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BEIRUT: With their money stuck in banks, the sharp decline in the value of the Lebanese lira, the suspension of Circular 331 and rising inflation, investors and Lebanon’s central bank, Banque du Liban, are in dire straits.
“The first five years of Circular 331 have been good for the ecosystem, including venture capital,” Walid Hanna, founder and CEO of Middle East Venture Partners, told Arab News.
A circular issued by BDL at the end of 2013 has injected nearly 400 million dollars into the entrepreneurial sector to build Lebanon’s knowledge economy.
Until the financial crisis of 2019, the startup powered the ecosystem seamlessly. Problems arose when business capital supported by the circular received capital calls from their banks and BDL in Lebanese Lira or US dollars.
Capital call is the legal right of a fund manager to ask fund investors or shareholders to pay a rata portion of their fund commitments.
“The collapse of the lira, which has lost more than 90 percent of its value, has made the situation complex and problematic,” Hanna added.
Waleed Hanna, Founder and CEO of Venture Capital MEVP. (provided)
In the year At the beginning of the financial crisis in October 2019, after local banks decided to freeze the savings of individuals and institutions, most VCs lost huge amounts of money. Even worse, the banks tied up their startup capital.
Another problem was that the VCs received their capital call – their due money from investors – in Lebanese dollars or “lolar”.
“Lolar” is the US dollar pegged in the Lebanese banking system; In other words, a computer entry with no corresponding tangible currency.
The “Lollar” issue has made it impossible for startups to expand their businesses abroad. BDL’s insistence that startups and VCs not spend any “Round 331 money” outside of Lebanon didn’t help matters, Hanna explained.
“So it’s a triple whammy for banks, start-ups and BDLs. This is where the decline starts,” Hanna said.
Deposits in banks
When asked how much money MEVP has tied up in local banks, Hanna replied that Impact Fund, MEVP’s Lebanon-based fund, has $7 million in banks. The company He launched his fund in 2014 with an initial capital of $70 million, most of which has been invested in 29 Lebanese startups.
“Many of these startups have gone out of business in the last three years,” Hanna drys off.
While VC has managed to sustain itself and is doing well with three other regional funds in the Middle East and North Africa, the current situation in Lebanon has become a thorny problem for them, other investors and fund managers.
Fawzi Rahal, managing director of Fla6Labs Beirut, told Arab News: “The first thing that affected us was the lack of ability to distribute funds to our startups.” “It interrupted our capital appeal and fundraising process.”
Flat6Labs Beirut, which manages a $20 million fund, plans to launch cycle 5 of the program, which involves investing in 8 to 10 startups. However, when the crisis hit at the end of 2019, the boot camp was cut short and Rahal and his team were unable to finalize the starters list for Cycle 5.
“Of course later, we realized that even if we made a shortlist, we couldn’t continue the investment because our capital call was delayed,” Rahal said.
Limitations of BDL
The BDL has banned all Lebanese startups from migrating abroad, thus preventing their activities and foreign funding, causing many startups to go bankrupt and cease operations.
BDL also stated that it would not accept an “exit” of startups denominated in the Lebanese lira or “lolar,” but wanted every startup to “exit” in new dollars, meaning it would be bought by foreign companies.
“That’s ridiculous,” Hannah said angrily. “We have a country that is going backwards with its GDP in the last three years and is suffering from inflation, currency depreciation, brain drain and the Beirut port explosion. Why would anyone invest in Lebanon under such conditions?”
However, according to a senior investment source who chose not to be identified, the central bank has a different view.
As part of Circular 331, which was in force at the time, BDL gave large amounts of money to banks, and the banks kept this money as shareholders or limited partners in the VCs. More importantly, they farmed the money when the currency of 1 dollar was 1,500 Lebanese lira. Today it is 25,300 Lebanese Lira.
This is one of the reasons why BDL does not accept initial exits in “lolar” or Lebanese lira and instead seeks fresh dollars.
“Essentially, BDL is asking if we are cheating their part. Because it looks like this [to them]A source with information told Arab News.
Even worse, he added, there is no legal distinction between the “lolar” and the dollar in Lebanon today.
The “lollar” stuck in banks is legally the same as new dollars, “so you can’t go to court and ask them to pay you in new dollars,” the source explained.
“And since the law doesn’t distinguish between the two, the law can’t protect you or BDL in that case.”
Break the stone
“I think it’s about aligning our interests as fund managers, BDL, banks and portfolio companies,” another senior banking source told Arab News.
“The fund managers and the bank’s shareholders both want the best possible price for their exit.”
The source continued, with no series of investments and most of their funds expiring their five-year investment period, a realistic approach is needed regarding the best exit in the current challenging environment.
“The ecosystem requires an overhaul of the current 331 regulatory framework that takes into account new challenges.
Our source reminded us that “the circular 331 compensations have had a positive impact so far on the challenges we are facing today”.
Arab News contacted other venture capital firms such as Berytech, BY Venture Partners and Cedar Mundi for this piece but did not receive a response.
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