Family offices: managing the fortune of wealthy dynasties

Family office is a private investment arm of wealth families. When family office manages the wealth of single family it is known as Single Family Office (SFO) and when it manages the wealth of many families it is called multi-family office. Family office manages every task related to the wealth of family from accounting to succession planning, investing and philanthropy management

Establishing SFO is very expensive. In order to justify cost your family need to have at least half a billion dollars. The wealthier a family is the more cost effective it is to have a SFO.

If a family doesn’t own enormous wealth to justify having SFO than a family can have Multi-Family Office (MFO). MFOs can provide services to those families whose net worth is in the range of 100 million dollars to 500 million dollars. MFOs are charged with the same responsibilities, as taken over by SFO. The difference lies in the number of families, served by the family office. SFO serve single family while multifamily offices serve a number of families.

The rise in popularity of family offices against the alternatives can be attributed to a number of reasons. The triggering event of this rise was global meltdown in 2008. Wealthy families, heirs of wealthy dynasties, watched, helplessly, their fortunes being destroyed by the meltdown. The families felt cheated by asset managers, wealth managers and others large institutions for losing their fortune without going themselves into bankruptcy. Banks, for instance, were saved from bankruptcy during the crisis. Families who were invested in large funds and other big institutions watched their entire fortune being wiped away without being able to take out their investments owing to, for example, gates in case of hedge funds.

Feeling cheated, these wealthy families now wanted to take control of their wealth. In order to take control of their wealth they created another type of financial institution, Family office. The impact of rise of these institutions was felt by many in the industry of asset management. As their competitors, family offices invest in much different way than did the alternative institutions. Take for instance the time horizon considered in case of investments. As investors, they have far longer time frames than private equity houses or venture capitalists. Often the long range investment means that there is no exit strategy planned at the time of investment by FO.

Benefits from family office accrue to both parties, one owning the family office and the other receiving investment form these family investment’s arms.

The benefits accrued to wealthy families far outnumber than the benefits to the investees. These include control of wealth, flexibility in investing, and privacy.

The major benefit is control over your family wealth, has been discussed in preceding paragraphs.

The family office helps not only to take complete control of your wealth management but also provides flexibility in investing. The choice of investments can vary widely from real estate investments to investment in start-ups. The increased tolerance for risk taking, when the returns justify, is the edge over other institutions. Now families can invest in those areas where there is more return.

Another benefit to the families is privacy. The privacy afforded by Family Offices can’t be provided by conventional wealth management institutions.

The benefits to the investee firms and companies include the long time period of investment, and the increased risk tolerance.

Owning to long time period investments by family offices, they are given preference by nascent companies over private equity houses.

"With a family office you don't have a time horizon. We like the long-term focus. It's great to have an investor who doesn't view going public as an exit opportunity, but rather a chance to buy more stock," said Pere Valles, Chief Executive of Spanish electoraltechnology company Scytl.

The increased risk tolerance means much more to start ups than to other types of investee entities. The increased trend in investing in technology related companies has added another dimension to the investment.  Generally technology companies don’t have tangible assets, to use them as pledge for arranging loan from bank. Many Family offices are betting on technology, stepping in where venture capital and banks are reluctant to tread.

Another benefit is that those who successfully receive old wealth, for their start-up, need not spend their time searching for new investors hence finding more time to focus on their business.

Related links
Single family office
Multi-family office
Blommber's family office report
Hedge funds close the gate

Tribes in the Arab world and politics

Tribe is social group based on kinship. Members are related to one another through blood relationship.

Tribal ‘asabiyya’

According to Ibn Khaldun ‘Asabiyya’ is the reason of royal authority. ‘Asabiyya’ is Ibn Khaldun’s terminology for ‘Group feeling’ or ‘Group cohesion’. According to his theory the more ‘assabiyya’ a group or tribe possesses the more they will be able to overpower others and thus acquire royal authority.

According to this theory tribes/ groups living in rural areas are more likely to acquire ‘assabiyya’ over the course of time while the city dwellers will lose ‘asabiyya’.

Tribal Rivalry

If inter-tribal tension is generated, it is very difficult to subdue it. This tribal rivalry can run for centuries. This inter-tribe rivalry helps promote ‘assabiyya’ within the tribe. The most important societies in today’s world that are tribal based are located in Arab countries.

The most important tribe in the Muslim world is the tribe of Quraish. Qusayy bin Kilab, member of Quraish tribe and ancestor of the Holy Prophet (upon whom be Allah's peace), founded a city state in Makah and made excellent arrangements for the welfare of the pilgrims coming from all over Arabia, with the result that the Quraish were able to gain great influence among the Arabian tribes and lands. Later on tribal rivalry between two branches, Banu Hashim and Banu Umayyad, of Quraish emerged.

The fierce sectarian schism among Muslims can be attributed to the tribal rivalry, between these two branches of Quraish. This rivalry has outlived many centuries. Later on this rivalry translated itself into sectarian tension.

Use of tribal kinship in acquiring and maintaining political power

The growth of tribe is independent of state. When tribal chief of one tribe marries lady from another tribe; it creates an alliance with that other tribe. In ancient tribal society when polygamy was common this was a perfect way to acquire political power.

The present Arab royals became kings through cementing ties with other tribes through marriages. King Abdul Aziz of Saudi Arabia, for instance, married many women in order to secure alliances with other tribes. As tribal chief these royals have political authority over whole tribe.

If the tribe is scattered in different countries then the chief can have tribal influence beyond his territory. Qatari emir, for example, has tried to grab the leadership of Banu Tamim tribe, as he is member of Al Thani family which is sub-tribe of Banu Tamim tribe. People of Banu Tamim tribe are scattered in many countries including Saudi Arabia, Iraq, and Qatar etc. In this way the emir tried to acquire influence beyond his territorial borders.

Another way of consolidating political power is to appoint tribal members and members of ally tribes to politically important posts. In the times of weak state authority tribal rivalry and tribal alliances, which are centuries old starts rising. As tribal institution is older than state in Arabian Peninsula, the state needs support from tribes for its structure. ‘Saudi Arabian National Guards’ is one example of dependence of state on tribal affiliations.

The ‘Saudi Arabian National guards’ are structured on tribal lines. Members from different tribes loyal to House of Saud have been recruited in ‘Saudi Arabian National Guards’. This institution helped ‘house of Saud’ to maintain its political power through uniting their tribal allies.

Some instances of tribal influence

Anazah tribe is the largest and most ancient tribe in the Arab world. The `Anazah’ have from an early date adamantly claimed the Al Saud family to be one of their own, probably because ‘Al Saud’ claimed ancestry from Wa'il, and many members of Al Saud claim descent from a branch of `Anazah’.

The ruling dynasties of Kuwait and Bahrain belong to Anazah tribe of central Arabia. Hence royal families of Kuwait, Saudi Arabia and Bahrain are distant cousins of each other. When Al Rashid ousted Al Saud family they took refuge in Kuwait. This was reciprocated by Saudi monarch a century later. When Saddam Hussain conquered Kuwait the ruling Al Sabah family was offered sanctuary in Saudi Arabia.

Although religion takes central place in life of many Arab people, as a result, shia-sunni divide is fierce in the region but tribal connections can often outweigh the importance of this divide. Common ancestry, geography and strict social code that demands allegiance between members, are the factors that binds the tribe.

Elections, when they take place, people cast votes for the candidates from their tribe. These people take pride in casting votes to their tribal chief, member from ally tribe or candidate supported by their clan chief rather than casting their votes on the basis of ideology.

Conclusion

Tribes are the most important social unit in the Arab world as tribes possesses ‘asabiyya’ more than any other social group. The sectarian and religious groups haven’t developed ‘asabiyya’ to the level at which they can counter the influence of tribes. Democracy is only successful in those areas where individuality is emphasized rather than collectivism. Unlike western society, the societies in the Arab countries are collectivistic as against individualistic, and this is the reason of failure of election, in many Arab countries, to bring meaningful democracy. The society needs to evolve in order to enjoy sustainable democracy. The urban life will help tribal ‘asabiyya’ to evaporate and only then election will be meaningful.

Growing importance of Sovereign Wealth Funds (SWFs)

Surplus wealth of many oil rich countries is managed by SWFs

Sovereign Wealth Fund (SWF) is state owned pool of money invested in various financial assets.  This investment fund is established by current or capital balance of payment surplus and budget surplus. Sovereign wealth funds can be distinguished from foreign exchange reserves. Sovereign wealth funds aim to maximize long-term returns while foreign exchange reserves promote short term currency stability. Recent years has seen a rapid rise in number of sovereign wealth funds. Rise in oil and gas prices led this rapid surge.

The primary purpose of SWF is to diversify economy and generate wealth for future generations.

Sovereign wealth funds invest in various financial assets

SWFs can be categorized in two types depending upon their financing.

1.       Commodity

2.       Non commodity

Commodity funds are those financed by commodity exports, the most common of which is oil export. This type of fund is usually set up by those economies that are dependent on single commodity exports. When the price of commodity in international market rises the exporting nation will see greater surplus. Conversely when export driven economy sees the fall in commodity price it faces a huge current account deficit. Therefore a sovereign wealth fund is established to stabilize the economy by diversifying the country’s wealth in other industries.

Non commodity funds are those financed through surplus foreign currency reserves.

Political motives

Sovereign wealth fund may have political/strategic motives like gaining control of strategic industries for political reasons. Many politicians criticized the investment by SWFs as security risk. On January 15th, 2008 Hillary Clinton said: “We need to have a lot more control over what they [sovereign-wealth funds] do and how they do it.” The huge size of these funds can make an impact on global economy. Some experts claim that all these funds combined to hold 5 trillion dollars in assets in 2012.

Extension of state

These funds can be thought of as extension of state therefore they are not necessarily driven by profit and loss. Hence these funds can act as a tool of Government policy.

As Arab countries faced the problem of food inflation their Governments started to negotiate for land lease through these sovereign wealth funds. This land will be used to produce food which then will be exported back to the investing country. This investment is in fact resource seeking instead of market seeking. Land grabbing by these institutional investors in Africa and Asia has occurred often to the prejudice of local population. Investing in agribusiness helps investors take control of not only producing but also of distributing the produce.

Rice Duck farming

Japanese farmer Takao Furuno is architect of integrated rice duck farming. In this method the rice crop is grown along with duck farming. Duck farming helps control pests and other harmful insects in rice farm.

Duck is useful bird. Its eggs and meat are useful sources of protein. the bird can be used to provide supplemental income for farmers. Another benefit is to produce meat.

Duck’s meat is halal if slaughtered according to Islamic principles. Halal food market has grown to 1.1 trillion dollars in 2013.

 Duck fat contains 35.7% saturates, 50.5 monounsaturates,and 13.7% polyunsaturated fats (containing omega-6 and omega-3 essential oils). This resembles olive oil which contain 75% monounsaturated fats (oleic acid), 13 % saturated fats, and 10% omega-6 linoleic acid and 2% Omega-3 linoleic acid.

Duck meat is also a source of zinc and selenium. Zinc can also boost your immune system while selenium helps your thyroid function properly.

The droppings of ducks can act as a fertilizer. Ducks also churn up water with their feet hence providing oxygen to rice plant roots, thereby boosting growth of the plant. Using this method per acre yield of rice can be increased to two fold.  Furthermore the rice produced using organic method is more wholesome as compared to grown using pesticides. Organically grown rice also fetch high price in the market. 

Popularizing duck rice farming method can help solve food problem as rice provides carbohydrates to human population. Duck and rice farming when combined increase per acreage yield of rice. Using organic method of agriculture can also help reduce damage to ecosystem.

Investment in Dubai realty market

After 2008 Dubai property market learned a lot from the crisis. Laws and regulations were improved. Property transfer fee has been raised to sideline speculators. Escrow account added another layer of security for investors. The payment to developers is released when the developer presents certificate that certain stage in construction has been reached. This ensures safety of investors from delay and cancellation of project.

Dubai night view

These new laws have brought stability to Dubai property market. Property market again bounced back.  According to Dubai land department Indian investors led the realty investors list by investing 18.123 billion dirham during 2014. The total transactions by Indians totaled 7353 during the period.

Pakistani investors were ranked second as they transacted 5079 times amounting to 7.588 billion dirham. These investors included entrepreneurs, professionals, civil and military officials, overseas Pakistanis and other high net worth individuals. Pakistan, according to wealth report 2013, had 415 ultra high net worth individuals. The average wealth of these ultra high net worth individuals was 120.5 million dollars. After economic recovery in 2014, number of super rich may have gone up.

British investment came third at 9.318 billion dirham. Iran and Canada came fourth and fifth respectively. Investment from Iranians stood at 4.5 billion dirham while from Canadians it was 3.157billion dirham.

The huge interest of Indo-Pak investors is due to following reasons. Investment outlets in home country like that offered by Dubai is lacking. Furthermore realty market in Dubai has been developed and matured since its opening in 2002 to foreign investors.  Secondly the proximity of Dubai to sub continent is another reason for Indo-Pak investors to invest in Dubai. Thirdly Dubai market offers unique opportunity of earning tax free rental income and capital gains.

The total non-Arab investment in Dubai during 2014 amounted to 64 billion dirham through 29,098 transactions. This constitutes more than half investment in the real estate. The balance is expected to remain in favor of non-Arab investors if oil prices remained dip.

Jordan topped the list of Arab realty investor in Dubai. 

Rise of Sudairi Brothers

‘Sudairi Seven’ was powerful alliance of seven full brothers within the house of Saud, royal family of Saudi Arabia. Sudairi seven, seven sons of King Abdul Aziz and Hassa bint Ahmed al sudairi, are largest block of full brothers. Now they along with their sons and grandsons have become important power centre in Saudi royal family.  Sudairi seven included:-

1.       King Fahd,
2.       Prince Sultan ,
3.       Prince Abdur Rehman ,
4.       Prince Nayef,
5.       Prince Turkey,

6.       King Salman,  and
7.       Prince Ahmed.

Bandar bin Sultan house, has been sold to hedge fund billionaire

Polygamy and half siblings.

Polygamy is rampant among Middle Eastern royals. The major reason of marrying many women is to build alliances with other tribes. Assabiyya or group spirit is very strong in Arab tribes. Member of tribe is supported through thick and thin by the other members of clan. The whole tribe stands with the tribal chief. This makes the tribal chief a powerful and influential person in society. When any tribal chief marries daughter of other tribal chief, whole of his wife clan support him in his power struggle. This makes tribal society of Arab world most suited for monarchies.

Polygamy gives rise to many half siblings. The group cohesion among them is less as compared to full siblings. Sudiari seven are largest block of full brothers among sons of first king Abdul Aziz. Owing to their assabiyya they wielded powerful influence. King Faisal, who was not from seven sudairi brothers, relied heavily upon the sudairi brothers in his powerful struggle against king Saud, the second Saudi king. King Faisal continued to favour the sudairi brothers as his allies and appointed them in key posts.

Competence, assabiyya, number, interest in politics and wealth

Besides assabiyya and their number, their rise can be attributed to their intense focus on politics rather than business. Unlike their half brothers they tended to be interested in politics. After being appointed in important posts like interior minister, defense minister and governor of Riyadh, they acquired valuable experience. Their children has also acquired experience in dealing with the outside world for example prince Bandar bin sultan who is son of prince sultan has remained face of Saudi lobby in United States for many decades.

Their number is 7 while their sons and daughters can number in hundreds. For example the deceased Prince Sultan has thirty-two children by his multiple wives. Their vast wealth helps them in the political arena. Prince sultan distributed his 270 billion us dollars among his sons in order to shore up their political position. Hence their competence, assabiyya, number, interest in politics and huge wealth led them to be most powerful alliance within Saudi royal family.

Although sudairi brothers support each other against other princes, each attempts to form, with his sons, another power group.

Sudairi kings

 ‘Sudairi seven’ influence grew since the eldest of them rose to the position of Monarch. The king Fahd who ruled Saudi Arabia from 1982 to 2005 was one of the sudairi brothers and was the eldest of sudairi brothers. He led the sudairi faction in the initial years of their rise.

King Salman, the incumbent monarch, is also from sudairi seven. He became king after the death of king Abdullah. King Abdullah established the family council to reduce the suadiri’s influence but later on changed his mind in order to secure position for his own son.