Nearly 90% of Middle Eastern SFOs are skeptical about investing globally. Why is this the case?
The Middle East has long been a region steeped in wealth, owing to its abundant natural resources, particularly oil and gas. Single-Family Offices (SFOs), which manage the wealth of ultra-high-net-worth families, have been a growing phenomenon in the region. Surprisingly, however, a large proportion of these SFOs have been hesitant to diversify into international markets. In fact, according to a recent study, close to 90% of SFOs in the Middle East are reluctant to invest in international markets. What could be the reason for this hesitancy? This article delves into facts, studies, and statistics that might help us understand this phenomenon.
Traditional Investments and Regional Bias
According to a 2019 report by PwC, traditional investments in the Middle East have primarily been concentrated in regional assets. These assets range from real estate and local equities to fixed-income securities. There’s a strong tendency to “stick with what you know,” leading to a form of home-country bias. This inclination towards regional investments is not just a matter of comfort or familiarity; it is also rooted in a complex blend of economic, political, and social factors that make international investments appear riskier or less appealing.
Low FDI Outflows Despite High Liquidity
One of the most perplexing aspects of Middle Eastern investment behavior is the disparity between their financial liquidity and their international investment activities. Despite having high liquidity and significant reserves, FDI (Foreign Direct Investment) outflows from the Middle East have remained relatively low in comparison to other regions. In 2019, the United Nations Conference on Trade and Development (UNCTAD) reported that the Middle East had one of the lowest rates of FDI outflows as a percentage of GDP among all global regions. This low level of external investment is particularly surprising given the level of capital available to invest. Nabil Rizk, Director at OROS Multi Family Office in the UAE, shed light on this trend during a recent Club gathering: “Many fund managers and private equity firms from Europe and the West often misinterpret the investment landscape here in the Middle East. They focus on sovereign wealth funds, overlooking the fact that the real power players are the single-family offices. What’s more, they frequently fail to recognize that these family offices are generally hesitant to invest in international markets, largely because they are not familiar with them.”
The geopolitical landscape of the Middle East can be a hindrance to international investment strategies. The region has been fraught with conflicts, sanctions, and political instability, which often complicates international financial relationships. Some Middle Eastern SFOs worry that diversifying globally could expose them to unacceptable risks, including potential complications arising from their geopolitical affiliations or positions. Therefore, many choose to invest in regional assets, which they perceive as being more within their control.
Regulatory Hurdles and Financial Secrecy
Navigating international financial regulations can be complex, and Middle Eastern SFOs may face scrutiny that their Western counterparts do not. For instance, the Foreign Account Tax Compliance Act (FATCA) in the United States imposes a significant reporting burden on foreign investors. Additionally, privacy and financial secrecy are highly valued by many Middle Eastern SFOs, which could make them hesitant to enter markets where disclosure requirements are stringent.
Cultural factors also play a role in investment decisions. In many Middle Eastern societies, there is a strong emphasis on maintaining control and direct oversight over one’s investments. The concept of entrusting family wealth to external managers or placing it in foreign markets may not align well with these cultural values. A 2018 study published in the Journal of Business Ethics found that cultural norms significantly impact investment decisions in the Middle East, including those of SFOs.
The Risk-Return Dilemma
While international markets, particularly in the developed world, can offer more stable and predictable returns, they often do so at lower yields. In contrast, the high-growth opportunities available in the Middle East, especially in emerging sectors like technology, green energy, and healthcare, are attractive from a return-on-investment standpoint. This situation creates a risk-return dilemma: the lower-risk international markets offer lower potential returns, making the higher-risk, higher-return local markets more appealing.
The hesitance of nearly 90% of Middle Eastern Single-Family Offices to venture into international markets is rooted in a complex interplay of factors, ranging from regional bias and geopolitical concerns to regulatory hurdles and cultural norms. As the global economic landscape evolves, it remains to be seen whether these offices will adjust their strategies to embrace international opportunities or continue to concentrate their wealth closer to home. However, given the multiple factors that contribute to their caution, any shift is likely to be gradual and carefully considered. For those interested in the intricacies shaping Middle Eastern Single-Family Offices’ investment decisions, the 142nd Single Family Office Forum offers an unparalleled opportunity for engagement. This event will bring together industry leaders to discuss crucial issues, including technological impacts on wealth management, navigating international regulations, and effective succession planning. To participate, be sure to register here.