Multisector investments

As vehicles for long-term wealth maximization and/or economic development, regional sovereign wealth funds play a fundamental role in the regional and global investment landscape. Decades of budget surpluses have enabled these funds to amass large sums of capital which made them a relevant player on the global scene, a reality that has raised the attention – and often apprehension – of states that receive their investments, due to the potential mixing of financial and political agendas. As a result, regional funds are increasingly adopting global standards on governance and transparency to dispel any concerns. On the regional front, funds are refocusing on the region and are increasingly plugged in to the economic realities of their governing states, leading to a direct role in driving, shaping, or supporting their government in target sectors and flagship projects.

In this context, key trends for these funds include:

• Defining/refining their mandate in light of the macroeconomic situation and existing ecosystem of sovereign vehicles
• Aligning their investment strategy and themes with their country’s economic and development vision
• Allocating a larger portion of their portfolio to direct investments with a more active investment approach
• Developing an increased exposure to yielding investment asset classes such as infrastructure and real estate to offset low-yielding fixed income instruments
• Adopting a global approach to investments across emerging and developed markets
• Balancing economic development and financial return mandates
• Setting up deal sourcing and co-investment partnerships/vehicles with other institutional investors
• Developing best-in-class capabilities across the investment life cycle to maximize value creation by transferring knowledge from investment partners
• Institutionalizing policies and processes (e.g., portfolio management) in line with best practices
• Improving governance and transparency in line with best practices, such as Santiago principles

A backbone of the economy in the GCC, multisector and/or family-owned conglomerates contribute to a significant portion of economic activity and employment in the region. Today more than ever, such companies are facing a new reality as changes in the macroeconomic landscape are affecting the sectors their businesses operate in. These changes include a negative outlook in consumer spending, slowdown in B2B activity as government spending is curtailed, and greater competition as a result of more-open trade agreements and a tighter funding environment following the financial crises and resultant cautious bank lending.

In this context, key trends for these conglomerates include:

• Focusing their portfolio on core activities where they can leverage their differentiated capabilities, while aiming to divest or turn around underperforming businesses
• Expanding core operating businesses into new geographies or adjacent sectors while leveraging strategic and operational synergies
• Rebalancing their asset class and sector exposure to avoid highly correlated investments that erode returns in times of economic softening
• Developing partnerships and joint ventures with international industry leaders to set up or enhance operations in local markets
• Monetizing investments and generating liquidity through minority sale of assets (e.g., to private equity firms) or listing a subsidiary
• Redefining their corporate management role and level of involvement vis-à-vis portfolio companies
• Developing best-practice functional capabilities at the holding level to aid the group and portfolio companies in executing core and support activities
• Professionalizing corporate governance with formal committees, independent directors, and a detailed delegation of authority across the organization
• Institutionalizing business activities by segregating them from family services and assets

Private equity’s contribution to the investment landscape in the region remains lower than in other emerging and mature markets. Although a more subdued economic environment has lowered valuation expectations, valuations remain full, deal volumes are flat, and exits are decreasing. Moreover, the industry is facing higher competition from sovereign investors who are more active in the regional landscape. Given the challenges of operating in this environment, international players – once interested in the region’s sustained growth – have scaled back their presence. Local players have also adjusted, with tier 2 general partners narrowing their strategy, or shifting to a deal-by-deal approach while tier 1 players remain active in fundraising and investing.

In this context, key trends for PE funds include:

• Creating dedicated opportunity funds targeting specific sectors or geographies with deep industry capabilities
• Expanding geographic scope to new emerging markets including Africa and South East Asia
• Focusing on sustainable value creation from existing assets when exiting investments in the next five to seven years will be difficult
• Strengthening corporate capabilities to improve portfolio management and value creation
• Setting up co-investment partnerships with other PE players or institutional investors to improve deal-sourcing capabilities
• Considering a wider range of funding sources including mezzanine and debt financing

Families today are operating in a very different environment from 10 years ago, particularly with the next generation coming of age and claiming their place in the family concerns. Businesses that were once led by a single principal owner are now facing a dilution of ownership and decision making that is further complicated by a divergence in views among generations. Such a setup is ripe for internal conflicts and deadlock if no clear governance framework has been instituted.

In this context, key trends for family principals include:

• Enacting best-in-class corporate and family governance frameworks to address ownership and oversight challenges during transition to subsequent generations
• Developing a family governance structure that maintains the family unity and balances the potentially divergent views of family members
• Establishing formal family offices to provide various services to family members, including wealth management, concierge, education support, and philanthropy
• Professionalizing the family service delivery model to optimize service levels at the lowest possible cost and increase the flexibility of the offering
• Gaining alignment on a set of principles and values regarding family and ownership matters
• Enforcing agreed-upon governance mechanisms despite local regulations that may not have the required flexibility
• Identifying alternative sources of wealth creation beyond core businesses to maintain an acceptable level of income and wealth for a growing number of family members
• Supporting next-generation development through education, entrepreneurship ventures, or employment opportunities