Gulf states experience growing pains as region transforms

Family dynamics remain one of the biggest influencing factors in the economies of the Arab Gulf states. Not only are the majority of businesses family owned, but the countries themselves are largely kingdoms controlled by royal dynasties.

Both business and political systems share the same challenges, regarding modernisation, succession planning and different attitudes of the generations to investment, ethics and geopolitics.

Despite the increasing focus under which the region finds itself under globally, now is not the time for breakneck expansion, but rather for caution, believes Sheikh Hussein Al Banawi, CEO of the Industrial Group, a Gulf-based manufacturing firm specialising in packaging and food flavours for Middle Eastern, African and Indian sub-continental markets.

Sheikh Al Banawi has been involved in the business through the 1970s oil crisis, two Gulf Wars and the Dubai debt crisis of 2009, which left the emirate’s bustling port perilously close to collapse, yet he believes the most challenging operating environment he has experienced is that of today.

“The last two years for me have been more challenging than either the 1970s or the global financial crisis,” admits Sheikh Al Banawi. “The region is not only going through a slow period as far as the economy is concerned,” he adds, “but there is still an element of turmoil from the corporate point of view and on the consumer side, whick makes planning and resource allocation difficult.”

This sentiment has left firms such as the Industrial Group extremely cautious about embarking on capital projects and future growth plans. 

Structural weakness

Visitors to the apparently thriving metropolis of Dubai can be distracted by the pace of construction and infrastructure development, losing sight of structural weaknesses apparent in the region’s underlying economies, stresses Sheikh Al Banawi, speaking at his offices in Dubai International Financial Centre (DIFC), on the eve of the FT Family Business Summit, held at the Palazzo Versace hotel, on the fast-developing shores of the Creek.

His firm is treading carefully into new territorial markets, including Africa and the Indian sub-continent, where he will consider so-called “toll manufacturing” or outsourcing, rather than the ultimate ownership of plants and machinery on which the  business has been based to date.

Most decisions on the direction of such firms are influenced by the families that own them. In the case of the Industrial Group, an independent management has been answerable to a Saudi-based ownership board since the early 1980s. “Typically, decisions go through a deliberation process of what defines our core business and where we want to be,” says Sheikh Al Banawi. 

Many Middle Eastern family firms have, he believes, failed to define their core offering, or have strayed into too many sectors in an effort to please different family members, leading to problems in selling up a diverse business when it comes to divestment.

“Some family businesses in the region are way over-diversified,” he says. “When the next generation takes over, very few businesses will look the same as they do today. You need to define your core business, stick to it, be very good at it and create a competitive advantage.”

He says he has discussed succession planning “time and time again” with colleagues both inside and outside the family. “You have to ask: is succession outside the family a possibility? This can be a sensitive topic, but you do need the process of succession at the top to at least maintain the achievements and accomplishments of the past, in the hope that this will lead the company forward.”

The absence of a smooth succession plan can lead to a dangerous vacuum in terms of both family leadership and business strategy. The Gulf region, he believes, faces very similar challenges to the family run businesses which have helped it thrive and put it on the world map. 

“We are a region that has tried to make the best of our oil wealth and tried to take the quantum leap to catch up with a world that started off the transformation way ahead of us,” he says diplomatically, addressing particular challenges in education, medical services, human capital and infrastructure. 

Key to nation building, he says, is the passing of power to the next generation. “The decision-making process is similar to corporate governance,” says Sheikh Al Banawi, with a leadership which must accustom itself to the ambitions of the next generation.

“Clearly a younger generation is looking forward to a young leadership,” promising an era of change, rather than the status quo, he says, referring in particular to the transfer of power in Saudi Arabia, whose Crown Prince Mohammed bin Salman has been making waves with state visits to the US, France and the UK.

The biggest risk for the region and its family businesses is if this change happens too quickly for its inhabitants to comprehend. “How do we manage it? National leaders need to create an environment in which we can survive and thrive.”

Much of this policy will involve maintaining diversity, while managing expectations of local youth in the face of demands from populist voices calling for localisation of labour.

“The region is home to 50m people, but there are more nationalities here than any other similar landmass in the world, which sends an extraordinarily powerful message,” says Sheikh Al Banawi. “We, as a Gulf region, are not yet ready to do without diversity of our human capital.”

Among these various nationalities that have succeeded in managing their businesses from the Gulf, and from Dubai in particular, the Indian diaspora have been particularly prominent.

Rise and fall

Another speaker at the Dubai event, Abhishek Sharma, CEO of Foundation Holdings, a specialist healthcare firm, talks about how his family moved to the emirate in the 1990s from India in search of a better standard of living.

“By 2008, this had become a magical place, a bustling city with oil at $130 a barrel. But six months later, the music stopped and the world collapsed,” recalls Mr Sharma, a graduate of the University of Pennsylvania, who worked for US private equity firms, before joining the family business.

Key to his success after this crisis has been co-operation with other local businesses, including the Belhoul family conglomerate. Both worked on the listing of the Al Noor Hospitals in London in 2013.

“We are entering a golden age of healthcare,” believes Mr Sharma. “The cutting edge of technology and biotechnology are today combining,” he says. Much of the investment in this sector, as well as education, will come from these arrangements of family offices working together and managing co-investments, he says, recalling how there was just one major listed healthcare business in the Gulf in 2017, with hospitals today enjoying a $12bn market capitalisation in the region. Gulf-based families have also backed some of the 25 IPOs of healthcare companies in India.

“Family offices are looking where to invest with low risk for high returns and they are finding healthcare and education can bring these results,” he says. These sectors will eventually constitute their own asset classes, he believes, in the same way as real estate holdings by families today match those in equities and fixed income.

“All the family offices we talk to have a huge thirst for these sectors,” adds Mr Sharma. “CIOs seek risk-adjusted, above market returns and they find these in healthcare.”

Private equity and emerging markets investments in both China and India should also be key parts of any family investment portfolio, he believes. But like many in the family-run Gulf-based investment industry, Mr Sharma increasingly questions the role of banks in wealth management: “What is the value of the private bank today if families can now get research at the touch of a button?”

Banks as bad guys

This anti-bank sentiment among family offices is also detected by Faranak Foroughi, managing director of the Edifice consultancy, which works with wealthy families across the Gulf.

“Banks are seen as being not unbiased. They try to promote their own products and have a high staff turnover,” she says, with families just getting used to dealing with one relationship manager, when their account is suddenly transferred to another.

She also finds huge resistance from banks to external ideas, with bankers spending “90 per cent of their time” trying to get approvals, leading many to leave and start their own investment advisory firms. 

Ms Foroughi is more positive however about the operating environment in Dubai, which has improved significantly since the financial crisis, although she has reservations about rising costs and low occupancy in many of the buildings springing up in the fast expanding DIFC.

Family offices across the region are becoming much more professionally run. Previously, group finance heads were in charge of investment management and would pool assets without any regard to risk analysis or asset allocation, leading to much duplication of investments and mandates.

“But the financial crisis affected a lot of them, as their portfolios had not been properly monitored,” recalls Ms Foroughi, leading them to bring in risk management disciplines. “Large families with more than $1bn in mandates with various banks now have an in-house manager. A level of professionalism has been introduced which did not exist prior to 2007.”

Right across the region, she says, family feuds began to erupt after founders passed on, leading to a major impact on gulf economies. This led to mediation from Dubai’s prime minister, Sheikh Mohammed bin Rashid Al Maktoum, and to the DIFC laying down guidelines to promote family governance and protocols around succession planning to avoid conflict. 

Yet the handover of power to the younger generation remains a slow one, adds Ms Foroughi. “As long as founders or elders are still the main decision makers, it is difficult to involve the next generation more pro-actively,” she says. “They train them, but do not give them too much power. The founder still has the final decision and can override them.”

Among the major differences between these generations is the central asset allocation philosophy, with the older generation still opting for a balance of traditional securities and bonds.

“The younger ones don’t want that,” she says. “They prefer venture capital, strategic and direct investments, which require a different set of skills. You need people from a private equity background to understand where the opportunities lie, especially as more and more funds are being allocated to this sector rather than to traditional portfolios.”

Financial hub

Foundation Holdings’ Mr Sharma also has few reservations about Dubai’s value as a financial centre, acting as a hub for the Middle East and springboard for investment into Africa. “Dubai has a fabulous airline [Emirates] and geographical position which is becoming the epicentre of emerging markets, from China to Africa,” enthuses Mr Sharma. 

“From investors’ perspectives, they want a centre giving them trust, transparency and stability, without regulations changing every day.

“Both the ADGM [Abu Dhabi Global Market] and DIFC have leapfrogged their peers into the world’s top 10 financial centres.”

Political and currency stability have also contributed to a country punching above its weight, he says. Saudi Arabia’s recent high profile, reflected by the Crown Prince’s reforms and visits to foreign leaders, have left the Gulf in the global spotlight, he believes.

“The whole region is now considered the biggest global opportunity to invest in,” says Mr Sharma. “Everyone wants to know how to get their money invested. The Gulf is no longer a backwater.”