Strong corporate returns are driving the flow of year-on-year capital within family offices in the Gulf Cooperation Council (GCC) from personal assets to corporate (family business) assets, the third annual Invesco Middle East Asset Management Study said Monday. The study said two fifths (40 percent) of family office interviews cited a strong shift from personal to corporate assets, and over a third (34 percent) more respondents thought capital was flowing toward corporates than to personal assets. The study found core factors driving capital flow to corporates are the need for corporate funding (27 percent), the attraction of corporate returns (16 percent) and corporate opportunities (4 percent). In contrast, the flow from corporate to personal assets is in large driven by succession planning (18 percent), diversification (9 percent) and stock market returns (9 percent). The shift to corporate assets and the role of family businesses is most apparent amongst single-family offices (SFOs), according to the study, who manage the wealth and assets of a single family, rather than multi-family offices (MFOs). Interestingly, net flow from personal to corporate is significantly higher for SFOs compared to MFOs, with funding (25 percent), corporate returns (19 percent) and corporate opportunities (13 percent) appearing as the key drivers of personal and corporate capital flow. In contrast, succession planning (25 percent), funding (20 percent) and corporate returns (15 percent) are the main drivers within MFOs. These key variations reflect the importance of personal versus corporate needs and highlights key differences in business models between the two. Nick Tolchard, Head of Invesco Middle East, said: "These results imply long-term requirements to segregate personal and corporate assets (for such things as succession planning or diversification) are outweighed by the ongoing short-term priorities around business funding requirements and potential returns. In essence, the opportunity for ultra high net worth individuals (UHNWI's) to participate in double digit corporate returns (rather than seek expensive bank financing or dilute shareholdings) is currently too attractive to turn down." The current business environment in the GCC also helps further unravel the reasons behind this capital flow trend. "Family businesses are typically run by well-connected GCC locals with monopoly (or oligopoly) rights within certain industries," the study added. As successful family businesses expand horizontally into new industries, barriers to entry can be high, resulting in attractive profit margins and corporate returns on capital. These corporate returns are higher than those available on personal investments, and can thus act as a disincentive to the transfer of corporate wealth into personal accounts. In a more general sense, many family businesses looking to export their core business lines across borders into adjacent GCC regions can find this difficult due to equivalent family businesses having the same protected advantage. Therefore, where business expansion has been successful, it has typically involved entry into larger but less protected markets within MENA (ex-GCC) or in India, the study said. Similarly, private ownership (family businesses) also present challenges for local asset managers and private equity firms. For local asset managers, local stock markets do not reflect underlying local profits and growth prospects, while local private equity firms can experience difficulties sourcing investment or exit opportunities due to the reluctance of family businesses to cede control or dilute their shareholdings.
