The decline of the oil price and the subsequent drying out of liquidity, the slowdown of China and the volatility of the global equity markets were some of the main themes of 2015. High-net-worth individuals (HNWIs) from the GCC and Southeast Asia derive their wealth mainly from family-owned businesses and are directly affected by these issues. They have been taking measures to counter existing market risks and are actively structuring their family wealth, by establishing family offices, foundations, trusts or investment funds. BISHR SHIBLAQ scrutinizes the family offices landscape.
Review of 2015
A clear trend in 2015 was the diversification of HNWIs by investing more broadly and becoming less affected by local economic conditions and the regional geopolitical situation. According to the GCC Wealth Insight Report 2015, only 33% of HNWIs in the GCC were affected by local economic conditions and only 24% by the geopolitical situation in the Middle East. This is quite a change from 2014 where 43% were affected by local economic conditions and 46% by the regional geopolitical situation. Almost a quarter of HNWIs were hesitant to make new investments in the Middle East due to the political instability.
It is interesting to note that according to the same report, 72% of HNWIs in the GCC consider it either very important (53%) or somewhat important (19%) that their banking and investment decisions are Shariah compliant, but that only 18% of their transactions in 2015 were Shariah compliant. The lack of availability of products in their home countries is of course one reason, but it is crucial tonote that these products and Shariah compliant structures are often not available when investing on a cross-border basis.
A further trend was the creation of more family offices in the Middle East and Southeast Asia, taking a more institutional approach to investing and to risk management. Family offices have become more structured in their approach, with clearer reporting lines, hiring internal advisors and legal counsels, establishing procedures and controls and introducing more regulations. Organizations that grew out of a sucessful family business are becoming increasingly sophisticated wealth and investment managers that are investing on a cross-border basis, competing with established wealth managers, and starting to attract other families for co-investments.
Some family offices have established themselves in well-regulated jurisdictions, such as London or the Dubai International Financial Center while others have chosen to structure their family assets in investment funds in fund domiciles such as Luxembourg or establish trusts in the Channel Islands. There are internal and external drivers that have caused these changes. Internally, the families try to structure their wealth and ensure that succession planning is in place. Externally, there is an increased amount of global regulations making professional structures indispensable.
Preview of 2016
If we look at next year, than it already appears that the oil price will not recover that quickly and that government spending will subsequently be cut further, putting additional strain on liquidity for family-owned businesses. Family offices are already underway to diversify their investments and are considering alternative strategies to minimize their risk exposure. As emerging markets are becoming less profitable and the real estate market is digesting oversupply in the GCC, family offices are starting to look abroad. Islamic investors may try to diversify from their home countries and look to invest increasingly into politically and economically stable regions, even if they have to accept lower yields.
The issue of Iran will be an important factor for the development in 2016. There are many questions to be answered, but many investors are gearing up to invest in Iran and to be the first to enter the market. The lifting of US secondary sanctions will allow regional businesses to enter into transactions with Iran. We might also see an increasing amount of Iranian wealth being deployed in financial centers active in Islamic finance such as Dubai, Kuala Lumpur, London or Luxembourg. According to a report of the Organization of Islamic Cooperation Iranian banks accounted for 40% of the global Islamic banking assets in 2014, ahead of Saudi Arabia with 18.5%. This already indicates the wealth that is waiting to be unlocked.
2016 will be an exciting year and we can expect many changes. Shariah compliant family offices seem to already have positioned themselves strongly to navigate through a difficult market; the question is whether they are dynamic enough to adapt to a changing Islamic economy. The development of the oil price, the opening of the Iranian market or the liberalization of the Saudi market are challenges, but also great opportunities for HNWIs. There also seems to be a strong potential for the development of new Shariah compliant products, as the availability of products seems to be far below the demand of those HNWIs who consider Shariah compliant investments to be very important.