How are family businesses in the Middle East reacting to the global credit crunch?
My experience with families is that these are some of the finest, most astute investors, whose wealth is typically engaged in direct investments in their enterprises or diversified into similar activities through private equity participation. In terms of the events we are going through at the moment, I think that everyone is looking very carefully at the structures that they have in place.
The model of investing with ôa friendö, and IÆm sure some of the historical wealth in the Middle East was invested in this way, is old tech. The amounts of money invested in this way could run to hundreds of millions of US dollars with someone placing some of that money in Western financial institutions. What weÆre doing is bringing modern solutions to the table.
When we come out of the current situation, it's private industry, private capital and the mobility of that capital that will make the economy work. Middle Eastern families have always been entrepreneurs in the sense that for years the West devoured their resources, but now the boot is on the other foot.
Current issues facing family businesses include how to attract talent, management succession and public listings. Are these relevant issues in the Middle East?
To date, there simply hasnÆt been a set of solutions for wealthy Middle Eastern families. Over 90% of all businesses in the Gulf Cooperation Council (GCC) states are family owned, an enormous amount compared to 60% globally. We [the DIFC] have a mandate to create and separate family activities from enterprises, something that has been happening in Hong Kong and the West for generations, but has simply neither been possible nor been protocol in the Middle East.
In the worldÆs first single family office legislation, we define single family offices as having a common ancestry relationship and meeting a three generation test. The DIFC has provided the infrastructure to enable laws and regulations to come into place so that the service providers û lawyers, accountants, bank managers û can create solutions for family businesses.
Within the region, family business management succession is a real issue. If you have limited international exposure and you want to IPO, you need to address issues of corporate governance. Many Middle Eastern families have a small knowledge base for how to make a home-grown company attractive to international investors. We have created the infrastructure to enable the legal entities to come up with these solutions.
In the first round of the subprime crisis we saw Middle Eastern investors going in to support Western financial institutions. In the latest round of capital injections, the Middle East has been absent. Can you explain why that is?
I really think that GCC money is among the most stable and long-term money in the market. We heard this when Dubai invested in P&O, now Dubai Ports World, their diversification was mostly into enterprise and industries that they see as strategic and long-term. At this time, I donÆt think they are going to overweight their participation in any one or other sector. What I do foresee in the next period, is some very careful analytics going on. Looking ahead, we will find that the sovereign wealth funds will become some significant investors.
Speaking of sovereign wealth funds, how did Middle Eastern investors react to the recent political opposition in the US to DP WorldÆs port facilities acquisition?
I can tell you, having sat with the leadership, that they are quite cool. These are very long-term-gain-minded investment decisions and Dubai continues to acquire significant assets in the US. As my boss said, ôWe are quick learnersö. I think in many ways Dubai had not been in that space before but they learned very quickly about the art of lobbying and have continued to amass significant other assets in the US, Europe and Asia.
At the same time, Dubai has been investing enormously in China and India. You may be aware that Dubai is one of the largest shareholders at the new port in Tianjin. Dubai will continue to diversify into assets as they take the long view. When you donÆt have oil, which is exactly DubaiÆs status, you absolutely must diversify.
Middle Eastern markets have been doing quite poorly over the past few weeks. Can you comment on this?
My own view on the markets in the Middle East is that they are relatively thin. The markets have relatively few stocks, compared to other markets around the world, and have always been volatile. There is very little institutional participation. When you get that, you get a more stable market.
Dubai is quite typically a Middle Eastern market. Dubai financial markets have probably a small number of very large companies that dominate those markets and any movement by those particular stocks can have a very dramatic effect on the entire market. What we have created is the DIFX [Dubai International Financial Exchange] which is our own global financial exchange. Nasdaq and DIFX have formed the Bourse Dubai to step into the international financial community. I feel that we are improving the standard.
While the markets have seen significant negative movement they are still way up, I donÆt know the percentages, from where they were two or three years ago.
As the credit crunch continues, what is the general outlook for investors and family businesses in the Middle East?
As we speak, we are at a point of transition. Traditionally, investors have had a very high pain threshold; they have been true entrepreneurs in terms of their investment appetite. I think we are now going into a period of great uncertainty. I think we will find, not just in the Middle East but around the world, that people are looking very carefully at their positions. I think we are going into a period of wait and see. People in the Middle East wonÆt be running scared; they are waiting and marking their time.
The traditional world has been very much driven by the West, that is to say the OECD model of tax treaties and taxation in money centres around the world. I think weÆre seeing the beginnings of a transition into the BRIC economic powerhouses. WeÆre seeing projects in BRIC economies and the Middle East come from absolutely nowhere. Massive balances are being repatriated west to east. Here in Hong Kong, arguably one of the most sophisticated economies in the world, families are the driving force. Families in the Middle East have 90% of the equity and families will be investing and creating employment. What we are doing is going back to basics.
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