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Trend Analysis - 04 August 2020

Succession planning brought into focus for Middle East families in the age of Coronavirus

The impact of the Coronavirus pandemic is causing Middle East families to evaluate their wealth and consider transfer strategies, making succession planning even more relevant and a matter of urgency. Family businesses need to review, take stock, and test existing structures more diligently than before.

Author of article:

James Howe

Client Director, Private Client

Family businesses currently represent 80-90% of commerce in the GCC, yet just 25% have an effective wealth transfer strategy and a legally applicable succession plan in place. Succession planning has often been an agenda item to be discussed ‘at some point’, but recent global events mean this has become a more pressing matter.

The family hierarchy is changing

The world is becoming more complex and families are more international than ever before, so succession planning is changing from the older, more traditional methods. Families are looking at control mechanisms – it is no longer the case that the eldest son or daughter will naturally take the lead; this leadership role is now based on merit, experience and education with the qualities of self-awareness that natural leaders possess.  The aim is also less likely to be to transfer the maximum value of assets down the family line as the value grows and the family expands.

Children of the patriarch may not always want to receive assets or take on the responsibilities of their families as they have done in the past – they have their own lives and beliefs and want to make their own way in the world, so the old hierarchical structure can sometimes be disregarded. They want to help society, support environmental issues, work in their communities or support well established charities, or even sustain personal and private charitable foundations. The current generation does not always want to pass on their wealth in a traditional way, particularly when they have earned and generated their own wealth.

The traditional assumption that wealth is to be maximised and passed down the line is under scrutiny and succession planning is therefore now a more complex and multi-faceted activity.

Middle Eastern families are increasingly looking further afield for Family Office services


Financial matters in the GCC can often be kept in-house using local family offices, structures and advisors. For families who want to safeguard assets for future generations, now may be the time to rely on partner jurisdictions that can offer certainty, excellent legislation and robust structures. Along with offering superior service quality and high levels of governance, offshore jurisdictions such as Jersey are well placed to meet this need.

 

The need for Liquidity


Trustees and fiduciaries will have made financial forecasts and promised support to beneficiaries and other funding arrangements, all of which must be reviewed, with the added element that beneficiaries are naturally now asking for and expecting financial support due to apprehension with the current economic climate. Liquidity is more important now than it has ever been. Family offices and trustees are taking steps to protect their revenues and to manage costs at P&L and balance sheet levels. Banks and credit providers are seeing increased refinancing requests and all credit positions need careful monitoring.

A trustee can look to preserve asset value as the key focus in the short term. Liquidity buys time and this affords trustees the opportunity to change and adapt. They can devise innovative solutions to safeguard a family’s assets now and into the future. Trustees in jurisdictions such as Jersey are incredibly well placed to drive these solutions, providing short and long term protection for the family’s wealth.

Why should GCC families look to Jersey?

Recent measures taken have helped ensure that, as far as possible, it is business as usual for advisers in Jersey who can support their GCC clients through these current challenges by close cooperation between industry, government and regulator. Inherent strengths give Jersey the edge in continuing to support the growing focus on succession planning which is anticipated in the region over the coming months.

Professional offshore trustees in such jurisdictions are renowned for their international experience and expertise, long history of stability and world class regulatory oversight. Families and their offices are attracted to using trust and fiduciary vehicles to protect and grow family wealth. It is essential that corporate trustees demonstrate proactive corporate governance.

A greater urgency to discuss succession planning

For those of us who work with Middle Eastern clients and intermediaries, a potted history over the past 30 years shows plenty of examples of shocks and bumps in the road. These cover everything from the Big Bang deregulation of UK financial markets in 1986, through two Gulf wars, the Asian financial crisis in 1997 and 9/11 to more recent events including the US credit downgrade, China’s devaluation of the Yuan five years ago, Brexit and of course, the Coronavirus pandemic.

Coronavirus has made succession planning a topic to be discussed with greater urgency. As the Middle East is, along with the rest of the world, in or starting to emerge from lockdown, wealth transfer strategies have been brought to the surface again and is understandably weighing on people’s minds.

Coronavirus cases are now in excess of eighteen million globally. Paradoxically, quarter one earnings have been largely ignored by the markets as a V-shaped market recovery has already taken place. By the end of this year, it is anticipated that equity markets will be higher, with volatility normal and the expectation of a W-shaped recovery. All markets should return to a more stable footing, despite an unprecedented sell-off, with China taking the lead in the recovery.

 

The ‘great wealth transfer’

The next generations of wealthy individuals, who inherit from what is known as the 'great wealth transfer’ in addition to their family expectations and obligations, have a tremendous opportunity to change the traditional approach to private family wealth. They can alter the focus from growing and preserving wealth for future generations to philanthropy, helping with climate change, looking at special purposes that change the world they see in front of them and all of this during their lifetimes.

We have yet to see how the economy post-Coronavirus will impact wealthy family business governance and structures and how they are to adapt to the new reality. Families should certainly now re-visit the philosophical questions and responsibilities that sit with them in dealing with significant wealth and their need for succession planning.

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