationale.
“Typically there is an absolute return target for these clients, so they will invest in a variety of instruments via banks,” Millar continues.” There tends to be a ‘best ideas’ approach rather than a formal asset allocation strategy, so while there will be some long term allocations to asset classes there will also be a significant tactical trading element to the portfolio that will have a time horizon of less than one year. For the family offices that adopt more fixed asset allocations there’s greater scope for asset managers to work with them directly.”
Taking ownership of their investment strategy as well as controlling costs, implementing investments, governance and succession plans is particularly important to many wealthy families in the Middle East suggests Lesley Hodgson, head of global family office & private investment offices group EMEA at Northern Trust.
She describes the region’s multi-family offices as mainly boutique investment managers who offer a limited range of services, and refers to a strong culture for families to invest in their local stock markets coupled with a higher proportion of real assets in their portfolios.
There is residual reluctance in the Middle East to relinquishing control of families’ affairs, but when the need arises the focus is on investment – often prompted by the sale of the family business, explains Michael Silver, partner and head of the Israel office at Stonehage Fleming.
“There is sufficient expertise available locally to service family offices through professionals, single service providers and intermediaries. Finding all these under one roof is rare and we don’t see the same competition here as we do in Switzerland or the UK, but we expect that to change,” he says.
Salamanca Group Trust & Fiduciary is experiencing increased demand for fiduciary services to establish structures for assets held outside of the Middle East, explains Michael Giraud, director and head of new business development. “Another favourite is a simple investment portfolio, which has a long-term time horizon that they consider a nest egg to protect from political and economic volatility, and to provide for future generations.”
Salamanca frequently finds that the family requires a provider that has an international approach rather than a jurisdictional view, he adds.” For this reason there is often a local family office to attend to local assets, but they have no qualms about importing personnel if there is an identified skill gap.”
In June 2014, Walid Chiniara merged his multi-family office practice into Deloitte. He now leads the firm’s private family enterprise consulting practice in the region and observes that while wealthy families initially tend to use a single family office for concierge-type services, as they evolve and separate family assets from business assets, the activities of the office expand into monitoring the implementation of governance systems and processes as well as investment.
Chiniara suggests that the sector lacks professionals with soft skills and empathy – important qualities for families struggling with the notion of entrusting non-family executives to make decisions on their behalf.
He refers to increasing diversification, with many families interested in high tech sectors, but also acknowledges that the risk appetite of next generation entrepreneurs who are new to the family office concept is still low.