BEIRUT: The ailing state of the economy’s major sectors is prompting venture capital firms to delve into new fields for investments, benefiting from Central Bank incentives aimed at boosting employment opportunities and entrepreneurship in Lebanon. One new initiative is the Impact Fund, which according to its management is the largest venture capital fund in Lebanon with investment commitments in excess of $50 million and the first to comply with the Central Bank’s circular 331.
The circular was created by Lebanon’s Central Bank in August 2013 specifically to support the growth of the country’s knowledge economy, a sector that is expected to materially improve high-tech employment in Lebanon.
“We basically want the youths to broaden their horizons by stopping to try and get government or banking and insurance jobs,” said Walid Hanna, managing partner at Middle East Venture Partners, which is responsible for launching the Impact Fund.
Hanna argued that sectors such as tourism, industry and agriculture do not have much potential in Lebanon.
“The success of the tourism sector is highly dependent on other countries while industry is very energy consuming and requires a lot of manpower that is expensive in Lebanon,” he told The Daily Star, while noting that for agriculture to compete with Syria and Jordan it would require large swaths of land, which is lacking in Lebanon.
“So we may as well invest in different sectors in which Lebanese brains and talents are really good,” he said. “This is the ICT sector.”
Hanna’s remarks came on the sidelines of the Impact Fund’s signing ceremony, which took place at Four Seasons Hotel Friday.
The Impact Fund is co-sponsored by BLOM Invest Bank and MedSecurities Investment, and has already received for its first closing, investment commitments from most of Lebanon’s leading banks including BLOM Invest Bank, Bank Med, Bank Audi, Fransabank, Credit Libanais Investment Bank and Al-Mawarid Bank.
Several other banks are expected to join for the second closing of the Impact Fund including Banque Libano-Francaise, Bank of Beirut, BBAC, LGB Bank, First National Bank, BML and others.
Under circular 331, the Central Bank guarantees up to 75 percent of the value of banks’ investments in startups or VC funds. A commercial bank that agrees to invest in startups receives seven-year interest-free credit from the Central Bank that can be invested in Treasury bonds.
The Impact fund will invest $500,000 to $5 million in next generation knowledge-based SAL companies that focus on the ICT sector and other creative intellectual-property-driven sectors. It is designed to fund companies that are expected to grow into regional and even global success stories.
“We are interested in entrepreneurs who are based in Lebanon but whose market is the MENA region or the world,” Hanna said.
The managing partner explained that the Lebanese market was very difficult, extremely competitive and small, and noted that nobody honors debts or pays on time.
“We do not invest in companies that are looking at Lebanon as a main market, but entrepreneurs have to be Lebanese and they have to register the company in Lebanon in addition to opening an office in the country,” he said, adding that the market for their sales had to be outside of Lebanon.
“We need a big market for us to be able to generate serious revenues and have a potential exit that is five or 10 times our initial investment,” he added.
Hanna explained that the role of the Impact Fund is not restricted to securing investments for projects; it also gets involved in the strategy of the company.
“In addition to investing money and taking a share ranging from 15 to 30 percent, we help companies in adapting their business plans in addition to introducing them to our networks and to potential clients that are from our networks to generate revenues for these firms,” Hanna said.
He said Impact Fund allows entrepreneurs to grow and to recruit more people by allocating a budget for marketing and business development. “When the company grows and grabs a big market share we try to find a buyer to acquire the whole company,” he said.
Hanna explained that the majority owners also have the right to buy the share owned by Impact Fund. “Once we exit we give back the money to our investors, who are the banks in our case,” he said.
He added that Impact Fund expects failure in 30 percent of the projects it invests in. “Failure is possible due to several reasons but we are not much worried about that because we also expect the 70 percent of success to cover for the losses,” he argued.
The Impact Fund’s investment Committee has so far approved five investments worth $12.5 million in aggregate, of which four have been finalized with one expected to close by the end of 2014. These include a $3 million investment in Mobinets, a telecoms software provider; a $2 million investment (part of a $3.5 million financing round) in Fuel Powered, which helps mobile games add multiplayer functionalities that instantly enable gamers to compete with each other; an investment in Fadel Partners, a software company that developed IPM Suite, an intellectual property rights and royalties management product; a $1.5 million investment in Klangoo, owner of the text analysis technology Magnet; and a $4 million investment in Bookwitty, an international online book distribution company.
Hanna believes that the weakness in the ICT sector in Lebanon is attributed partly to the lack of funding on the part of universities in the country in the research and development departments. “Universities are not very tech-savvy,” he said.
However, he added, the circular 331 issued by the Central Bank, which will allow total investments up to $400 million in technology companies, will change the ICT eco-system in the country.
For his part, Saad Azhary, chairman and general manager at BLOM Bank, emphasized the importance of the ICT sector in increasing the productivity and competitiveness of the economy. “The ICT sector contributes in creating productive sectors that are subject to increasing and sustainable demand on their products and that do not get affected by financial crises,” he said.
Meanwhile, BankMed’s executive general manager, Mohammad Ali Beyhum, expressed his concern about facing challenges in exiting these investments after three to five years. “I don’t believe that the stock exchange is the way to get out of these investments given the situation of our capital market today,” he said. “However, having said that, it is really important to give this incentive to these companies.”
Beyhum said that the $50 million investment in the ICT sector is a good start relative to the total value of the ICT sector in Lebanon which has reached $360 million.
“There is much that needs to be done to bring this sector to the level that we have seen in Jordan and the [United Arab] Emirat.
The Daily Star