A Banker’s Primer to Saudi Arabian Family Offices

A Banker’s Primer

 

  • Major global banks have established a presence in the Kingdom, only a few years ago, though with an almost exclusive focus on corporate and private banking.
  • The predominant banking business model involves a partnership between a local bank with an International partner, where critical areas such as risk and asset management are under the purview of International partner.
  • At the apex of the wealthy client pyramid are Family Offices, vehicles established to formally manage the day-to-day investment affairs of the richest families.
  • There are several type of family offices in Saudi Arabia, and they are constantly evolving due to the influence of the Western world.

The Kingdom of Saudi Arabia was never a banking hub for the GCC in the tradition of Bahrain, and later Dubai. That is, foreign banks were never historically established in Riyadh, Jeddah and Dammam with active mandates in servicing the local economy or with the intent to be utilized as a springboard for access to other nations in the GCC. Instead, the commercial linkages between the seat of Islam’s holiest sites and the rest of the world were first based on the general trade in goods, and later—the defining moment in the nation’s history—the discovery of crude oil occurred in the early twentieth century. In the wake of oil’s discovery was the founding of the energy behemoth Saudi Aramco (the Saudi Arabian Oil Company), having begun operations in 1933 as the California-Arabian Standard Oil Company.  With the technological advances and labor-intensive expertise required to extract and manage the world’s most precious tradable commodity came legions of skilled workers from the United States and other nations, critical in establishing what was once considered the consummate American outpost in the Middle East.

The Aramco camps in Eastern province were akin to transplanted Midwestern US cities.  Based on this model in the utilization of crude oil and the reliance on its financial dividends for economic development and later growth, no absolute national consensus was ever formulated on the internationalization and broad-based opening of the Kingdom’s market to foreign banks with the aim of establishing bricks-and-mortar presence.  It is only in the last several years that a few of major global banks established a presence in the Kingdom, with an almost exclusive focus on corporate and private banking.

Historically, the predominant banking business model in Saudi Arabia has been for local banks to include a non-Saudi partner institution, typically with a stake of 40 percent. Critical areas of bank management, including, heads of finance, risk management, asset management—just to name a few—were within the purview of the banking partner by contract. Over time, wealthy Saudi clients have become accustomed to dealing with their local banks for corporate loans and regional brokerage and investment services. When it comes to sophisticated investments, packaged as funds for example, the reliance continues to be on US and European private banks—many of which have been reliant on the “briefcase banker” approach. This entails flying bankers to the Kingdom for a few days of marathon one-on-one client meetings to introduce a product and collect a tidy sum of money—with the hope that the fees generated from client investments will ultimately cover the banker’s costs.

At the apex of the wealthy client pyramid are Family Offices, vehicles established to formally manage the day-to-day investment affairs of the richest families. In Saudi Arabia there are several types of these entities and it is worth our while to outline them.

The Mega Family Office:

The minute a foreign banker lands at an airport in the Kingdom, these family offices are the first few stops to make as they represent the wealthiest fifty families in the Kingdom. By their very nature, they were established decades ago and have highly sophisticated departmental structures, for example splitting managerial investment functions among Equity, Fixed Income and Private Equity teams. There is a formal investment committee process in which new proposals are discussed on voted on and IT expenditure to support detailed reports and investment analysis are standard. In a few cases, these billionaire families have offices in Dubai, Europe (primarily London and Geneva) and the US to complement their Saudi presence. The logic behind this is approach is to remain closer to their investments abroad while vetting ideas from the source. But also from a practical standpoint, many senior investment staff members are precluded from leaving their families due to personal obligations in their home countries.

Multi-Generational Office:

This structure supports various owners from many branches of the family. In the Kingdom Due to the participants in this office structure, the internal challenge is to accommodate various points of view regarding investments (type, time horizon and risk). These types of offices at times allow other families, generally maternal relatives, to participate while functioning as a multi-family office to increase the purchasing power of the owning family group. In effect, multi-generational offices reflect the current state of Saudi Arabian family businesses with young sons and daughters, typically freshly minted university graduates, being brought into the family business in the hope of an inter-generational succession proceeding smoothly one day.

The Corporate Group:

This type of entity supports the shareholders of operating business. The primary role is to maintain business control through effective wealth transfer, providing strategies for internal stock transactions among shareholders or leverage as needed to generate liquidity for owners. The office also supports owners’ financial needs for income, diversification of assets, and risk management.   A head of finance for these groups will typically handle both the company’s day-to-day affairs as well as individual investment management for the Chairman and associated family members.

The Single Provider Office:

In the last few years, some families have decided to stop granting bankers calling for an appointment to hold sales meetings, as a matter of policy. Instead, they have relied on an internal staff member to vet various product providers and settle on a single institution to manage the office’s affairs. It then becomes the mandate of the bank advisory professional handling the relationship to suggest investments from third party banks or investment houses. This “gatekeeper” approach has a major benefit for the families involved as there is a simplification of the process and reporting is handled by the hired bank, an ostensible cost savings.

Philanthropy/Foundation Office:

The Kingdom has an immense number of philanthropic institutions that families have established apart for their corporate alms-giving that is compulsory in Islam. Many of these offices are distinct from the family’s investment arm and, as would be expected, their investment universe is typically more limited. When it comes to the plethora of foundations which dot the Arabian landscape, the majority that bankers deal with are affiliated with religious or university funds. Bankers visiting Saudi Arabia are frequently surprised by the risk-return profile of these investors, with many delving into products that are far more esoteric than one would expect. Of course Sharia-compliance remains of paramount importance.

The Royal Family Office:

The trend today within these offices is launching new businesses and offering value-added projects for the benefit of Saudi society. Most of the initiatives undertaken by these investors will target a particular rate of return on a project or a feeder fund to a project, instead of seeking an income-generating fund investment—for example. The due diligence on the banker at the beginning of an introductory meeting is critical and being asked for a return visit is not assured. Knowledge of local market deal flow is key in these relationships.

The evolution of the family office unit, much like business itself, relies on constant change. There are trends in Europe and the US that are having an impact both on the vision and operational aspects of establishing, managing and growing a family office. Despite the influence of corporate practices and financial institutions on the most sophisticated investors in the Kingdom, most of them continue to hold sacred one slogan: “Made in Saudi Arabia.”

 

[1] (Source:  https://www.familyoffice.com/understanding-family-office/types-family-offices)

 

The article is written by Ragheed Moghrabi for Arab Business Review

To read more thought-leadership stuff by leaders from Arab Region, please visit Arab Business Review

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