90% of Gulf's commercial activity in family firm hands

The GCC faces an urgent need for radical engagement between family businesses and private equity, according to a landmark thought-leadership report - 'The Impact Of Private Equity On GCC Family Businesses' - produced by Ithmar Capital, the GCC-focused private equity firm and Dow Jones, a leading provider of global business news and information services.

The report - the second in a biannual series which charts the impact of private equity on the Gulf - says the ongoing intersection of family businesses and private equity in the GCC presents a unique opportunity for both parties.

The report says that within the GCC over 90% of all commercial activity is estimated to be controlled by family firms which number over 5,000, hold combined assets of more than $500bnn and employ 70% of the workforce. It points out, however, that worldwide, only 30% of family businesses survive into the second generation, and less than 6% beyond the third generation.

"If the US pattern in repeated in the GCC, the region faces great succession challenges as many family businesses here are now entering the second generation era," said Faisal Juma Belhoul, Co-Founder and Managing Partner, Ithmar Capital.

Dialogue between family businesses and private equity, however, could hold out a bright future for many, according to the report.

"If partnerships between private equity firms and family businesses in the GCC can successfully create an environment in which managers can act as owners and owners no longer need to act as managers, then all parties can confidently look to a truly competitive future."

Re-engineering is urged if family firms are to successfully compete in both global and domestic markets, with private equity having a key role to play.

"Private equity has already been the foundation for success the world over. Family businesses in Europe, which partnered with private equity firms, increased exposure to new markets by 60%, with two-thirds also out-performing their competition," says the report.

"The average value of private equity-backed businesses doubles at the point of exit after an average ownership period of just three and a half years.

"Family business owners should be mindful that despite the popular perception of private equity as synonymous with short-term cost-cutting, the bulk of growth in private equity-owned firms in fact derives from organic revenue growth and acquisitions. Employment levels remained the same, or even higher, at exit versus entry in 80% of US deals and 60% of European deals."

The report says it is vital that family business owners recognize that private equity can offer unparalleled experience in meeting their capital restructuring, market repositioning, management optimization and governance needs.

"Private equity also enables the definitive separation of business ownership from business management, and the development of family firms into institutions, rather than 'one-man shows."

At the same time, says the report, private equity investors have to differentiate their expertise and clearly demonstrate their value, whilst always remaining sensitive to the regional business culture.

"There is a learning curve in operation for all parties, and the focus on value creation must become a constant one for families and investors," says the report.

"Both must be aware that value derives as much from factors, such as motivated and incentivised management as from capital resources. It may simply need unlocking, rather than creating anew."

The report examines the most fundamental issues currently facing GCC family firms, and features interviews with family business owners as well as private equity players to forge recommendations of a 'partnership' approach to the future.

"This report constitutes a defining moment in the understanding of the impact of a rapidly expanding asset class on a dominant business model and the informed views and expertise on show will set the agenda for discussion and analysis of the future," said Belhoul.

The report's findings are based on aggregate data from Dow Jones' unique research processes. The data was collected through interviews with leading figures in the private equity sector, industry analysis and previously published data.

The report covers a range of issues including restructuring and market strategy, governance, succession, the approach required from family businesses and that required from private equity providers. Case studies focus on Saudi Arabia's Al-Touq diversified group, the Kanoo Group, a Gulf-based multinational and Gulf Capital, the Abu Dhabi-based alternative investment company.

"Private equity investors need to accept that things like family businesses and networks and the importance of self-fulfillment through business belong not only to the past, but also the present and they are not simply going to disappear. They are too significant a component of the region's cultural framework, and indeed form part of the distinctive nature of the GCC private equity opportunity itself," said Jessica Canning, Director of Global Research, Dow Jones.