The Rise of Intrapreneurs

Globalization, technological developments, the ease of transferability of ideas and mobility of people has resulted in a structural change in the world’s economy. Among other changes, industries have witnessed a shift away from larger firms, characterised by mass-scale production, towards an increasing number of smaller firms. Interestingly, in order to remain competitive, even large firms have seen a re-composition of their business units into smaller and innovation-centric units.

At the heart of these small and innovation-centric units is an ‘Intrapreneur’-someone who thinks like an entrepreneur but is an employee within an organization. An intrapreneur drives organisational change, feels liberated to experiment with creation of new products or processes, thinks ‘out of the box’, and is highly motivated by creation of innovation in the organisation.

Harvard Business Review (HBR) suggests that, for any organisation that wishes to build an innovation engine within it, must excel at operationalizing ideas from its energized people- its intrapreneurs, who are willing to do everything they can to fight off internal resistance without creating chaos. The HBR finds that in a firm with 5,000 employees, there are at least 250 natural innovators; of these at least 25 are great intrapreneurs who can build the next business for a firm.

According to Forbes, big companies need to nurture intraprenuership to survive. Big names like Google, 3M and Intel are well known for their efforts in encouraging intrapreneurship by allowing their employees to spend some proportion of their time on developing innovative ideas, unrelated to their regular tasks. Some of the examples of intrapreneurial business units, within organisations that were a roaring success include, Mac, iPhone, iPod inside Apple; Driverless cars, Google Glasses at Google; Play station from within Sony; Post-it Notes inside of 3M; Digital Light Processing Technology inside of Texas Instruments, and many more.

The benefits accrued as a result of intrapreneurial innovation are not limited to an organisation alone. They have a far reaching impact on the economy too. According to World Economic Forum report titled ‘The Human Capital Report 2016’, the Human Capital Index is positively correlated with gross national income (GNI) and gross domestic product (GDP) per capita. Therefore, economic gains from increased human capital can be fully realised only when players across all sectors employ them efficiently.

While the concept of intrapreneurs’ contribution in enhancing business value is still evolving in advanced countries, emerging economies are observing, learning and aiming at building a conducive environment, fast. In the case of UAE, government is making conscious and consistent efforts to develop itself into a knowledge and innovation rich economy by encouraging R&D and innovation in both the public and private sector. According to The Global Innovation Index 2017, UAE currently enjoys 3rd ranking among North African and Western Asian countries and 35th globally among 127 countries in terms of performance in the 2017 Innovation Index. In 2015, with current total investment in innovation estimated around AED14 billion, annually, of which AED7 billion are allocated for R&D, the UAE government envisages in its Vision 2021 to become amongst the most innovative nations in the world.

Regulations Faced by Wealth Managers in GCC

The GCC governments are actively pursuing creation of a world class ecosystem in the wealth and asset management space. Some of the regulators are at par with international standards of supervision and oversight, propelling the GCC market as one of the most attractive financial hubs in the world. However, there are areas that still require reforms in order for the region to fully enjoy the benefits.

Saudi Arabia’s Capital Markets Authority (CMA) has been streamlining the regulations for licensing, listing and foreign participation in Saudi Arabia. Formed in 2003, it has successively introduced a number of laws and regulatory frameworks to streamline wholesale banking, regulate mutual funds industry, control issuance of capital, rationalize listing regulations and issue licenses to brokerage companies.

In the United Arab Emirates, financial services such as investment management are generally provided from three hubs, namely onshore in the UAE (i.e., outside of a designated free zone); the Dubai International Financial Centre (DIFC); and the Abu Dhabi Global Market (ADGM). All three of these institutions have their own rules and regulations. The DIFC and the ADGM are economic free zones within the UAE and have been established with the aim of attracting foreign investment. Some of the incentives offered to foreign businesses include concessions, a zero per cent tax rate and the ability to own a 100 per cent subsidiary (foreign ownership restrictions apply outside the free zones)(The Law Reviews)

The Dubai Financial Services Authority (DFSA) is the independent regulator of all financial and ancillary services conducted through the DIFC, including investment management. The rules and regulations governing investment management in the DIFC are set out in the Collective Investment Law 2010, the Collective Investment Rules module of the DFSA Rulebook (CIR) and the Regulatory Law (The Law Reviews). The DFSA has given investment firms more flexibility to classify their clients as professional, for example by easing a requirement for the firms to assess clients’ net assets.
In addition, they will be allowed to classify some clients as professional because of the nature of the services being provided to them, without an asset test. It has also created a new class of DIFC-domiciled funds, aimed at the richest and most risk-tolerant investors, which face less stringent regulation than existing funds (Arabian Business)

Similarly, Qatar has established its own regulatory framework under the Qatar Financial Centre (QFC) based on international law and best practices.

In the case of Bahrain, the Central bank of Bahrain has played a key role. It has put in place regulations that recognise the importance of expanding key areas such as the corporate governance, as well as the role and responsibilities of each relevant party of a scheme. It also expands the variety of funds that can be established in Bahrain, by introducing rules governing Real Estate Investment Trusts (REITs) and Private Investment Undertakings (PIUs). Private Investment Undertakings are new breed of investment funds with a high degree of flexibility in structuring, aimed to facilitate private investments, the like of a family held investment, single investor or a single investment type. Due to the investment risk characteristics it may exhibit, such type of scheme can only be initiated to High Net-Worth Individuals and Institutional investors. In keeping with Bahrain’s leadership in Islamic finance, the CIU rules also provide a solid foundation for the establishment and management of mutual funds that comply with Sharia principles.

One of the biggest obstacles in the growth of asset management industry is the regulations relating to foreign ownership. Typically, in the GCC, 51 percent of ownership needs to be held by a national who is paid a sponsorship fee for being a silent partner, while the foreign investor bears the entire risk. However, hybrid models of ownership have emerged for instance the establishment of free zones. Currently, GCC countries are at varying levels of transition to a 100% foreign ownership model. Free zones (in the UAE) allow 100% ownership but there are limits to their mandate. Qatar has opened up some sectors for 100% ownership, though actual approval is at the sole discretion of the Ministry of Business & Trade. Saudi Arabian General Investment Authority (SAGIA) allows 100 percent ownerships if the company is incorporated under SAGIA regime.

Demographics of Hnwis in Middle East

High Net worth Individuals (HNWIs) are defined as individuals with more than US$ 2 million worth of investible assets (2017 GCC Wealth Insight Report). According to the World Wealth Report 2015, the total global population of HNWIs of 15.4 million accounted of US$ 59 trillion worth of wealth. The population of HNWIs in the Middle East has been growing steadily from 0.4 million individuals in 2010 to 0.61 million; representing approximately 4 percent of global HNWIs population in 2015. These individuals in the Middle East were reported to account for US$ 2.3 trillion worth of wealth in 2015.

The World Wealth Report 2016, gives a breakdown HNWI investable wealth in Middle East and Africa and reports that 18.3 percent of investable wealth of investable wealth lies in retail bank accounts, 17.6 percent is with primary wealth managers, 16.7 percent is kept in the form of physical cash, 10.6 percent is with other wealth managers, 9.5 percent is invested in own businesses while the remaining 27.2 percent is invested in other forms of investments. This is mostly in line with global HNWIs.

Majority of financial assets held by HNWIs in the Middle East and Africa are reported to be in the form of cash and cash equivalents; around 26.3 percent. This is closely followed by investments in real estate, equities and fixed income; 19.8 percent, 18.9 percent and 17.9 percent of their total financial assets, respectively. The remaining 17.1 percent of the HNWIs financial assets are in alternative investments including structured products, hedge funds, derivatives, foreign currency, commodities and private equity.

Among HNWIs in Middle East and Africa, approximately 85 percent of the individuals have an equal bend towards a ‘blended-focused’ and ‘growth-focused’ investment philosophy. A blended focus towards investments refers to investments with strong return potential but at a reasonable price, whereas a growth focus approach refers to investments that exhibit above average return potential, even if the share price/purchase price appears expensive related to metrics such as the price/earnings ratio (PE ratio).

There is a growing bend toward Shariah Compliant investments among HNWIs in GCC. According to 2017 GCC Wealth Insight Report, eight in ten HNWIs (80%) say that it is important that their investments are Shariah compliant (up from 71% in 2016), including 62% who rate this as ‘very’ important. Moreover, compared to 2016, there has been an increase in the proportion of HNWIs who donate to religious causes (up to 51% from 36%).

There is also a broad support for increasing the number of women in senior management and board- level positions. 77 percent of the HNWIs interviewed for the 2017 GCC Wealth Insight Report, support increasing participation of women in senior management positions with 59 percent supporting introduction of quotas to have more women on the boards of public companies.

PWC predicts that the MENA region population will double by 2020 with approximately 40 percent in KSA and 35 percent in UAE to be younger than 24 years. With digital advancements, a rapid rate of urbanization (around 85 percent rate of urbanisation), Expo 2020 and government’s focus
towards real estate and hospitality sector, GCC has great potential in economic growth and wealth creation.