Since 2008, times have been tough for family businesses. The antidote: tapping into hidden value. Like families in general, family businesses seem to function relatively well in troubled times. In fact, many studies show that, in the long run, they perform better than other business models. Key factors for their ongoing success include a management perspective that emphasizes the long term, strong brand and family name recognition, and often a strong focus on the core business.1 But in the Gulf Cooperation Council (GCC), family businesses are trending in the opposite direction.2 During the recent crisis, they have been less resilient than the rest of the economy despite a pre-downturn history of rapid growth and market dominance. Since 2008, the A.T. Kearney GCC Family Conglomerate Index has decreased by 60 points, while the Bloomberg GCC 200 Index has decreased by 40 points, a 20-point performance gap (see figure 1).3 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. - See more at: http://www.atkearney.com/paper/-/asset_publisher/dVxv4Hz2h8bS/content/gcc-family-businesses-unlocking-potential-through-active-portfolio-management/10192#sthash.sb692Hgw.dpuf

1. GCC Family Businesses:
Unlocking Potential
Through Active Portfolio
Management
Since 2008, times have been tough for family
businesses. The antidote: tapping into hidden value.
GCC Family Businesses: Unlocking Potential Through Active Portfolio Management
1

2. Like families in general, family businesses seem to function relatively well in troubled times.
In fact, many studies show that, in the long run, they perform better than other business models.
Key factors for their ongoing success include a management perspective that emphasizes
the long term, strong brand and family name recognition, and often a strong focus on the
core business.1
Family businesses seem to function
relatively well in troubled times. In fact,
they often perform better than other
business models.
But in the Gulf Cooperation Council (GCC), family businesses are trending in the opposite
direction.2 During the recent crisis, they have been less resilient than the rest of the economy
despite a pre-downturn history of rapid growth and market dominance. Since 2008, the
A.T. Kearney GCC Family Conglomerate Index has decreased by 60 points, while the Bloomberg
GCC 200 Index has decreased by 40 points, a 20-point performance gap (see figure 1).3
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.
Figure 1
Family businesses in the GCC have struggled since 2008
100
100%
80%
–40%
71
61
60
60%
–60%
40
40%
20%
2008
2009
2010
2011
2012
A.T. Kearney GCC Family Conglomerate Index
Bloomberg GCC 200 Index
Note: 100 basis is January 1, 2008.
Source: A.T. Kearney analysis
Credit Suisse Research Institute, September 2012
1
The GCC includes Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates.
2
Top 80 listed GCC family-owned conglomerates and top 200 listed GCC companies, respectively
3
GCC Family Businesses: Unlocking Potential Through Active Portfolio Management
2

3. This might come as a surprise to some, considering the advantages GCC family businesses enjoy.
The biggest advantage is the ability to capture the region’s significant growth via international
partnerships and franchises across multiple sectors, which are reinforced by local regulations, and
exceptional leaders with strong entrepreneurial spirit and intimate knowledge of local markets.
Given these strengths, the question of what is causing GCC family businesses to underperform
deserves a closer look. Families must consider how they can capitalize 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 internationalize their businesses, and challenges associated with generational
transition of leadership and business management.
Portfolio Management Challenges
GCC family businesses are seeing performance recover more slowly than the market for several
reasons. One is the way they’re managing their wide-ranging portfolio of businesses and investments. Most GCC family businesses have a highly diversified, fragmented portfolio (see figure 2).
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 (see sidebar: Unlocking the Hidden Value on page 4).
Several other issues are creating obstacles to recovery:
Low visibility of the true performance of individual assets and the portfolio as a whole.
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.
Figure 2
Most GCC family businesses have fragmented portfolios
Number of sectors in the portfolio
(%)
38%
Business sectors in the portfolio
(% active in sector)
72%
64%
56%
28%
56%
44%
17%
36%
17%
28%
24%
Transportation
Media
Food and
beverage
Industrial
66% of family
businesses participate
in five or more sectors
Hotel and
leisure
7+
Construction and
engineering
5 to 6
Real estate
3 to 4
Financial
services
1 to 2
Retail and
trading
16%
Note: Based on a sample of 40 major family businesses in the GCC; includes investments
Sources: Zawya, Bloomberg, public company information; A.T. Kearney analysis
GCC Family Businesses: Unlocking Potential Through Active Portfolio Management
3

4. Lack of clear strategic direction and formalized 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.
Insufficient anticipation of mid-term and long-term trends. 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.
Without active portfolio management, several undesirable outcomes emerge:
Fragmentation of capital with limited platform for competitive advantage. Over recent years,
the focus has been on growth, with top-line growth being the priority. Growth in low capitalexpenditure businesses, such as service- or distribution-focused activities (agency arrangements,
for example) has limited the establishment of robust barriers to entry. Many family businesses
Unlocking the Hidden Value
Recent applications of structured
portfolio management with
diversified family-owned
business portfolios in the GCC
show just how much latent value
can be unlocked. A deep look at
regional family business portfolios and the underlying performance at the individual business
level is revealing, with players
falling into one of three categories.
Only about 30 percent of
businesses in the portfolio are
true value creators. This group
contributes the vast majority of
profits (often 70 percent) from
55 to 70 percent of the total
revenues. However, they use only
about 50 percent of the equity
deployed, demonstrating a
less-than-ideal approach to
allocating capital.
The largest bucket of companies,
usually 30 to 60 percent, is the
complexity makers. Often in
non-core segments or somehow
subscale to the value creators,
these businesses tend to be either
historical interests that have not
been actively managed or new
ventures that have yet to reach
maturity. At least some of these
in the latter category will flounder
after a good business opportunity
fails to materialize, often because
of a lack of continued management focus after the initial
investment. Despite their large
numbers, complexity makers
only deliver 25 to 30 percent of
revenues and 25 to 35 percent
of profits. While not unprofitable,
these businesses can have two
negative effects on the portfolio.
The first is the need for capital
investment, as this group tends
to use more capital for smaller
returns than the value creators.
Second, the level of management
attention required to make these
ventures successful could deliver
more bang for the buck if it
focused on continuing to grow
and enhance the strongest
performers. Complexity makers
should be treated with care to
select and cultivate the future
stars, while regularly cleaning
up the others to redeploy financial and business resources for
higher returns.
The value destroyers must be
addressed most aggressively.
These businesses, which have
fallen out of favor either with the
market or management, should
not be allowed to destroy the
good work of the others in the
portfolio. Tackled strongly and
exited or restructured, the
released capital and resources
can provide a quick, valuable
uplift to the overall portfolio.
The potential for unlocking value
is undeniable. Addressing the
underperformers, redeploying
equity to higher-yielding
opportunities, and capturing
latent synergies in the portfolio
can have a tremendous impact.
In fact, applying robust portfolio
management can increase profits
by 10 to 30 percent.
GCC Family Businesses: Unlocking Potential Through Active Portfolio Management
4

5. face having to build a differentiating industrial platform to compete against new market entrants
and expand into new markets.
Organizational complexity and potentially distracted management. Diversification on
such a large scale often leads to complex organizations, overstretched span of control at the
CEO or chairman level, fragmented management focus, and protracted decision-making
processes—particularly in companies where all strategic decisions are taken by one person,
who is typically the family head.
Erosion of asset value. Unstructured and reactive portfolio management makes it difficult to
effectively review capital expenditures to remain competitive. Hesitating to make decisions
about divestments from value-destroying assets also contributes to sometimes hidden erosion
of portfolio asset value.
Any one of these elements can undermine a portfolio’s potential value and robust performance.
In some cases, portfolio growth is slowed to the point that revenue expansion can no longer
compensate for eroding portfolio profitability. This puts family businesses at great risk, especially
in tough economic times.
Building on Three Pillars
Although many have yet to fully embrace the change, some GCC family businesses are seizing the
opportunity to build sustainable, robust, protected investment portfolios—and they’re doing it by
building on the three pillars of effective portfolio management: performance transparency, investment strategy, and active investment management (see figure 3). Following is a close look at each:
Performance transparency. Portfolios are comprised of assets that deliver widely varied
performances, from outstanding to abysmal. The latter category, however, can go unnoticed
if the portfolio is performing decently as a whole. This happens when portfolio performance
Figure 3
Three pillars can help fortify GCC family business portfolios
Effective portfolio management
Performance
transparency
• Four sets of indicators to assess
the portfolio’s overall performance:
economic, financial, operational,
and strategic
• Comprehensive appreciation of
performance, including competitive
strengths and weaknesses
Investment
strategy
• Clear vision and strategy for the
portfolio with identified, targeted
industrial platforms
• Prioritization of sectors for focus
to support strategy
Active
investment
management
• Investment review
• Active investment value capture
• Investment performance
monitoring
• Investment approach
Source: A.T. Kearney analysis
GCC Family Businesses: Unlocking Potential Through Active Portfolio Management
5

6. is not effectively monitored. Too often, there’s a focus on aggregate growth, either revenue or
assets, which can obscure a portfolio’s real performance. This is particularly true for GCC family
businesses, which tend to be complex and wide ranging. A clear understanding of overall
portfolio performance—and effective asset management—requires monitoring four elements:
Economic. Provides clarity on investment returns, value creation, and efficiency of resource
allocation. Tracking share price, internal rate of return, return on equity, return on capital
employed, and economic value-added or risk-adjusted returns will help answer questions
such as these: What is the return on investment? How does the added value compare with
the cost of funding? Is there optimum allocation of financial resources for maximum portfolio
return? What is the real return given the level of risk being taken?
Financial. Provides a sense of business potential and financial sustainability. Track growth
in revenue, profit, and earnings before interest, taxes, depreciation, and amortization as well
as margins (both gross and operating), working capital, cash flow, and gearing (debt related
to equity capital). This will generate insights into an asset’s financial viability and potential
contribution to portfolio performance.
Operational. Provides data on an asset’s efficiency. Tracking indicators such as the cost of
goods sold, operational expenditure, employee productivity, and asset productivity can shed
light on the performance and competitiveness of the combined assets.
Strategic. Provides an indication of the robustness of the market positioning and likely
long-term economic and financial contributions. The focus is on private equity investors’
value-creating activities, including the number of interactions and initiatives, and on investee
companies’ market share and performance in key areas of business.
Some GCC family businesses are seizing
the opportunity to build sustainable,
robust, protected investment portfolios.
In short, performance transparency provides the information needed to assess portfolio
strengths and weaknesses, develop investment strategies, and effectively manage assets.
Investment strategy. Historically, many GCC family businesses started and developed as
commercial agents to international companies or as contractors to government projects.
As competition increases, they need to rethink their value proposition. Key to any business’s
success and sustainability is the ability to focus and have a clear value proposition. This is
challenging with just one business, let alone a diverse conglomerate or business portfolio.
But this is precisely where family businesses must develop strong capabilities for long-term
success. Developing a strong investment portfolio, defining the areas of focus, and building
a platform for competitive advantage require a strong investment strategy.
A four-step process can be used to create such a strategy:
First, assess the current positioning and outlook of the business. Honestly articulate the
competitive positioning of the core business. Note the sustainable advantages along with the
weaker elements. In addition to this internal view, analyze the market environment, moving
GCC Family Businesses: Unlocking Potential Through Active Portfolio Management
6

7. beyond the immediate atmosphere. Garnering an understanding of the long-term trends and
how they might affect the business positioning and market environment is essential.
Once this is clear, it is possible to identify the next set of opportunities. These could be in the
current business and markets or in new areas as a result of changing local market dynamics,
new industrial trends and consumer patterns, or opening and closing of various geographies.
After understanding the playing field and identifying where opportunities may arise, the third
phase of strategy development is to identify which opportunities are worth pursuing. Several
elements need to be considered:
• What are the conditions for success, and how can internal strengths be capitalized on to
create competitive advantage?
• What long-term value would the opportunity bring to the overall portfolio? Given current
business, which opportunities would strengthen the core for the future? Alternatively, how
would exploring other opportunities that might not be directly complementary provide value by
capturing adjacent emerging trends (or protect against potential negative impacts in the core)?
• What are the funding requirements for this expansion to both protect the current
business and capture the new opportunities? (For example, which assets would need
to be divested or restructured?) With this potential portfolio expansion, how can the
risk be managed effectively?
Answering these questions requires reviewing and prioritizing industry-related sectors to build
relevant platforms. It’s important to note, however, that there is no clear-cut answer to the
question of whether to focus or diversify a family business portfolio. The benefits of focus are
as clear for family business portfolios as they are for any other portfolio. However, given that
families in the GCC are often highly exposed to very cyclical businesses such as construction,
a systematic diversification of the business portfolio can reap rewards, for example in the form
of countercyclical revenue streams or as a pillar of effective risk management, spreading
market and credit risk.
After deciding on a strategy, the last step is to determine a targeted investment approach.
Again, answer a few important questions:
• What investment capital is available?
• What is the tradeoff between investing in current businesses versus in new ventures? What
are the risks and rewards?
• What is the best entry mode—organic, acquisition, or partnership, for example—for target
investment opportunities, both for portfolio growth and protection?
An objective assessment of what is needed to be successful in the investment venture and what
current portfolio and management can bring to it is crucial. As the region’s markets become
competitive, family businesses must be able to see the true value of their contribution from the
perspectives of the market and also external partners, particularly international leaders that bring
the core expertise and intellectual property to any partnership. This will enable them to reap the
full rewards of their positioning and lay the foundation for long-term success.
The process must be systematic, consistent, and integrated with portfolio management, with
an objective of being proactive about future portfolio-building opportunities. This also helps
mitigate risk and set the stage for organizational changes that might have to be made.
GCC Family Businesses: Unlocking Potential Through Active Portfolio Management
7

8. Active investment management. With a clear assessment of the portfolio performance and
investment strategy, active investment management becomes the core engine to generate
value and superior returns. Investments in the portfolio should be managed through three
consistent and systematic processes (see figure 4):
Investment review. Thoroughly assess investment opportunities—whether startups or existing
businesses—to support internal decision making.
Active value capture. Review portfolio performance, develop plans for creating value, and
follow up on turnaround performance. Identify and review other opportunities, including
acquisitions, mergers, and divestments. Follow up on execution and post-deal performance.
Investment performance monitoring. Map current investment activities, and create an
integrated database of relevant investments. Implement key performance indicators, and
employ a mechanism for quantifying and reporting value created and its contribution to
portfolio performance. This is essential to effective management and decision making.
Active investment management requires internal governance and organizational support. Clear
investment guidelines and an investment committee can help ensure the structured application
of investment strategy, portfolio management, and assessment of potential opportunities.
Large family businesses can benefit from forming a dedicated, in-house team with the authority
to do the following:
• Manage processes and undertake portfolio analysis
• Execute investment processes, either through its own resources or by retaining external
advisors
• Investigate performance of the underlying investments to assist decision making by the
investment or management committee
Figure 4
Three processes will help maximize a GCC family business portfolio
• Review new opportunities
(investments and acquisitions)
2. Active value capture
Ac
ti
• Develop action plan and ways to
engage business owners
• Mobilize investment or operations
teams for value capture, and provide
required resources
• Execute action plan (investment in
new business, acquisition, turnaround,
merger, and divestment)
Po
• Design and contribute to portfolio
strategy sector (sector investment
strategy, acquisition, merger, and
divestment strategies)
ws
vie
re
capture
lue
va
ve
• Assess existing investments (for example,
as-is performance and expansion
opportunities), revisit investment
thesis, and refresh value creation
Inves
tm
en
t
1. Investment reviews
r
tf
o
m li o p
o n e r fo r m a n c e
it o
rin g
3. Portfolio performance monitoring
• Track at entity, sector performance, and portfolio levels
• Track operational achievements and value creation versus action plans
• Report information for portfolio management decisions
Source: A.T. Kearney analysis
GCC Family Businesses: Unlocking Potential Through Active Portfolio Management
8

9. An Indispensable Tool
Entrepreneurial approaches to investment and portfolio management have given family
businesses a competitive advantage for many generations. The experience and maturity built
and transferred through family history have resulted in distinctive management approaches
and superior performance. But while some GCC family businesses have initiated the kind of active
portfolio management described here, many have yet to do so.
If the region’s family businesses are to return to their historically high level of performance,
they must not only grow and sustain their current business, but develop beyond the GCC.
Active portfolio management is an indispensable tool for accomplishing that goal. This transformation will be scrutinized 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.
Authors
Cyril Garbois, partner, Middle East
cyril.garbois@atkearney.com
Cyril Gourp, principal, Middle East
cyril.gourp@atkearney.com
Rebecca Hall, principal, Middle East
rebecca.hall@atkearney.com
The authors would like to thank Dr. Abdulrahman Al-Tuwaijri for his valuable contributions to this paper.
GCC Family Businesses: Unlocking Potential Through Active Portfolio Management
9

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