Dubai: The biggest advantage of GCC family business is the ability to capture the region’s significant growth via international partnerships and franchises across multiple sectors.
However, according to a new study by A.T. Kearney, a global management consultancy firm shows that after the global financial crisis, GCC family businesses rebounded to some extent, but the overall recovery has been slow.
As the overall market has trended mostly up, family businesses have trended downward. Since 2008, the A.T. Kearney GCC Family Conglomerate Index has decreased by 60 points.
GCC family businesses are seeing performance recover more slowly than the market for several reasons. One is the way they’re managing their wide-ranging portfolio of businesses and investments.
“Most GCC family businesses have a highly diversified, fragmented portfolio. This contrasts with family businesses in the more mature European and North American markets, where portfolios tend to be more focused and have clear business platforms. While GCC family businesses have been extremely successful diversifying, few have implemented systematic, active portfolio management,” said Cyril Garbois, Partner Middle East at A.T Kearney.
The study finds that many regional family groups lack clear strategic direction. Stringent investment guidelines have not been fully developed, which results in conflicts among stakeholders about which investment strategies to follow. This creates a portfolio where assets are accumulated without the structural strength that comes with a clear investment and divestment rationale, which commonly supports large investors.
“Given the region’s rapid growth in recent history, many family businesses have not felt the pressure to implement processes for monitoring mid- and long-term market trends or to develop contingency planning to deal with a downturn in business. As a result, an internal ability to develop foresight and embed it in strategic planning and risk management is often missing,” said Cyril Gourp, Principal at A.T. Kearney Middle East.
Although many have yet to fully embrace the change, some GCC family businesses are seizing the opportunity to build sustainable, robust, protected investment portfolios. Investment portfolios of GCC family groups comprise assets that deliver widely varied performances, from outstanding to abysmal.
The latter category, however, can go unnoticed if the portfolio is performing decently as a whole. Too often, there’s a focus on aggregate growth, either revenue or assets, which can obscure a portfolio’s real performance. Therefore, performance transparency provides the information needed to assess portfolio strengths and weaknesses, develop investment strategies, and effectively manage assets.
Historically, many GCC family businesses started and developed as commercial agents to international companies or as contractors to government projects. As competition increases, they need to rethink their value proposition. Key to any business’s success and sustainability is the ability to focus and have a clear value proposition. Developing a strong investment portfolio, defining the areas of focus, and building a platform for competitive advantage require a strong investment strategy.
With a clear assessment of the portfolio performance and investment strategy, active investment management becomes the core engine to generate value and superior returns. Investments in the portfolio should be managed through consistent and systematic processes including: Investment review, active value capture and Investment performance monitoring. Active investment management requires internal governance and organisational support. Clear investment guidelines and an investment committee can help ensure the structured application of investment strategy, portfolio management, and assessment of potential opportunities.
In conclusion, if the region’s family businesses are to return to their historically high level of performance, they must not only grow and sustain their current business, but develop beyond the GCC. Active portfolio management is an indispensable tool for accomplishing that goal.
