Middle Eastern ultra high net worth (UHNW) family businesses are stepping up offshore investments especially in the British Virgin Islands (BVI) heirs come of age, says an industry expert.

Many billions in assets are held by structures in the British Virgin Islands (BVI) designed for wealth and succession planning purposes. However, within this only a relatively small portion are currently owned by families and businesses from the Middle East region – but this is set to increase significantly in coming years.

Some lawyers working in the region have already seen the creation of BVI business structures rise by as much as 25 per cent over the last three years with this trend set to continue.

Huge opportunity for multiple generations

This is as a result of international succession planning becoming increasingly important for Ultra High Net worth (UHNW) families in the Middle East. According to a PwC survey, 38 per cent of businesses in the region are keen to ensure their business stays within the family, compared to just 30 per cent globally.

This represents a huge amount of wealth considering 80 per cent of the GCC private sector is made up of family businesses, much of which is tied up in tangible assets and properties.

Rajiv Kumar Singh, Group Commercial Director for the Middle East and Africa at Vistra, notes that many UHNW families are now focusing on asset protection and wealth distribution. “There has been an explosion in wealth here in the last 15 years,” he says, “but there hadn’t been much focus on succession planning until more recently. Now, as the second and third generation of families step into business leadership roles, they are becoming much savvier.”

Singh notes how younger family members in the Gulf region are encouraging older relatives to consider structuring their assets, including making use of offshore jurisdictions like the BVI for the advantages they offer. “In the past, setting up a company to pass on assets wasn’t a consideration for family businesses in this region, but now they are considering how to manage and pass on global wealth in a way that is optimal for succession,” he explains.

A need for flexibility

Philip Ireland, Dubai –based partner, Maples and Calder, the Maples Group's law firm, notes that one of the key developing trends for UHNW families in the region is to take advantage of the flexible share structures offered in the BVI. He explains: “In the Gulf region, families can’t create local onshore companies with different share classes and cannot tailor rights in the way that they can via a BVI vehicle.”

Ireland points to the Memorandum and Articles of Association (M&As) of BVI companies, which enables families to detail how shares should be issued and allocated if a primary shareholder should die. For example, the M&As could prescribe for two classes of share – one of which is held by the primary shareholder and ceases to hold rights on their death, and the other which is held by the intended successors.

“Creating onshore entities for the purpose of succession planning in the Gulf region can be somewhat restrictive, but the BVI offers maximum flexibility to families,” adds Ireland.

Key to this for UHNW families in the Gulf is that shares that have been issued by a company incorporated in the BVI are regarded as assets situated in the jurisdiction even if the share certificate and/or register are maintained outside the BVI, or the deceased shareholder has never been to the islands.

Managing international assets

Another growing trend wealth and succession planning professionals are witnessing in the MENA region is an increase in the need for UHNW family offices to manage global portfolios of assets.

“Many families are using offshore structures within or on top of local structures,” says Chris McKenzie, Partner at Fin│Law. “The offshore structure allows them to organise and better manage international assets, such as foreign-based properties.”

In part, families are choosing to retain foreign assets in BVI structures as they enable them to be managed in a tried-and-tested jurisdiction that operates under English common law.

“This new generation of business leaders is aware of the benefits of succession planning outside of Sharia law,” adds Singh. “Also, some of these assets may be in areas with geopolitical or economic uncertainty, so there is some reassurance in holding them in a jurisdiction ruled under English common law.”

McKenzie also notes that holding relatively illiquid assets, such as foreign property, within a BVI structure makes them easier to sell as part of the succession process.

Access to sophisticated instruments

Experts in the region have also increasingly been advising UHNW families on creating their own investment funds, with a number of ‘start-up’ fund structures in the BVI allowing families to become their own asset managers.

“More families are looking for sophisticated financial instruments as a means of managing assets,” explains Ireland.

This growing trend is seeing wealth and succession advisers help individuals set up their own ‘incubator’ funds that allow clients to attract and pool a small amount of investment and manage it through their own fund.

Such funds do not require the same levels of administrative expertise that a normal large investment fund must adhere to, thus providing savvy families with the ability to set up and run a cost‐efficient licensed fund allowing them to withdraw on demand.

A family business can invite up to 20 investors into its incubator, each of whom must make a minimum initial investment of $20,000 but must not exceed a cap of $20 million of the aggregate value of its investments –often known as the 20-20-20 criteria.
Young business leaders look offshore

The drive towards more complex financial instruments and smarter corporate solutions to optimise succession planning is being driven by the new generation of family business leaders, leading experts to believe this trend will continue to increase in the coming years.

The most recent figures from the BVI’s Financial Services Commission found that there are now over 1,100 private trusts set up in the jurisdiction, with the figure for Q2 2019 almost double the number created in the first quarter of the year.

“The succession push we are seeing is a coming of age moment,” says Gary Hales, Head of Equiom Fiduciary in the Middle East. “The children are driving this. They are savvier than their parents and grandparents and have a more global outlook towards money management.”

That said, the PwC report also found that more than nine out of ten Middle East family businesses still do not have a succession plan in place, illustrating that many have yet to experience their first intergenerational transition of power. However, as that moment draws nearer for more and more businesses, increasing numbers of UHNW families are realising that they must look beyond their home jurisdiction to ensure their global assets are taken care of into the future.

McKenzie adds: “We are spending time educating family offices – often very savvy business leaders – on how to manage their international assets. The key has been to build trust and explain the succession opportunities offshore structures and funds offer them.”

Clearly, the opportunity for both sides of the pond is clear. Savvy, sophisticated wealth and succession planning is key to protecting the future of Middle Eastern family businesses.

About the author

Simon Gray is head Business Development & Marketing, BVI Finance.