Keeping it in the family
THE FAMILY BUSINESS is one of the great Middle Eastern stereotypes. A sprawling empire impenetrable to any outsider; an ageing patriarch who consistently pops up on the Forbes rich list; a multitude of children vying for control of company assets; and, of course, a cosy relationship with politics.
Such is often the outside perception of the family-owned business groups that wield such influence in economic and political life in the Arab world, and nowhere more so than in the oil-rich states of the Gulf such as Bahrain, the UAE, Qatar, Kuwait and Saudi Arabia. And although much of it is cliché, the power of the families – both the ruling variety and those behind the large trading groups – is greater than ever thanks to sky-high oil prices and a sustained economic boom.
But things might just be changing. With the Gulf states slowly opening their markets – some more quickly than others – and a new generation of western-educated children trying to tweak the old business model, a gradual shift is emerging that might result in more families listing their capital on the region’s stock exchanges.
The big question, and it’s a sensitive one, is how these influential family interests are to be balanced against market liberalization, fiercer foreign competition and such rapid immigration that Gulf nationals are fast becoming minorities in their own countries.
Ruling the economy
Exactly what proportion of the region’s GDP is controlled by the leading local families is impossible to calculate, given the opacity of most of their interests. But from their very creation, the Gulf states have been dominated by the family institution. "The family forms the fabric of local society, and is very present in all fields of life including business, politics, or education," says Amer Halawi, head of research at The National Investor (TNI), an Abu Dhabi equities house.
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"Many UAE family businesses have been wanting to take advantage of stock market financing for some time, but have been reluctant to float the minimum required 55% by the UAE Companies Law"
Amer Halawi, The National Investor |
"Over here, the family has been at the core of political and economic influence, with often a central figure concentrating authority. This is very visible across the Emirates and across decades – from early family-tribes to the current ruling families."
Many of the families that today command multi-billion dollar empires, such as the Kanoos in Bahrain or the Maktoums in Dubai (see profiles), were already prominent traders in the early 20th century, before any of the Gulf Cooperation Council (GCC) states actually existed as countries.
When they did, often by gaining independence from British control, the dominant local families – the Al-Thanis in Qatar, the Al-Khalifas in Bahrain, the Al-Sabahs in Kuwait, the Al-Sauds in Saudi Arabia and the various families of the UAE including the Maktoums and the Al-Nahyans – found themselves at the helm of new-born states that were sitting on some of the world’s largest energy resources.
"There’s a temptation, especially when looking at the region from the west, to see these as old-style monarchies that work in a traditional way," says a Dubai-based business intelligence analyst. "That’s not the case. The way in which power is exercised is very much on a consensus basis, and without getting the consensus of the other main families, the ruling families can’t do very much at all."
Despite this model, the ruling families remain the most influential across the board. Although the exact system varies from country to country, they ultimately control revenues from energy production, while also retaining direct or indirect ownership of many other strategic and unlisted assets such as infrastructure, ports and airlines. The families also wield powerful influence on the boards of most listed companies, even if their interests are represented indirectly by nominee directors.
Agents of profit
Although the ruling families have based their fortunes around national economic interests, many of the largest private family groups have made billions by other means.
Through political favour, some, such as the Hariris in Saudi Arabia, have consistently won huge government infrastructure contracts. Others, such as the Al-Futtaim family in the UAE, have built empires around acquiring distributorships for consumer products.
"The main family-owned groups don’t directly control the actual distribution of brands in the Gulf," says Simon Lindsey, managing partner of GRMC Advisory Services, a Dubai consultancy.
"The agency laws do. They stipulate that a retailer, a brand or a wholesaler can only have one local distributor in each relevant market. The middlemen in this arrangement are the family-owned trading groups, who continually leverage their growing muscle by scooping up more and more brands."
Central to this is company law, which, despite varying across the region, usually requires foreign firms to have a local partner, or agent, when doing anything from forming a new bank to distributing tomato ketchup. This partner must hold a majority stake in a joint venture, although several exceptions include free-trade zones in the UAE, or certain non-strategic sectors in Bahrain, where foreign investors are permitted to own 100% of companies.
And although the local partner can simply be an individual, most foreign firms prefer an established family business with plenty of clout in the local market.
"It makes things simpler to have a more powerful partner since the business and government communities overlap – though to different extents depending on the country," says Lindsey. "The more influential these firms become, the more attractive they are as a partner, so there is some degree of a reinforcing cycle consolidating their position."
More eyes on IPOs
Thanks to such an entrenched and favoured position in their home markets, as well as political connections and colossal profits in recent times, few family groups have needed external capital to keep growing.
In the past year, IPOs have dried up across the region, partly because of the 2006 market crash, when four of the seven GCC bourses shed more than 35% of their value and the Saudi Tadawul dropped by 52%. Analysts say that many planned listings were postponed, and also note an over-regulated IPO process in markets that are driven largely by sentiment and are rife with insider trading.