MacKapital_SFO_11.15

SINGLE FAMILY OFFICES:
A BRIEF FOR INVESTORS
OF THE MIDDLE EAST
Kary Mack
November 2015

SINGLE FAMILY OFFICES: A BRIEF FOR INVESTORS OF THE MIDDLE EAST
Introduction
The key ingredient for the creation of significant family wealth has changed little over the centuries. History
shows no matter the epoch or nationality, at the center of the narrative is usually a talented entrepreneur or
industrialist that possessed a clear vision of success as well as the resolute character to forge that vison into
reality.
Although historically the creation of vast affluence possesses similar storylines worldwide, the management
of family wealth has, in fact, changed significantly over recent decades. Spearheading the change in our
modern era is the single family office (“SFO”) or its commercial counterpart, the multi-family office (“MFO”).
Today, SFOs are one of the fastest growth sub-sectors in the wealth management industry. Driving this
expansion are the fortunes produced by entrepreneurs in finance, media and technology. Like the wealthy
of the Industrial Revolution, these industrialists and their families are joining the growing global trend of
separating the family business from the management of wealth and forming stand-alone SFOs. In doing so
affluent families have clearly recognized the essential benefits of creating an organizational structure that
focuses strictly on the security and management of their personal and financial affairs.
Moreover, the SFO model is flexible and adaptable for international families also possessing significant
wealth. In fact, given regional circumstances and cultural traditions, the SFO model is a highly worthwhile
investment option for prosperous families of the Middle East.
The Single Family Office (“SFO”)
SFOs trace their lineage back to ancient Rome where the concept of major domus or head of household was
first developed. In Medieval times the “major domo” or chief steward took charge of a prominent family’s
wealth and assets. Modern SFOs began to take shape in the mid-19th
century with the development of private
banks and trust companies formed to help the Industrial Revolution’s entrepreneurs manage their wealth. In
fact, John D. Rockefeller created the first SFO in 1882, which catered exclusively to the needs of Rockefeller
descendants. Shortly thereafter groups of prosperous families began to collaborate — forming MFOs —
which lay the foundations of existing wealth management businesses such as Bessemer Trust, Wilmington
and Pitcairn.
In view of this long and successful history in the West, it is widely believed there are roughly 3000 and 1000
family offices in the US and Europe, respectively. In the Middle East there are approximately 30 to 40 family
offices, with several of them based in London and Switzerland.1
Until recently most wealthy Asian families,
according to the Financial Times, preferred to keep their money in their businesses, creating conglomerates
in the process.2
Now the publication believes there are approximately 200 Asian SFOs, up from 50 as recently
as 2008. These latter two zones will likely see continued growth in the number of family offices due to their
respective regions’ economic development and expansion. In fact, Bloomberg News estimates that SFOs in
Asia and the Middle East will more than double to about 400 over the next eight years.3
1 Kirby Rosplock, PhD, The Complete Family Office Handbook, (Hoboken: John Wiley & Sons, 2014) 590.
2 Jeremy Hazlehurst, “The rise of family offices in Asia,” Financial Times, June 26, 2015.
3 Klaus Wille, “Family Offices in Asia, the Middle East to Double, Insead Says,” Bloomberg Business, April 26, 2015.

Regardless of location, establishing a SFO is not inexpensive. A useful rule-of-thumb in the West is that
families with sufficient wealth exceeding $500 million should consider establishing an office.4
Assets under
management (AUM) of that magnitude provide both the critical mass and capital foundation on which to
build a sustainable organization, complete with experienced senior management (i.e. CEO, CIO and CFO). In
Europe when it comes to staffing and infrastructure, running costs for a SFO are said to approach 0.6% of
AUM.5
In the Middle East tax advantages are available for expatriate professionals, which may help to reduce
operating costs. Additionally, like a professional investment management business, SFOs are scalable
enterprises. In other words, growth in AUM for the SFO does not necessarily dictate growth in headcount or
running costs. In fact, SFO staffing is dependent on two primary factors: the type of personal services
provided to the family and the type of investment risk acceptable to the family. Both of these topics are
addressed in subsequent sections of this report.
Notwithstanding the cost, affluent families firmly believe SFOs are a sound investment. The organization
becomes unique and personal to them. According to the peer-to-peer advisory firm, the Family Office
Exchange (“FOX”), once founded the SFO actually provides a management structure that helps preserve the
family “enterprise” by supporting four dimensions of the prosperous family, namely:
A. Business Legacy—where the wealth originates, and for some, the corner-stone for the
Family Enterprise;
B. Family Legacy—where the family comes from and where they are heading together;
C. Financial Legacy—where financial security and management of the wealth are maintained;
D. Philanthropic Legacy—where the lasting contribution for the family resides, by giving back
in a meaningful manner.6
Functions of SFOs
The SFO model is both a functional and modular organization. As you can see from the illustration on the
following page, the model can be constructed to provide a mixture of both personal (e.g. concierge services
& philanthropy) as well as financial services (e.g. wealth management & tax) to affluent families.7
These
services can be added or subtracted on a discretionary basis, and when collectively housed together, the
functions represent a full-service SFO.
The SFO model offers additional benefits to affluent families, particularly for the dynasties of the Middle East
and Asia. On the one hand, under this management structure interests between financial advisors and the
family are clearly better aligned. On the other hand, risk management can now be centralized as well as the
coordination of other important professional services to the family. Moreover, because families of the Middle
East and Asia tend to be both large yet highly interrelated through marriage, the SFO model provides a central
platform from which proper family governance can be reviewed as well as administrated.
4 Michael A. Faber, “Creating Best Practices for Your Family Office,” Ackerman Publications, July 29, 2013; Rosplock, The Complete
Family Office Handbook, 38.
5 Rishi Yadav, “The Global State of Family Offices,” Gapgemini Publications, 2012, 6.
6 Rosplock, The Complete Family Office Handbook, 40-41.
7 Ibid, 56.

In light of the above, many affluent international entrepreneurs and industrialists are quickly moving to
separate their operating businesses from the management of their wealth by establishing stand-alone SFOs.
As discussed below, this strategy makes sense from both financial and operational standpoints. In short, a
stand-alone SFO not only helps define the purpose of the organization it also clarifies the roles of attendant
employees.
Wealth Management
Despite the variety of functions and services offered by the SFO model, it turns out, according to affluent
families, that wealth management is the organization’s top priority.8
This was the researched conclusion of
the Wharton Global Family Alliance (GFA), a unique partnership between the Wharton School of the
University of Pennsylvania and leading families from around the world.
Since its founding in 2004 the GFA has regularly produced groundbreaking research on single family offices.
For example, in its inaugural 2008 report based on extensive surveys and interviews, the GFA found that SFOs
worldwide shared a common intent in their creation “across all sizes, generations, and geographies of
families.”9
As the below chart indicates, that intent — or objective — principally is trans-generational wealth
management, followed by the consolidation function of accounting, tax and estate planning services.
Moreover, the GFA concluded in the 2008 report that SFOs are predominantly seen by families as private
investment offices; other more “soft” objectives of the family were significantly less important to survey
respondents.
8 Raphael Amit, “Single Family Offices: Private Wealth Management in the Family Context,” The Wharton School, University of
Pennsylvania, May 2008, 11.
9 Ibid.
Family
Members
Strategic
Wealth
Management
Investment
Planning
Tax and
Financial
Planning
Family and
Legacy and
Leadership
Philanthropic
Giving
Trust and
Estate
Service
• Identify Financial Resources and Objectives
• Develop Intergenerational Wealth Transfer Plans
• Coordinate with Professional Advisors
• Facilitate Information Flow
• Provide Personalized Attention
• Monitor Investment
Performance
• Provide Comprehensive
Performance Reporting
• Participate in Manager
Selection
• Develop Tax-Efficient Strategies
• Oversee Personal and Entity Tax
Returns
• Review Personalized Financial
Plans with Client
• Support Strategic Long-Term
Family Vision
• Actively Guide, Promote, and Support
Governance and Committee Business
• Family Philanthropic
Mission
• Develop Personal Gifting
Programs
• Administer Family
Foundations
• Provide Estate Planning
Recommendations
• Develop Family Wealth Plans
• Support Trustees in
Fiduciary Duties
Source: Family Office Exchange, “Family Office Primer,” 2013

In light of the above objectives, the GFA has since researched and gone on to publish that families have a
perceived importance of the activities performed by their SFOs. As shown in the below table, within the
framework of wealth management, asset allocation has consistently ranked as the top activity with families
over the course of the surveys. Moreover, it is not surprising to see that risk management has emerged as a
top activity for SFOs following the recent and severe financial crisis.
Top Five SFO Activities (2007 2009, 2011)
Activities
2007
Rating
Activities
2009
Rating
Activities
2011
Rating
Asset Allocation 3.4 Asset Allocation 3.3 Asset Allocation 3.3
Manager Selection &
Monitoring
3.3 Investing 3.3 Investing 3.2
Information Aggregating
& Client Reporting
3.1
Manager Selection &
Monitoring
3.1
Manager Selection &
Monitoring
3.1
Estate Planning 2.8
Investment Performance
Measurement
2.9 Risk Management 2.9
Legal Services 2.6 Estate Planning 2.8 Estate Planning 2.8
Most Valued = 4, Least Valued = 0
Source: Raphael Amit, “Benchmarking the Single Family Office: Identifying the Performance Drivers, 2012,”
The Wharton School, University of Pennsylvania, September 2012, 6.
0 20 40 60 80 100
Wealth Management
Accounting Consolidation
Family Unity
Family Education
Philanthrophy
Concierge
Most Important Objective of the SFO
Americas Europe RoW
Source: SFO research project database 2007
Extremely
Important
Not
Important
MONEY
ISSUES
SOFT
ISSUES

On a regional basis, asset allocation and risk management are particularly important for affluent families of
the Middle East for three particular reasons. First, geopolitical hazards continue to haunt the region,
notwithstanding the peaceful objectives of the region’s sovereign leadership. Second, much of the dynastic
wealth is directly tied to either real estate or the petroleum industry, which are hard assets and completely
anchored and indigenous to the region. Lastly, economies and financial markets of the Middle East are,
unfortunately, limited in depth and scope and, therefore, provide a paucity of liquid investment options for
affluent families.
Risk Management & Benchmarking
In light of the above hazards, and with regard to their investments, Middle Eastern families are
understandably highly risk averse. Though extremely sophisticated and early adopters of international
diversification and multi-asset investing, many families hold targeted investment returns that simply exceed
rates of inflation prevailing in the Middle East. In fact, understanding the tolerance of risk is the main job of
the SFO, or for that matter, any good wealth manager. This understanding is usually accomplished by
executing a detailed questionnaire, which ultimately leads to an investment policy statement for either
individual family members or for the entire SFO organization. Once accomplished, SFO investment executives
can implement the appropriate strategic asset allocation program that reflects the policy. Tactically, the
strategy can be implemented either through the selection of third-party managers or through the direct
purchase of financial assets such as equities or fixed income securities.
Along with personal services, it is perhaps risk tolerance of the family that firmly dictates the organizational
structure of the SFO. For example, an office with a high risk tolerance will likely engage in direct investing and
require a deep and organized bench of investment and risk management professionals. Conversely, SFOs
with low risk profiles can limit the size of their organization by utilizing third-party managers when tactically
implementing the organization’s strategic asset allocation. Of course, third-party managers employed must
demonstrate a performance track record of generating exceptional returns with corresponding low levels of
volatility.
SFOs actually have a variety of benchmarks from which to choose in order to measure investment
performance. On the one hand, the S&P 500 and MSCI World indices are widely used by SFOs that embrace
risk and whose asset allocation is predominantly geared toward US or global equites. On the other hand,
SFOs that have a variety of investments and outsource capital to third-party managers can construct a
baseline, synthetic index that reflects the organization’s strategic allocation across multiple asset classes and
investment strategies. In fact, as this sub-sector of the wealth management industry has evolved, many SFOs
have now begun to benchmark their organization’s performance against the large US university endowments
because of the recognized common investment thesis and long-term perspective.
Investment Performance
Having established risk parameters of the family, the SFO’s top activity is to implement an appropriate asset
allocation program. With financial interests clearly aligned, asset allocation is best executed at the SFO.
Unlike external vendors, the SFO will have a strong view of the totality of the family’s assets. This knowledge
provides a commanding understanding of proper diversification of investments across liquidity schedules,
asset classes and world financial markets.

Holding a holistic view of a family’s wealth is a clear competitive advantage for the SFO. Recent GFA research
supports this conclusion. As you can see from the following table, in-house asset allocation provides better
net returns than when the activity is outsourced. Moreover, it is reasonable to assume that when the SFO
has a strong strategic vision of proper diversification, tactical implementation of the investment strategy
benefits. However, the below table suggests that investment performance is more consistently enhanced at
the tactical level when third-party managers are employed rather than when the SFO actively makes
investments directly. In other words, the below data supports the old Middle Eastern investment aphorism:
to generate great performance, you should give the bread to the baker.
As SFOs look to give the “bread to the baker” and outsource capital to third-party managers, focused
consideration should be centered on boutique active investment managers. In a proprietary study of equity
strategies from 1995 to 2014, Affiliated Managers Group (AMG) found that boutique active investment
Source: Raphael Amit, “Benchmarking the Single Family Office: Identifying the Performance Drivers,”
The Wharton School, University of Pennsylvania, November 2009, 8.
In-House / Outsource Ratio vs. Actual Net Return (last 5 years)
0 1 2 3
More than 10%
7% – 9%
4% – 6%
Less than 3%
Asset AllocationNet Return
0 1 2 3
More than 10%
7% – 9%
4% – 6%
Less than 3%
Manager Selection & MonitoringNet Return
0 1 2 3
More than 10%
7% – 9%
4% – 6%
Less than 3%
InvestingNet Return

managers outperformed both non-boutique peers and indices over the last 20 years.10
According to the study,
investors utilizing boutique managers exclusively would have created 11% greater wealth over the period of
analysis.11
Additionally, AMG concludes core characteristics that position boutiques to generate long-term
outperformance include: aligned interest of key principals through direct equity ownership; the presence of
a multi-generational management team; an entrepreneurial culture with partnership orientation; an
investment-centric organizational alignment; and a commitment to build an enduring franchise.12
Interestingly, GFA research also indicates that having an “entrepreneurial culture” benefits the investment
performance of SFOs. In this particular study the GFA took the analytical approach of reviewing SFO incentive
schemes. For example, executive compensation was considered “entrepreneurial” when packages included
cash bonuses based on portfolio performance, carried interest (profit sharing) in principal investments and
co-investment opportunities. Clearly, the below chart indicates the more entrepreneurial incentive schemes
in place the better the SFO investment performance. Therefore, it is also reasonable to conclude that
establishing entrepreneurial incentive schemes not only helps retain staff but furthers the investment
performance of the SFO.
Best Practices
As mentioned earlier, wealth management is the SFO’s top priority. In keeping with that view, The Complete
Family Office Handbook states that most traditional SFOs focus much more on how they oversee financial
investments than they do on running the office as a business that follows best practices in corporate
governance.13
Clearly to be an elite organization, SFOs need to manage capital effectively as well as have
good governance procedures and decision making processes that help the family and the operation function
well.
10 Affiliated Managers Group, “The Boutique Premium. Do Boutique Investment Managers Create Value?” June 15, 2015, 1.
11 Ibid.
12 Ibid, 9.
13 Rosplock, The Complete Family Office Handbook, 413.
The Wharton School, University of Pennsylvania, November 2009, 13.
Number of Entrepreneurial Incentive Schemes Compared
to 5-Year Performance
1 1.3 1.6 1.9 2.2
More than 10%
7% – 9%
4% – 6%
Less than 3%
Number of Entrepreneurial Incentive SchemesNet Return

At the public company level, according to the Handbook, the two key hallmarks of good governance are
transparency and accountability. In a family setting, a third component is added: participation.14
In order to
achieve these three hallmarks, the Handbook recommends establishing a board of directors that includes
family members as well as independent directors that are external to the family. Large Middle Eastern
families, interrelated by marriage, should find this board approach of particular interest. On the one hand,
the board is a unifying body that can provide cohesiveness to the family. On the other hand, independent
directors will help provide diversity to the decision-making process, helping to ensure disparate views within
the family are heard and acknowledged.
The GFA, in turn, took a different approach to establish best practices for SFOs. Mining its survey data, the
GFA’s technique divided respondents into two groups: “High Performers” (SFOs with 5-year net returns
greater than 6%); and “Low Performers” (SFOs with 5-year net returns below 6%). With those two categories
in mind, the GFA then analyzed six operational activities of SFOs through the prism of quality (adjusted for
expenses). The analysis concluded that “High Performers” consistently delivered superior service across the
spectrum of activities. The results of the study, illustrated in the below chart, suggest that quality in non-
investment activities — such as education and succession planning — are also strongly associated with the
investment performance of SFOs.
In subsequent publications the GFA identified additional performance drivers of SFOs. For example, the
organization studied the relationship between the SFO and the wealth distribution of the family. In particular,
this study concentrated on families whose wealth is largely tied to an operating business controlled by the
family vis-a-vis families whose wealth is held largely in financial assets managed by the SFO. Results of the
study suggest that among “High Performing” SFOs there is less family wealth tied to an operating business,
14 Ibid, 433.
The Wharton School, University of Pennsylvania, November 2009, 4-9.
Expense-Adjusted Quality Index (Mean Comparison)
0 10 20 30 40
Governance
Documentation
Investment Management Process
Communication
Human Resources
Education & Succession Planning
High Performers Low Performers

with greater family wealth held in the confines of the SFO.15
This would suggest that when the SFO is not an
independent entity and acts more like a “holding company,” investment performance is often compromised
on behalf of financing other legacy dimensions associated with the family enterprise.
Summary
SFOs have a long and successful history in the West of providing important personal and financial services to
affluent families. Given the flexibility and adaptability of the model, and given the wealth and economic
growth within the regions, the number of SFOs are likely to increase significantly in the Middle East and Asia
over the next decade.
Based on discussed research, wealth management is the top priority for SFOs, and within the wealth
management objective offices should concentrate on leading the asset allocation and manager selection
activities to generate the best possible returns for the family. SFOs have a clear competitive advantage in
leading these activities because key individuals within the office understand and possess a holistic view of an
affluent family’s wealth. Additionally, third-party managers should be utilized in the implementation of the
asset allocation program rather than the SFO exclusively engaging in direct investing activities. Moreover,
when outsourcing capital SFOs should strongly consider boutique active equity investment managers given
their outperformance over non-boutique peers and indices over the last 20 years.
Lastly, in order to become an effective and successful organization, SFOs should follow four strategic
guidelines in the establishment and running of the office, namely:
1. Be constructed as a stand-alone organization staffed with experienced professionals;
2. Develop a complete understanding of the family’s tolerance for risk;
3. Possess an entrepreneurial ethos; and,
4. Embrace sound governance programs that promote transparency, accountability and
family participation.
15 Raphael Amit, “Benchmarking the Single Family Office: Identifying the Performance Drivers,” The Wharton School, University of
Pennsylvania, September 2012, 10.

References
Affiliated Managers Group. “The Boutique Premium. Do Boutique Investment Managers Create Value?”
June 15, 2015.
Amit, Raphael. “Single Family Offices: Private Wealth Management in the Family Context,”
The Wharton School, University of Pennsylvania, May 2008.
Amit, Raphael. “Benchmarking the Single Family Office: Identifying the Performance Drivers,”
The Wharton School, University of Pennsylvania, November 2009.
Amit, Raphael. “Benchmarking the Single Family Office: Identifying the Performance Drivers, 2012,”
The Wharton School, University of Pennsylvania, September 2012
Faber, Michael A. “Creating Best Practices for Your Family Office,” Ackerman Publications, July 29, 2013.
Hazlehurst, Jeremy. “The rise of family offices in Asia,” Financial Times, June 26, 2015.
Rosplock, Kirby PhD. The Complete Family Office Handbook. Hoboken, John Wiley & Sons, 2014
Wille, Klaus. “Family Offices in Asia, the Middle East to Double, Insead Says,” Bloomberg Business,
April 26, 2015.
Yadav, Rishi. “The Global State of Family Offices,” Gapgemini Publications, 2012.

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