The dual shocks of COVID-19 and low oil prices are severely stressing GCC economies. This especially applies to many family businesses, which entered the crisis on shaky footing with high leverage, limited liquidity, and depressed profits. It is vital that these businesses weather the current storm and prepare themselves for the future because these organizations constitute 60% of the region’s non-oil GDP and employ 80% of the workforce according to PwC’s Middle East Family Business Survey.
Fortunately, most family businesses have taken sound measures for the immediate crisis. Many are supporting staff and retaining the talent necessary for their long-term success. Some are contacting key clients and suppliers to coordinate actions and ensure business continuity. They are drawing down credit lines and pooling cash among their businesses while getting the most from their working capital.
Beyond the crisis response, family businesses must adapt themselves to a changed post-crisis landscape. We believe family businesses should adopt four strategies to better position themselves for long-term success:
- 1. Diversify through a new lens
- 2. Digitize their core operating businesses and invest in “stay-at-home”
- 3. Take advantage of localization opportunities
- 4. Pursue private sector participation (PSP) opportunities
1. Diversify through a new lens
Economic cycles have shortened, and financial crises have become sharper, more frequent, and global in nature. Consequently, the traditional risk management focus on sectors and geographies is failing to shield portfolios adequately. Moving forward, family businesses need to take a more encompassing view of risk when constructing and managing their portfolios. They should incorporate an assessment of other factors (e.g., cybersecurity threats, disruption to supply chain, geopolitical events) on cash flows and valuation drivers (e.g., demand, price) to understand risks in aggregate across the portfolio. They should also conduct portfolio stress testing against these potential shocks.
Family businesses need to improve portfolio liquidity and geographical diversification. This means rebalancing and, where necessary, overhauling their portfolios to reduce concentration on core businesses. Taking some of their assets public can boost liquidity and allow them to benefit more directly and faster from government stimulus packages during times of crisis. Geographical diversification can also reduce potential market risks.
2. Digitize their core operating businesses and invest in “stay-at-home”
Before the pandemic, online shopping and working from home was on the rise. Now it is likely to become a structural “way-of-doing-business” for consumers and businesses alike. Thus, family businesses, particularly those in retail or financial services, will need to adapt their operating companies’ business models to the new “stay-at-home” economy. They will need to open digital channels and offer services remotely. For that, they will need to invest in digital infrastructure and cybersecurity and develop the appropriate digital capabilities for their core operating businesses.
In considering new investment opportunities that will benefit from the “stay-at-home” economy, family businesses should look at digital business enablers such as cybersecurity, distance learning tools, remote work platforms, digital banking, and delivery services.
3. Take advantage of localization opportunities
The closing of national borders to protect populations from COVID-19 has accelerated the examination of critical supply chains and how to increase localization efforts. For family businesses, investing in local production capabilities and supply chains can reduce reliance on imports and protect against potential supply chain disruptions. Opportunities in manufacturing could be particularly attractive given the manufacturing sector’s stable performance through oil cycles in Saudi Arabia. They can also consider domestic tourism and entertainment opportunities given the expected drop in international travel.
4. Pursue private sector participation (PSP) opportunities
Government deficits in the region are increasing, a result of lower oil revenues and higher spending to support economies. For example, the Saudi government announced stimulus packages totaling SR 120 billion ($32 billion) as of April 9, 2020. Governments will therefore need family businesses to fuel the economic engine more than ever. Family businesses should respond by taking on significant PSP projects such as infrastructure opportunities by, potentially, creating partnerships between multiple family corporations to combine capabilities and share risk.
To adapt to these changes and enhance the performance of their businesses and investments, family businesses must strengthen their corporate holdings by attracting the right talent, improving portfolio construction and value-creation capabilities, and investing in digitization initiatives. In this manner, they can be ready for growth after the pandemic.
This article originally appeared in Entrepreneurship ME, June 2020.
About the authors
Ramy Sfeir and Marc-Albert Hamalian are partners, and Bilal Mikati is a principal, with Strategy& Middle East, part of the PwC network.
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