Share |

Middle East – moving into the fast lane

Scott Mcculloch is editor of Families in Business.

Ahead of our Middle East Families in Business conference on ­6th April we ask whether family business in the Middle East must reform if they are to survive in a global economy. Leading business figures in the region think so. By Scott McCulloch

Do private equity investors find family businesses attractive and what are they really looking for?

Last year, Samir Al Ansari, chief executive of Dubai International, Capital made a curious statement about the state of family businesses in the Middle East. He said: "The majority of family businesses are still run as family businesses. There is no transparency, there are no proper accounting standards, and there is no corporate governance. These family businesses will not survive."

Family businesses in the Middle East are said to control 90% of economic activity compared with 70% outside the region. Throughout the Middle East family held companies dominate the private sector. The majority of these enterprises, as in most developing economies, are young emerging small- and medium-size companies.
 
Although Middle Eastern economies have a higher concentration of family business than their Western counterparts, they share similar problems. One common area is life expectancy: Middle Eastern family businesses have an average lifespan of just 23 years, according to Douglas Dowie, general manager of the National Bank of Dubai. More chilling is the survival rate figures of post-founder generation enterprises. Only 6% survive to the third generation and fewer than 2% survive in Saudi Arabia, says Amin Nasser, a partner at PricewaterhouseCoopers. Fortunately, he adds, many Middle Eastern family businesses are "extremely well run" and profitable. But times are changing in the Middle East as established family businesses, which generate billions of dollars in revenue, realise their practice must change to survive in an increasingly competitive environment.
 
Family-owned businesses must face up to external pressures in the future, namely the dismantling of protectionist policies. Analysts believe that unless corporate governance structures are put in place the region will see a rise in the number of business failures. External pressures are already lowering trade barriers for certain countries ahead of their entry into the World Trade Organization.
 
The Olayan Group, a leading diversified Saudi enterprise comprising 50 companies, has long since structured itself to go with the tide of the WTO, according to company chairman Khaled Olayan. Olayan is sceptical on the subject of why some companies feel the need to go public to protect the future generation. He believes safeguarding future generations comes down to a company's structure.
 
Yet it is easy to see why some family business owners may be considering IPOs. The advent of the Dubai International Financial Centre, the Middle East's first onshore capital market, is a testament of rising levels of wealth flowing into the region, as well as increasing demand for sophisticated financial services. And capital inflows inevitably bring in more competition. Designated as a "financial free zone" to create a unique financial services cluster economy for wealth creation initiatives, DIFC is just four years old and is the brainchild of Sheikh Mohammed Bin Rashid Al Maktoum and the Dubai government to create an environment of economic growth in the UAE and the wider region.

Consider Saudi Arabia. If the top ten family businesses in Saudi Arabia were to list, they would inject at least $50 billion into the Saudi stock market, according to Basil al-Ghalayani of the Jeddah-based BMG financial advisory group. Nevertheless, while some family businesses are interested in going public, others are deeply reluctant.
 
The combined forces of free trade and improved corporate governance, are underlining the need for change. Faranak Foroughi, head of private banking at the National Bank of Dubai, believes there is room for improvement in the level of transparency of accounting practices in Middle Eastern family businesses.
 
Although Foroughi believes it crucial to develop a succession policy as part of a long-term strategy, family members should "feel a sense of pride" and should not be forced to remain in the business if they are not interested.

Taking a company public was one option for securing funding and succession, but was not without its pitfalls, according to Naguib Sawiris, chairman of Egypt's Orascom Telecom. An opponent of the listing process, Sawiris says if you can avoid it then do so. He believes his decision to float Orascom reduced his freedom of action in running his company. "A lot of shareholders are short-termist and don't understand the value you are building long term, " he told Gulf News in a report last year.
 
Family-owned companies in oil-rich Saudi Arabia should go public to ensure growth and avoid bitter succession disputes, says Fahad al-Sultan, secretary general of the Saudi Chambers of Commerce and Industry. Sultan began urging family firms to set up during the oil boom of the 1970s. He believes there is a need to move such companies towards an "institutional and objective manner of management" – in other words they should tighten their corporate governance.
 
A staggering 95% of companies in Saudi Arabia are family owned, 45 of which are in the top 100. Meanwhile, Saudi firms have been reporting massive profits on the back of the oil-driven boom. According to Sultan, 70% of Saudi Arabia's family businesses are still run by first generation charismatic leaders. Although they drive their companies to profitability through unbridled gumption, he believes it hardly a model for good long-term corporate governance.
 
Succession planning for wealthy families in the Middle East has often been complicated by cultural and religious constraints that rule out many traditional techniques. However, changes in the investment rules in the region can now help ensure the continuity of family businesses after the founder's death. While oil has been the primary source of wealth for the Middle East throughout the second half of the 20th century, entrepreneurial families there have amassed large fortunes in associated economic sectors.
 
Analysts say families have been reluctant to go public, as they want to keep control of their companies and avoid exposing their operations to outsiders, as required by disclosure rules. Sultan concedes the Saudi process of going public is convoluted, but sooner or later they will have to make a leap to the stock market.

Meanwhile, the wealth that has been created within the Middle East's leading family enterprises has led to considerable overseas investment, both as a hedge against local political instability and because of the improved investment returns perceived to be available in the US and Europe.

Click here >>
Close