UHNW family businesses
Author: Simon Gray.
Simon Gray is head of business development & marketing, BVI Finance.
Tue 3 Nov 2020 04:00 PM
This is an article from arabianbusiness.com. Original text HERE
Why Middle East UHNW family businesses are set to step up offshore investment
Many billions in assets are held globally by structures in the British Virgin Islands (BVI) designed for wealth and succession planning purposes.
However, within this only a relatively small portion are currently owned by families and businesses from the Middle East region – but this is set to increase significantly in coming years as international succession planning becoming increasingly important for Ultra High Net Worth (UHNW) families. Some lawyers working in the region have already seen the creation of BVI business structures rise by as much as 25 percent over the last three years with this trend set to continue.
Huge opportunity for the next generation
A recent report by PwC identified the significant role that family businesses play in the region’s economy. With a GDP contribution of 60 percent, a workforce contribution of 80 percent, and $1 trillion estimated to pass from one generation to the next within a decade. Furthermore, 38 percent of businesses in the region are keen to ensure their business stays within the family, compared to just 30 percent globally.
Many UHNW families are now focusing on wealth distribution. Whilst there has been an explosion in wealth in the region over the last 15 years, there hasn’t been a focus on succession planning until more recently. Now, as the second and third generation of families step into business leadership roles, they are becoming much savvier.
Family Offices incorporate asset management, cash management, risk management, financial planning, lifestyle management, and other services.
Younger family members are encouraging older relatives to consider complex financial structures and offshore corporations. In the past, setting up a company to pass on assets wasn’t a consideration for family businesses in this region, but now they are considering how to manage and pass on global wealth in a way that is optimal for succession.
According to PwC, many Middle East families are taking a fresh look at their business portfolios and operating structures and figuring out ways to become leaner and more competitive. Thirty-four percent of those surveyed expect to significantly change their business models over the next two years.
A need for flexibility
This is where the BVI as a jurisdiction comes to the fore. Creating business entities for the purpose of succession planning in the Gulf region can be somewhat restrictive, but the BVI offers maximum flexibility to families. A good example is the Memorandum and Articles of Association (M&AA) process in the BVI, which enables families to detail how shares in their business should be issued and allocated if a primary shareholder should die. These rules enable the creation of two classes of share – one of which is held by the primary shareholder and ceases to hold rights on their death, and the other which is held by the intended successors.
Key to this for UHNW families in the Gulf is that shares that have been issued by a company incorporated in the BVI are regarded as assets situated in the jurisdiction even if the share certificate and/or register are maintained outside the BVI, or the deceased shareholder has never been to the islands.
Managing international assets
Another growing trend wealth and succession planning professionals are witnessing in the MENA region is an increase in the need for UHNW family offices to manage global portfolios of assets. Many families are using offshore structures within or on top of local structures. The offshore structure allows them to organise and better manage international assets, such as foreign-based properties. Holding relatively illiquid assets, such as foreign property, within a BVI structure makes them easier to sell as part of the succession process.
Families are also choosing to retain foreign assets in BVI structures as they enable them to be managed in a tried-and-tested jurisdiction that operates under English common law and with robust IMF FSAP1 guided regulatory standards. This is especially relevant when some of these assets may be in areas with geopolitical or economic uncertainty.
Access to sophisticated instruments
Experts in the region have also increasingly been advising UHNW families on creating their own investment funds, with a number of ‘start-up’ fund structures in the BVI allowing families to become their own asset managers. Indeed, more Middle East families are looking for sophisticated financial instruments as a means of managing assets. This growing trend is seeing wealth and succession advisers help individuals set up their own ‘incubator’ funds that allow clients to attract and pool a small amount of investment and manage it through their own fund.
Such funds do not require the same levels of administrative expertise that a normal large investment fund must adhere to, thus providing savvy families with the ability to set up and run a cost-efficient licensed fund allowing them to withdraw on demand. A family business can invite up to 20 investors into its incubator, each of whom must make a minimum initial investment of $20,000 but must not exceed a cap of $20 million of the aggregate value of its investments – often known as the 20-20-20 criteria.
Young business leaders look offshore
The drive towards more complex financial instruments and smarter corporate solutions to optimise succession planning is being driven by the new generation of family business leaders, leading experts to believe this trend will continue to increase in the coming years.
Figures from the BVI’s Financial Services Commission found that there are now over 1,129 private trusts set up in the jurisdiction, again driven by a younger generation with a global outlook towards money management.
That said, the PwC report also found that succession planning was a key issue. More than nine out of ten Middle East family businesses did not have a succession plan in place, illustrating that many have yet to experience their first intergenerational transition of power. However, as that moment draws nearer for more and more businesses, increasing numbers of UHNW families are realising that they must look beyond their home jurisdiction to ensure their global assets are taken care of into the future.
Clearly, the opportunity for both sides of the pond is clear. Savvy, sophisticated wealth and succession planning is key to protecting the future of Middle Eastern family businesses.
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