Family businesses are benefitting from economic growth, says J.P. Morgan Private Bank
Jonathan A. Conner, head of J.P. Morgan Private Bank in the Middle East discusses family businesses and expansion in the GCC
Can you sum up the nature of the family business landscape in the GCC region? Also, how does it stand out against other regions?
Outside of the government-led upstream energy sector, family businesses make up a substantial portion of the economic output and wealth creation in the GCC region. From their humble beginnings as local merchants, enterprising families grew with the tremendous economic expansion of the region over the past five decades.
From the largest merchant families holding agencies across multiple sectors to those that have focused their efforts on a few core areas, family businesses represent the core of private enterprise. The degree to which this exists is certainly unique to this region.
Can you elaborate on how such firms are faring in the current economic climate? Is it possible to gauge family firms as a whole if they’re spread across verticals?
The past few years in the region have been characterised not only by the aftershocks of the global economic crisis, but also by geopolitical events that directly affect people and businesses in the region. While the length of the road to recovery has varied across the GCC region, it is enjoying a period of economic growth, benign inflation and rising energy prices, which provides the bedrock for regional wealth generation.
In addition, many families are benefitting from rising real estate prices, which is encouraging more commercial and residential developments to address the favourable demographics in the region. Well-diversified family businesses are benefitting from growth, as GCC consumers find themselves with more expendable income to spend on basic consumer staples, as well as higher discretionary spending on items, such as automobiles, luxury goods, vacations, and second and third homes.
PWC’s recent survey indicates strong growth. Is this likely to continue for the foreseeable future? What are the main factors that will influence the rate of growth?
Growth in the GCC region has certainly been strong. While economic growth is highly correlated to oil prices and government spending, steady global growth is a contributing factor. Global demand for oil, mainly coming from Asia, will also continue to be a significant factor for growth in the Middle East region. Barring any significant geopolitical events, positive global growth will translate into continued growth prospects in the GCC region.
Please sum up the growth opportunities and current trends regarding private equity investing.
The dislocation from the global financial crisis has lead to many opportunities in the private equity and debt markets. Many banks and traditional providers of growth capital exited these markets, paving the way for private capital, mainly through funds and direct investments, to provide growth capital to companies in the developed and emerging markets.
For those investors able to commit capital for a seven- to ten-year time period, there continues to be opportunities in private equity that offer higher risk adjusted returns than the public markets. For instance, an area that is underserved by growth capital is Sub-Saharan Africa. With accelerating and diversified economic growth, favourable demographic and urbanisation trends, and improving macroeconomic and political stability, it presents a compelling opportunity for private capital.
How big of a factor are succession plans? Are there any trends with regards to larger family firms including ‘outsiders’? How are the things developing there? Do firms reach a critical size where they must be more pragmatic about senior leadership?
As family run businesses expand and time inevitably marches on, it becomes critical to ensure that the business can survive and thrive after the mantle of leadership is passed down to the next generation. Succession planning needs as much attention and thought as a company’s operating strategy. The clearer the roadmap of succession, the less likely it is to be disputed by members of the family once the inevitable generational handover occurs. Of course, as a firm grows bigger and more complex, so do the skills required to manage it efficiently.
First-generation founders may have a clear understanding of the business, having grown it from the ground up. However, as the company expands into multiple sectors and beyond the GCC region, next-generation managers may not necessarily have the skills to lead the company. In this case, some families have hired professional external managers with substantial operating experience to assist the family in growing the business into a world-class group.