In particular, because the period following every crisis inevitably becomes the build-up to the next crisis, it is an opportunity to find ways of dealing with these situations more effectively in the future.
In times of crisis, businesses’ organisational and governance structures are put to the test, and the Covid-19 pandemic is proving to be an extraordinary example of that.
There is much less time for strategy and decision-making in a crisis, and this is also the case for single-family offices and other preferred forms of organised family wealth management.
Every wealthy family now needs to start looking at how it, and its team, have responded. In the Middle East, family businesses and private investments are often intertwined, managed by one team with no clear separation, and such a team might have become overloaded. Did the decision-making process function properly and could the decision-maker be reached in time? Did portfolio performance match the agreed risk profile, and was family office staff able to repatriate family members efficiently?
Crises are always unexpected, and so the analysis should not turn into a blame game, but instead concentrate on improving processes and governance methods wherever this is necessary and reasonably achievable. Part of the focus should be on decision-making, which is an important part of every family office’s operational set-up.
Some key elements are: does the family (office) have the knowledge and governance structure to take immediate measures and make important decisions quickly? Given that a lack of reliable and comprehensive information is a major problem in any crisis, is there a process for gathering key information? Before any decision is taken, several scenarios should be considered: is the organisation accustomed to scenario thinking?
Dysfunctional governance not only affects a family’s wealth but could also ruin family relationships. Now that the dust is starting to settle, a family should consider whether this is the right time to adjust its vision (or develop a new one), and if so, whether is this is the right time to involve younger generations in the process. Family heads are encouraged to reflect on their own role, and think about whether the outcome has been the right one.
The right strategic asset allocation
The right strategic asset allocation and effective risk management are essential for preserving wealth over generations. That said, not many family offices will have foreseen this pandemic. Despite having a very long-term investment horizon, the sudden market collapse may have had a severe impact on a family’s wealth.
Family offices in the Middle East that were already expecting and positioning for a market downturn in 2020, based on macro-economic analysis, might have been quite well prepared. Nevertheless, with the real economy coming to a standstill at the same time, these families might still have been badly affected in terms of their business activities and private equity investments. Family offices that had been more opportunistic and less strategic about their investments will have been caught by surprise, and the interweaving of financial investments with operational businesses will undoubtedly have made the situation much worse.
The Covid-19 pandemic has proven a lot of old investment theories right. Spreading risk by diversifying investments while taking into account a family’s operational businesses, as well as diversifying in terms of geographical and sector exposure, time horizon and investment types, is crucial in preserving family wealth.
In the months ahead, families and their family offices should not only focus on getting their businesses back on track, but also force themselves to review their business and investment philosophy and their strategic asset allocation.
This includes looking at how their investment team performed and which external advisors proved to be useful, checking whether asset managers kept to their mandate, and reassessing the family’s current risk profile and adjusting it if necessary.
Crises will always happen, and each one is different. Even if you happened to do well in this one, it is important to prepare carefully for the next crisis, whenever it may arrive.
Jan van Bueren
Global Head Family Office Advisory