From Tradition to Transaction - The Rise of Private Equity in Family Businesses in the Middle East
Family Businesses in the Middle East
In the Middle East, a family business is not just a commercial venture but a legacy, often with family members holding majority ownership and steering day-to-day operations. These enterprises are the economic bedrock of the region, making substantial contributions to GDP, employment, and overall economic stability. For example, as per a KPMG report titled “The regenerative power of family businesses: United Arab Emirates edition” (October 2022), family-owned entities in the United Arab Emirates account for 60% of the GDP, employ 80% of the workforce, and represent around 90% of the private companies.
These businesses are characterized by their governance structures, which often involve centralized decision-making by the family head, and their values, which emphasize trust, loyalty, and long-term relationships. Succession planning is a critical aspect, with many family businesses currently undergoing generational transitions. However, family businesses face several challenges in an evolving economic environment. These include limited access to capital, resistance to change, and difficulties in succession planning. The need for modernization and professionalization is becoming increasingly apparent as these businesses strive to remain competitive in a globalized market.
The Emergence of Private Equity in Family Businesses
Private equity has emerged as a powerful force in the global financial landscape, and the Middle East is no exception. Outside of funds’ arena, it is a form of business funding in which a business receives capital from a private equity investor in exchange for a stake in the business. These transactions are usually structured as a direct acquisition of shares in mature companies. Private equity firms typically employ investment strategies such as growth capital, buyouts, and acquiring minority stakes. These strategies provide family businesses with the necessary capital for expansion, professional management, modernization and strategic guidance that private equity firms offer.
The shift towards private equity in family businesses is underscored by findings from PwC’s Private Equity and Family Business Survey 2023. The survey indicates a significant change: 90% of family businesses are now open to the prospect of private equity investments, a substantial increase from the 61% recorded a decade earlier, and a big contrast to the mere 18% in 2011. This growing inclination suggests a broader acceptance and understanding of the benefits that private equity can bring, including capital infusion and strategic expertise. Concurrently, the enthusiasm for such investments is mirrored by private equity investors themselves, with an impressive 98% indicating plans to invest in family businesses in the forthcoming years. This eagerness reflects a recognition of the unique value proposition offered by family businesses, such as strong market presence and potential for growth.
The Convergence of Tradition and Modern Finance in the Middle East
The landscape of private equity in the Middle Eastern family businesses is being reshaped by strategic initiatives and regulatory transformations. Governments across the region are actively pursuing economic diversification, moving beyond traditional oil-centric models towards broader, knowledge-based economies. Pioneering initiatives include Saudi Arabia’s Vision 2030 and Qatar’s Vision 2030. Complementing these, regulatory reforms are designed to attract foreign investment and stimulate private sector growth. The liberalization of foreign ownership laws and the inception of specialized economic zones, such as the Dubai International Financial Centre (DIFC), Abu Dhabi Global Market (ADGM), and Qatar Financial Centre (QFC), are prime examples.
Moreover, enhanced legal structures under company and bankruptcy regulations and robust investor protection measures have further increased the confidence of private equity investors. These have created an environment of increased transparency and accountability, essential for the facilitation of business and the protection of investments.
Finally, as Middle Eastern economies become more integrated into the global market, there is an increasing trend of cross-border private equity investments. Family businesses are looking to expand their footprint internationally, and private equity can provide the necessary capital and expertise to facilitate this growth. Also, the region is witnessing a surge in innovation and startup activity, particularly in sectors such as fintech, e-commerce, and health tech. Private equity firms are keen to invest in these high-growth startups, driving deal activity.
A Success Story
The BinDawood Group, founded by the BinDawood family in 1984, is a prominent example of a family business that has the benefits of private equity investment. Over four decades, the Group has grown to operate one of Saudi Arabia’s largest chains of supermarkets and hypermarkets. In 2016, Investcorp acquired a 7% minority stake in BinDawood Holding, reflecting confidence in the company’s strong market presence and growth potential.
Following the successful initial public offering (“IPO”) of BinDawood Holding on the Saudi Stock Exchange on October 21, 2020, Investcorp’s stake was reduced to 5.6%. This listing marked a significant milestone for the family-owned business, transitioning it into a publicly traded entity and enabling broader market participation in its continued success.
Investcorp’s strategy included plans to divest its 5.6% stake in BinDawood Holding, aiming for a full exit that would demonstrate a successful private equity investment cycle - from acquisition to IPO and eventual exit once the company has achieved a certain level of growth and market stability.
Benefits of Private Equity for Family Businesses
Reflecting on the success of private equity investments in family businesses, as exemplified by the BinDawood Group, it becomes evident that such investments can be highly beneficial for family businesses.
A primary advantage is the access to capital that private equity firms provide. This influx of funding is crucial for family businesses looking to expand, acquire new ventures, or modernize existing operations. Beyond mere capital, private equity investors bring a wealth of expertise in professional management. They are known for introducing seasoned management teams and instilling governance best practices, enhancing financial reporting, and driving operational efficiency. This injection of professional acumen often results in a significant uptick in business performance and long-term viability.
Strategic guidance is another cornerstone of the private equity value proposition. With their extensive industry expertise, private equity firms assist family businesses in navigating the complexities of market dynamics. They help identify and seize growth opportunities, offering insights that can refine business strategies and push the company forward in an increasingly competitive landscape.
Lastly, the issue of succession planning, often a sensitive subject within family businesses, can be adeptly managed with the involvement of private equity. These firms provide a structured approach to leadership transition, ensuring that the business does not just survive but thrives during and after the handover of power. This structured approach can be invaluable in maintaining continuity and stability in business operations, safeguarding the legacy of the family business for future generations.
Challenges and Considerations
While the benefits of private equity are significant, family businesses must also consider potential challenges. One major challenge is the potential conflict between traditional family business values and the profit-driven approach of private equity firms. Bridging this cultural gap requires effective communication and mutual understanding.
Legal and regulatory considerations specific to the Middle East also affect such transactions. Family businesses must navigate complex regulatory environments and ensure compliance with local laws.
The impact of private equity partnerships on family governance and succession planning is another critical consideration. Bringing in external investors often means relinquishing some degree of control, and family members may need to adapt to a more collaborative decision-making process. Private equity can facilitate smooth succession planning by providing a structured approach to leadership transition, but it requires careful planning and alignment of long-term visions.
Future Landscape
The future of private equity transactions in family businesses in the Middle East looks promising. Economic diversification efforts and regulatory reforms are expected to drive increased deal activity in the private equity space. While traditional sectors such as retail and real estate will continue to attract investment, emerging sectors like technology, healthcare, and renewable energy are likely to see growing interest from private equity investors. As Environmental, Social, and Governance factors become more critical to investors, family businesses that prioritize sustainability and social responsibility may find it easier to attract private equity investment. Additionally, as digital technology transforms business operations, private equity is well-positioned to support family businesses through this digital transition.
Conclusion
The rise of private equity transactions in family businesses in the Middle East marks a shift from tradition to transaction. While the infusion of capital, professional management, and strategic guidance offers numerous benefits, family businesses should carefully navigate the challenges associated with this transformation. As the region continues to evolve, the partnership between family businesses and private equity is set to play a pivotal role in shaping the future economic landscape.
