Beirut: With their money stuck in banks, the sharp devaluation of the Lebanese pound, the de facto suspension of Circular 331 and high inflation, investors and the Central Bank of Lebanon, the Banque du Liban, have reached an impasse.
“The first five years of the Circular 331 initiative are beneficial for the environment, including venture capital,” Walid Hanna, founder and CEO of Middle East Venture Partners, told Arab News.
A circular issued by the Banque du Liban in late 2013 allocated nearly $400 million to the entrepreneurship sector to build a knowledge economy in Lebanon.
“The initiative developed the ecosystem seamlessly until the financial crisis hit in 2019. The problems arose when the circular-paying venture capitalists received capital calls in Lebanese pounds or US dollars from their banks and the Banque du Liban,” Hanna said.
A capital call is a legal right whereby a fund manager requires a fund’s investors or shareholders to pay a proportionate part of their financial obligations.
Hanna added that “the devaluation of the lira, which has lost more than 90 percent of its value, has complicated and complicated the situation.”
After local banks decided to freeze the savings of individuals and companies at the beginning of the financial crisis in October 2019, most of the investment capital lost a large amount of money. Even worse, the banks raised the capital of their start-up companies.
Another problem was that venture capitalists received capital calls – money owed to them by investors – in Lebanese dollars, aka the “rich”.
“Lawler” means the US dollar tied up in the Lebanese banking system. In other words, importing a computer without tangible currency attached to it.
The loller case prevented start-ups from expanding their businesses abroad. Hanna explained that the Banque du Liban’s request of startups and venture capital not to spend “Circular 331 money” outside of Lebanon did not help solve the problem.
Hanna concluded: “This is a triple whammy for banks, startups and the PDL. That’s where the decline started.”
deposits in banks
When asked how much money MEVP has stashed in local banks, Hanna replied that the Lebanon-based MEVP’s Impact Fund has $7 million in banks. The company launched the fund in 2014 with an initial valuation of $70 million, most of which was invested in 29 Lebanese startups.
“Many of these startups have already closed their businesses in the last three years,” Hanna said dryly.
While venture capital relies on three other MENA region funds to position itself and do well, the current situation in Lebanon has become a thorny problem for them and for other investors and fund managers.
“The number one thing that affected us was the lack of ability to distribute money to our startups,” said Fawzi Rahal, managing director of Fla6Labs Beirut. “It disrupted the call for capital and the fundraising process.”
Flat6Labs Beirut, which manages a $20 million fund, plans to launch the fifth cycle of its program, investing in 8 to 10 startups. However, the boot camp came to a halt when the crisis erupted in late 2019 and Rahal and his team were unable to finalize their Cycle 5 starting shortlist.
“Of course, later, even though we were on the shortlist, we realized that our capital call was delayed and we could not continue with the investments,” said Rahal.
Bank of Lebanon restrictions
The Banque du Liban prevented all Lebanese startups from moving abroad, limiting their ability to relocate and access foreign funding, leading to the bankruptcy of many startups and the suspension of their operations.
The Banque du Liban does not accept the “exit” of startups in Lebanese pounds or “Loller”, but it wants every startup to “exit” with the new dollar, that is, to be bought by companies abroad with dollars become
“That’s ridiculous,” said Hannah harshly. “A country that has been in decline for the past three years with shrinking GDP, inflation, currency devaluation, brain drain and the shock of the Beirut port explosion. Why would anyone invest in Lebanon under these circumstances?
However, the central bank has a different view, according to a highly placed investment source who chose to remain anonymous.
As part of Operational Circular No. 331 at the time, the Banque du Liban provided many funds to the banks, and the banks invested these funds as partners or limited partners in venture capital. And most importantly, they invested the money when the exchange rate for one dollar was 1,500 Lebanese pounds. Today it is 25300 LL.
This is one of the reasons why the Banque du Liban did not accept the exit of start-up companies in the “dollar” currency or in Lebanese pounds and instead demanded new dollars.
“Essentially, the BDL is wondering if we’re cheating on its role, because that’s what it is [to them]An informed source told Arab News.
To make matters worse, he said, there is no legal distinction between “lolar” and the dollar in Lebanon today.
The source said the “noose” stuck in the banks is legally equivalent to new dollars, “so you can’t sue someone and ask them to pay your membership fee in new dollars.”
“Since the law does not distinguish between them, the law cannot protect you or the Banque du Liban in this case.”
break the deadlock
Another senior banking source told Arab News: “I am considering aligning our interests as fund managers, PDLs, banks and portfolio companies.”
Both fund managers and bank shareholders want the best possible price for their exit.
The source further said that in the absence of follow-on investments and with most funds reaching a five-year investment horizon, the current difficult environment requires a realistic approach to better exits.
“The environment requires an update of the existing regulatory framework 331 that takes into account new challenges and allows us to break out of this impasse.”
Our source reminded us of the “positive impact of Circular 331 on the challenges we face today.”
Arab News contacted other venture capital firms such as Peritech, Buy Venture Partners and Cedar Mundi, but received no response.