Active portfolio management is key to achieve the target
Family businesses in the GCC, which have trended downward after rebounding to some extent during post-recession, must not only grow and sustain their current business, but develop beyond the region, A.T. Kearney, a global management consultancy firm said.
“The biggest advantage of GCC family business is the ability to capture the region’s significant growth via international partnerships and franchises across multiple sectors. These are reinforced by local regulations and exceptional leaders with strong entrepreneurial spirit and intimate knowledge of local markets,” the consultancy said.
“After a tough 2008, GCC family businesses rebounded to some extent [as did the market], but this did not last. As the overall market has trended mostly up, family businesses have trended downward,” A.T. Kearney said in a report. Since 2008, the A.T. Kearney GCC Family Conglomerate Index has decreased by 60 points.
The report, entitled “GCC Family Businesses: Unlocking Potential through Active Portfolio Management,” said that families must consider how they can capitalise on their advantages to recover, and then build on this to recapture stronger performance. Sustainability is crucial, after all, as many of these businesses are facing increased competition in local markets, pressure to continue to internationalise their businesses, and challenges associated with generational transition of leadership and business management.
“GCC family businesses are seeing performance recover more slowly than the market for several reasons. One is the way they are managing their wide-ranging portfolio of businesses and investments. Most GCC family businesses have a highly diversified, fragmented portfolio. This contrasts with family businesses in the more mature European and North American markets, where portfolios tend to be more focused and have clear business platforms. While GCC family businesses have been extremely successful diversifying, few have implemented systematic, active portfolio management,” A.T. Kearney said.
The report said opportunities exist to increase the systematic tracking and visibility of the contribution each individual business makes to a portfolio’s overall performance. “This often goes untracked. Value creators — and destroyers — must be clearly identified.”
Another challenge is lack of clear strategic direction and formalised risk appetite. “The development of clear strategic direction for the businesses, and therefore the investment portfolio, is often not systematic and inclusive. Discussions around the tradeoff between risk and reward are also not embedded in the culture. Stringent investment guidelines have not been fully developed, which results in conflicts among stakeholders about which investment strategies to follow. This creates a portfolio where assets are accumulated without the structural strength that comes with a clear investment and divestment rationale, which commonly supports large investors,” the report pointed out.
Insufficient anticipation of mid-term and long-term trends is yet another setback. Given the region’s rapid growth in recent history, many family businesses have not felt the pressure to implement processes for monitoring mid- and long-term market trends or to develop contingency planning to deal with a downturn in business. As a result, an internal ability to develop foresight and embed it in strategic planning and risk management is often missing,” the report said.
The consultancy firm said although many businesses had yet to fully embrace the change, some GCC family businesses are seizing the opportunity to build sustainable, robust, protected investment portfolios. Active portfolio management is an indispensable tool for accomplishing that goal. This transformation will be scrutinised by many stakeholders, especially governments, as the long-term sustainability and success of these conglomerates are often inextricably linked with entire economic segments and considerable employment of the local population.
The report argued that investments in the portfolio should be managed through three consistent and systematic processes including: Investment review, active value capture and Investment performance monitoring.
Active investment management requires internal governance and organisational support. Clear investment guidelines and an investment committee can help ensure the structured application of investment strategy, portfolio management, and assessment of potential opportunities.