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Saudi Arabia family offices prepare for IPO and M&A deal surge

30 March 2022

Brian Carey

Director Private Wealth, Intertrust Group

Brian Carey

Director Private Wealth, Intertrust Group

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What would an active IPO market mean for Saudi Arabia’s family offices, companies and regional M&A? Brian Carey, director of private wealth at Intertrust Group, offers his thoughts

Just over ten years ago, Saudi Arabia’s family offices simultaneously weathered the petrodollar and global financial crisis. So any hopes of jumpstarting a homegrown IPO market or testing the waters of leveraged finance went on hold.

The second generation of dynamic family-member managers has emerged thanks to overseas education and prestigious work placements in M&A and fund investment. Additionally, being mentored by their fathers, grandfathers and other family members means these younger managers have learnt from those crises and the challenges for any asset-rich, rather than cash-rich, economy.

For many Saudi Arabian and Middle East family offices, now is the time to build a lasting legacy of family and financial sustainability at home and abroad. This will be made possible by a newfound focus on cash-generating industries and opportunities.

First and second-generation merchant families have already shown they can build domestic and pan-regional businesses, employing tens of thousands across sectors including real estate, financial services, food production, industrial services, retail and infrastructure. They now aim to replicate this in social infrastructure – such as renewables, fintech, healthcare, hospitality, transport, education – and professional services such as banking, blockchain, insurance tech, regulatory technology, payments and lending). One example is Saudi Arabia’s Vision 2030 initiative project, which is positioning Riyadh as a global fintech and investment hub for inbound and outbound M&A and IPO opportunities.

How will succession and external capital shape Saudi Arabia’s family offices?

In the latest Deloitte Middle East Family Enterprise Survey, Transformation: fit for the future, Scott Whalan, financial advisory family office leader at Deloitte Middle East, said: “Whilst the operating environment in the Middle East surges into the digital age, driven by skilled people able to secure deals, manage assets and adhering to a global rulebook, the ‘why’ remains fixed to a more historic aspect, legacy.”

A third of Middle East family offices will hand ownership to the next generation in its current form, according to Deloitte’s findings. About 14% will hand over a revised corporate structure, for example by dividing assets or changing legal structures. Half do not expect to make any ownership changes for the next five years.

Others would be ready to attract external shareholders (inward investment) in the short-term. Some 8% of family offices questioned were prepared to sell shares through an IPO. A further 4% are also considering selling shares to an external strategic or financial investor, such as private equity.

Through divestment, families will also be able to reinvest in sustainable businesses at home in areas such as hydroponics, renewables and housing. Attracting external capital through public listings will also bring more access to debt facilities and a maturing financial market to target growth sectors that rely heavily on them, such as car hire or the booming world of SPACs, private equity or real estate funds.

The Kingdom plans to invest more than USD1tn in tourism over the next 10 years – a move likely to spark M&A activity. Tourism is expected to account for 10% of Saudi Arabia’s gross domestic product by 2030, according to Arab News. Sector-related projects that could bolster start-up and infrastructure-related opportunities include the USD500bn Neom project, a futuristic city and nature preserve, and Qiddiya, a major amusement park, entertainment and sports project.

New era of corporate and family governance in the Middle East

The next-generation of managers have first-hand experience of international fund management, private equity, M&A deal execution and corporate compliance. As a result, they are well prepared to diversify assets, attract external capital and welcome international talent.

This means a new era of corporate family governance that could entail:

  • Changing ownership structure and redomiciling family assets
  • Separating boards representing family members and corporate members
  • Adapting to global accounting standards, such as audited balance sheets, to secure lending in the open market
  • Implementing or adapting family constitutions
  • Being legally attentive to shareholder concerns and ideas, regardless of shareholding size
  • Adopting End of Service Benefits (EoSB) to attract and retain international talent
  • Educating international advisers on Saudi and Middle East family culture and patriarchal responsibilities

Number of Middle East family offices set to grow

As family offices evolve and diversify their assets and ownership structure, others are likely to follow. So one would expect the number of family offices to proactively target deal opportunities at home and internationally.

This will be the case if private equity funds or strategic investors acquire a stake in an asset. Both are likely to prompt portfolio companies to expand into new markets through a buy-and-build strategy. This would lead to new capital structures in the form of debt facilities for family-owned assets.

As a result, family offices will be competing to secure talent – both local and international – to assess and manage deal opportunities.

Given that many real assets – such as infrastructure, aggregates, real estate and banking – are already regionalised, a lot of amalgamation is likely. Investment in automation and digitalisation will make these operations more cost effective and profitable. Family offices, being nimble and first movers in the region will also provide them with an investment advantage.

This will undoubtedly make assets more attractive should they come on the selling block or list on the Saudi Stock Exchange or a dual listing elsewhere.

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