Family offices are growing in the Middle East because there is a demand for a corporate-like structure from wealthy families to manage their growing wealth and assets.
Middle Eastern family offices are the byproduct of rapid economic transformation nearly 90 years running, along with an increasingly savvy and sophisticated wealthy population who demand higher levels of service for their ever-growing assets.
To understand how these family offices came to being and what they’re looking for, let’s first look at the overall wealth landscape of the region.
Since the discovery of oil and gas on the Arabian Peninsula in the late 1930s, Saudi Arabia and neighboring countries in the Gulf region have witnessed meteoric rises in economic growth, as well as dramatic gains in personal wealth among their citizens.
While sales of energy resources are not the only means by which the region has developed, the discovery of “black gold” has nonetheless played an instrumental role in the overall development of the region, as oil revenues have been used to develop other sectors of economies in the Middle East.
Across the oil- and gas-producing regions, governments have recognized the importance of a versatile economy beyond oil, so they are investing more in technology, tourism, entertainment, financial services, and real estate.
Today, Saudi Arabia is home to 224,000 millionaires, the most of any Middle Eastern country. Kuwait, with a population of less than 5 million compared to Saudi Arabia’s 35 million, comes in second with 217,000!
And cities like Dubai and Abu Dhabi, once sleepy fishing villages along the shores of the Persian Gulf, have transformed into modern and luxurious metropolises within just a few decades.
Such rags-to-riches stories hold true for the rest of the UAE and countries like Kuwait, Bahrain, and Qatar, which hosted the 2022 World Cup.
In these countries, the current leadership, be it in business or government, is increasingly visionary and assertive. With ambitious plans for development and diversification, areas like financial services come into focus.
With these kinds of numbers, it's no wonder family offices in the Middle East are growing.
While Middle East wealth numbers are interesting in themselves, there is more to look at regarding these individuals and families:
While a smaller number practice Christianity and Judaism, Islam is by far the largest in the region.
Focusing on the Muslim majority and the role Islam plays, practices vary by countries and individuals.
From lifestyle choices to financial decisions, Islam can have an influence.
Consider a few of these Islamic finance principles:
Of course, there is a lot more to learn about Islamic finance.
When interacting with Muslim family offices and wealthy individuals, one should be aware of these factors.
Hadi Al-Alawi, Chairman & CEO of Al-Hayat Group, shared his views that reflect the role Islam plays:
“One of the five pillars of Islam, zakat, or charity, is a religious obligation for all Muslims who meet the necessary criteria of wealth. It is a mandatory charitable contribution, and our tradition is that 20% of what we earn must go to charity. Money can buy anything tangible, but it will not buy you credibility, honesty, love and loyalty; these you need to develop with the relationships you build, which can in turn bring you more wealth than the money you earn.”
In short, Middle East family offices will have moral (and in some cases legal) obligations to make good use of their wealth.
Family offices in the region have changed their investment approaches over time. Previously, it was a more preservation-driven mindset, but nowadays the focus is to diversify family holdings and grow wealth.
Further reflecting religious values, a Lombard Odier report found that demand for Islamic investment strategies in the Middle East is very high among younger investors, and almost as strong as it is for older generations.
In fact, 91% of younger investors already allocate to this asset class, and 88% plan to increase their allocations to sustainable assets.
Real estate has historically been a large part of a family office portfolio, but private investments are making gains, as they offer potential for higher returns.
Technology investments are another growing area in popularity. The Lombard Odier report also found that 79% of younger Middle East investors believe there are significant opportunities in the digital and tech sectors.
Here are a few notable Middle East family offices investing in technology.
Just as demand for Islamic investment strategies is very high among younger investors, there is greater interest in sustainable investing.
According to the Lombard Odier report:
The Next Gen respondents in the Lombard Odier report show a strong sense of loyalty to the Middle East, as 89% hold their assets in the region.
The Lombard Odier report continues to provide valuable insight on Middle Eastern investors.
While 85% of young respondents share traditional Middle Eastern values based on religious or cultural principles, 31% say those traditional values are updated for the present day. 79% of older investors, however, say their values are "exclusively traditional."
What's more, younger investors place greater focus on improving their lifestyle and remaining wealthy compared to older investors over the age of 40 (45% vs 16%), who are more interested in their financial and reputational legacy.
Should these younger investors start their own family offices or inherit one as the successor, their values will influence how they invest.
Venture capital is another area family offices in the Middle East look at. Technology is one of the major sectors they invest in through VC.
Paul Aver, a managing partner at Frontier Path, a venture consulting and investment advisory firm for Dubai's family offices, said that these FOs have been active in VC the last 4 years.
He also had some interesting commentary about the younger generation and tech:
“About 3-5 years ago, it would be difficult to talk with families about technologies and innovation, but now it is a standard thing. The young generation is interested in technology and innovation. Some of them are maybe not so excited about the traditional business that their families were doing for many years. They want to do something new.”
Part of the reason for the change is that profit margins in "traditional" industries like fashion, retail, automotive dealership, traditional F&B, or construction are dwindling, according to Aver.
While men hold the majority of representation and control, as is the case in family offices globally, women are making gains.
According to a We Are Guernsey survey of 30 Middle Eastern family offices:
As more women in the region make gains in higher education, as is the case in Saudi Arabia, they'll be more likely to take on leadership roles.
The views of Rasha Badawi, director at Barclays Wealth and Investment Management in the Middle East, can only indicate that more women will be active in the family office space:
“As traditional family roles change and more women hold prominent positions in international business, their growing global influence is going to be a major economic force over the next decade, redefining areas that have historically been focused on, and dominated by, men.”
Only 24% of Middle East HNWIs have succession plans for wealth and family businesses.
What's more, just 42% of family offices have a constitution, and among those, 44% had developed this constitution more than 5 years ago.
Indeed, the lack of succession planning in the MENA (Middle East and North Africa) region remains a threat. The lack of planning could reflect conflict of vision between family members and the varied interests of the heirs.
The importance of succession planning cannot be overstated.
Arnaud Leclercq, Partner Holding Prive and Head of New Markets at Lombard Odier, shared his views:
“After a period of considerable wealth accumulation since the 1970s, many older [HNWIs] are preparing to pass on their wealth and their business to the next generation.
Preparation is key. Effective estate planning and a robust succession framework for the family business that includes formal governing documents can ensure that private wealth and business ownership are transferred smoothly and without conflict.”
Indeed, family offices need to make succession planning a priority as older generations are soon to retire.
Fortunately, almost nine-in-ten (87%) of Lombard Odier survey respondents think that their family business is structured to allow for efficient intergeneration wealth transfer.
Additionally, more than two-thirds of respondents said having a succession that complies with Shariah principles mattered to them.
With so many moving pieces, it's hard to focus on everything all at at once.
Investing, succession planning, managing internal operations...
So, it's important to see what other wealthy families are doing.
One of the more notable events in the region is the Middle East Family Office Investment Summit.
At a conference like this, there is a lot to learn:
These events are great ways to establish connections with other family entities, and being in similar networks, two sides can share references and resources with each other for mutual benefit.
Consultants, both locally and globally (with local Middle East locations), can offer a wide range of family office consulting services.
They can help develop plans and help in various areas: legal, operations, technology, staffing needs, accounting, tax advisory, wealth transfer planning, governance, etc.
Here are just a consultants in the Middle East:
Within family offices, there are a lot of internal inefficiencies.
Often times, people do manual work that is error-prone and time-consuming, like generating reports and managing data.
Additionally, family members don't want to do that work nor should they be doing it. Thirdly, they're using old and inefficient technology to manage everything.
Family office outsourcing providers for the Middle East like Empaxis help in all areas:
Reconciliation reporting and performance reporting are just some of the areas family offices benefit from us. Anything related to the middle- and back-office, Empaxis does it.
As more Middle Eastern family offices increase allocations in private equity and venture capital investing, they will need help processing all the investment statements as they come in.
Empaxis can automate all those processes. See how other clients benefited from automation.
It's an exciting time to be a Middle Eastern family office, as new opportunities continue to emerge.
But with these opportunities and so many moving pieces, families cannot do it all alone.
That explains why family offices continue to be set up in greater numbers, helping formalize these matters.
And it should be the goal of every family office to drive greater efficiency and reduce operational risks.
They should network with their peers, consult experts in family office management, and leverage third parties effectively.
For those who are looking to partner with these family offices, they should be mindful of Middle East family values and priorities, shaped both by religious tradition and general circumstances of today's world.
And for family offices themselves, they should take comfort in the resources at their disposal ready to assist.