Appetite for restructuring

The United Arab Emirates (UAE) and the wider Middle East region continue to demonstrate an extraordinary pace of change, but what is increasingly clear is the sense of ‘permanence’ in the region. What is happening now is a push towards diversified economies, the infrastructure to support such economies and the workforce to sustain them. This drive for change, progress and diversification is also being reflected in the approach of UAE families to wealth structuring.

Options

For many years, ultra-high-net-worth (UHNW) families from the region have structured their international assets through the use of options in international finance centres such as the British Virgin Islands, the Cayman Islands, Guernsey and Jersey, often focusing on trusts and (for larger families) private trust companies. However, these structures were not always the answer for holding real estate and operating businesses situated in the region. For a number of years now, we have seen a rise in genuine domestic structuring options and UHNW families in the UAE taking a more ‘blended’ approach to structuring their assets through a combination of domestic and international structuring options.

In large part, this is due to the pace of change mentioned above, and the appetite for more diverse, sophisticated, globally focused structuring mandates among UAE families has heralded a step change in how those families manage and merge their domestic and international interests.

For example, foundations have been available in Abu Dhabi since 2017, closely followed by their introduction in the Dubai and Ras Al Khaimah international financial centres, with the number of foundation structures incorporated across those markets continuing to rise fast. These foundations are typically used to hold real estate in the region but interestingly they are now being used for a wide variety of structuring opportunities. These include the holding of luxury asset classes or simply to act as an orphaned vehicle in a fund or corporate structure.

The concept of blended structuring is also evident through the sharp rise in demand among UAE families for private fund vehicles, such as Jersey private funds, and more innovative corporate structuring solutions. Jersey private funds, for instance, are proving useful for single families or multiple but connected families wishing to spread risk and pool capital for specific real estate, private equity or venture capital investment opportunities.

From a corporate perspective, there has also been a rise in demand for pooled investment vehicles, which have required the split of economic and voting rights with the establishment of different classes of shares to ensure control with the founder, albeit providing for an orderly split of the income to the next generation.

For some families, it is too early to establish trusts and, in such scenarios, a corporate solution that can address immediate structuring concerns can be helpful, with the possible overlay of trusts to follow.

Appetite

A number of factors are driving this appetite for blended structuring.

First, the focus on the imminent mass transfer of wealth is shining a spotlight on the behaviours, attitudes and influence of the next generation. In the Middle East, this is more likely a transfer from founder to first generation or second generation, whereas dynastic European, UK and US families are traditionally some way further down the generational line. In the US, for example, it is anticipated that from 2022 to 2045 a total of USD84 trillion will be transferred either to heirs (GBP72.6 trillion) or charities (USD11.9 trillion).[1]

However, there have been decades of wealth accumulation in the Middle East, and the need for a clear succession plan for the transfer of control, the family operating businesses and privately held assets is fundamental.

Interestingly, Millennials consistently show a stronger appetite for advice than older clients, albeit with an increased tendency to switch between providers, and this applies equally in a UAE context. This is critical for advisors when it comes to navigating and selecting suitable blended structuring options.

The UAE is also a global leader in technology, fintech and digital assets, with technology likely to be an integral catalyst for change and in finding simple and pragmatic solutions for Millennials and Generation X.

Traditionally, outbound investment from the region has focused on real estate and, in more recent times, private equity, but times are rapidly changing. The Financial Times, for instance, reported in April 2023 that ‘Silicon Valley investors are touring the Middle East, seeking to build long-term allegiances with sovereign wealth funds during the worst funding crunch for venture capital firms for almost a decade’.[2]

In return for investment, sovereign wealth funds from the Gulf Cooperation Council (GCC) are taking significant stakes in hot tech sectors such as artificial intelligence. Again, this appetite to explore rapidly emerging, cutting-edge options is a significant factor when it comes to structuring and ensuring a blended approach works well for the family in question.

Regulations

From a regulatory perspective, another key development has been the evolution of the Dubai International Financial Centre (DIFC) Family Arrangements Regulations.[3] These have been issued in conjunction with the Global Family Business and Private Wealth Centre in the DIFC and recognise that family-owned businesses are the powerhouse of the GCC, accounting for as much as 60 per cent of gross domestic product: a figure that is higher still in the UAE.

Many of those businesses have grown rapidly, taking advantage of simple decision-making processes and light-touch regulation but many still do not have effective succession plans in terms of the transfer of control to the next generation and beyond.

Fundamental to the success of any family business is avoiding disputes and conflict, and the new regulations now authorise family trusts or other entities holding family-run businesses to incorporate binding arbitration procedures in the event of a dispute (such as a forced-heirship claim under Shari’a law).

The purpose of the new regulations is to assist the UAE family business law[4] in allowing families to plan their succession and long-term legacy, as well as avoiding disputes. They also provide a framework whereby advisors, corporate service providers and registered persons can become ‘accredited’, with a view to ensuring good governance, expertise and conduct.

It is early days, but the vision is a progressive one and, with precedent, it should provide a genuine long-term solution to ensuring an orderly succession in respect of UAE-situs assets.

For many UAE families, succession planning needs to go hand in hand with the structuring of international assets, being cash, venture capital and private equity investments, as well as foreign-situs real estate and other private market opportunities. Understanding the ramifications and application of these new regulations, therefore, is important in the context of blended approaches to wealth and family business structuring.

Conclusion

As the UAE continues on its path of rapid expansion, diversification and implementation of its vision, these are exciting times for the region. Against that backdrop, it is fully expected that families who are aligned with this regional trend will, in tandem, continue to explore the benefits of blended structuring, so securing the benefits of domestic vehicles while harnessing the appeal of international structures that can deliver on their succession and investment objectives.

The extent to which the UAE can efficiently and effectively bring those two worlds together will significantly impact the success of its global ambitions going forward.