Governments and wealthy families are accelerating the changes needed to safeguard their financial future.
The global upheavals of the past 12 months have been challenging even for a region like the Middle East, renowned as it is for the steady way it adapts to new trends.
The Covid-19 pandemic has accelerated many changes already underway, such as the shift away from traditional hydrocarbon revenue. And the need to diversify in order to survive has not only been felt at the government level: the region’s many Family Offices are assessing the tricky balancing act involved in making changes that bring immediate benefits without being detrimental to future generations.
The International Monetary Fund’s (IMF) 2020 report, The Future of Oil and Fiscal Sustainability in the GCC Region, highlighted the need for Gulf Co-operating Council (GCC) countries – which account for around a fifth of the world’s oil production – to accelerate radical initiatives to reduce their reliance on it. Demand for oil is expected to peak in 2040, and the report suggests that “at the current fiscal stance, the region’s financial wealth could be depleted by 2043”.
The Kingdom of Saudi Arabia (KSA) is at the forefront of change, its Vision 2030 being arguably the boldest initiative. It is accompanied by a US$1tn-plus investment in reducing its dependence on oil, diversifying its economy, developing public service sectors and encouraging inward investment. This includes the already headline-grabbing land property development projects.
There have also been significant changes to the region’s tax system. Over the past two years, new forms of taxation have been introduced by a number of GCC countries. VAT, levied by KSA, Bahrain and the United Arab Emirates (UAE), is proving attractive to other governments seeking new revenue streams. Oman is the latest to follow suit and will introduce VAT from April 2021.
Liquidity and listings
Since the Saudi oil company Aramco’s record flotation last year, there has also been a big increase in companies wanting to list on the Saudi Stock Market, Tadawul. Mohammed bin Abdullah El Kuwaiz, chairman of the Saudi Capital Market Authority, recently revealed that there are 15 applications for new listings in the market.
It is here that Family Office investment comes into the picture. Family-owned businesses are a significant driving force in the growth of the Middle East.
Privately-owned assets there were expected to reach US$11.8tn at the end of 2020, with the UAE, Saudi Arabia and Kuwait accounting for over 22% of that, according to Boston Consulting Group, quoted in the Global Finance – Middle East and North Africa: Wealth Shift June 2019 report.
This wealth in the Gulf countries also has outstanding liquidity, with the report also stating that 82% of this was held in investable assets, compared with a world average of 60%.
The global transfer of wealth from corporations to individuals is projected to reach new highs in the coming decades. So it is no surprise that the Family Office has emerged as a significant influencer in the private wealth industry, both in terms of structuring trends and fund investment.
The growing number of liquidity events, such as listings in the Saudi market, plays into this abundant and fluid wealth.
To increase “dry powder” reserves (committed, but unallocated capital), some families across the GCC look to listing as a way to generate liquidity for further investment. It can create a war chest for future acquisitions or opportunistic investments.
This helps to ensure sustainability for the family, diversifies investments and reduces the risk of exposure to a single market, region or sector.
The growing need for fiscal sustainability of family wealth requires a strong flow of deals and attractive investment opportunities, as well as a professional investment team. We examine the growing professionalisation of Family Offices in this article.
The lure of private equity
The other area proving increasingly attractive to Family Offices is private equity, where returns outpace public markets. The 2020 Knight Frank Wealth Report and Preqin Annual Report, which examined global investment asset allocation by Family Offices, found that private equity and real estate were clear favourites. And PwC’s Private Equity Trend Report said 73% of private equity firms consider Family Offices as potential investors in their next fund.
Many wealth management reports show that direct investment by Family Offices outside public markets is increasing year on year. Why?
Clearly, Family Offices are adapting to the low yields from bond markets and other traditional investments by diversifying their portfolios, often in sustainable and ethical ways.
Before Covid-19, commercial and residential real estate was an extremely popular asset class for Intertrust Group’s Middle East clients, many of whom were attracted by capital appreciation and solid returns. How this will look once the pandemic is over is a moot point.
Some families, who already have large deployable reserves, have also created Special Purpose Acquisition Companies (SPACs) as sole enterprises or as part of joint ventures as they seek the returns desired over the next 12 to 18 months.
This was already happening pre-pandemic and, given the hype around SPACs and current global listings data, it is a trend we can safely assume will continue.
About Intertrust Group
We have been present in the Middle East for over 20 years, providing world-leading, specialised administration services in more than 30 jurisdictions. Our focus is on bespoke corporate, fund, capital market and private wealth services that enable our clients to grow and thrive.
Our exceptional client service and the ability to navigate the complexities of conducting business in the region has cemented our position as one of the leading service providers. We operate in both the Dubai International Financial Centre (DIFC) and Abu Dhabi Global Market (ADGM), offering a full suite of services in most of the free zones and assisting with mainland entities.
If you wish to discuss your business or personal structuring needs, please contact one of our team. We can help with everything from simple company administration matters, information about SPACs and assistance with an Initial Public Offering SPA, to wealth structuring matters or family governance.
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