BEIRUT: With their money stuck in the banks, the sharp devaluation of the Lebanese lira, the de facto suspension of Circular 331 and rising inflation, investors and the Lebanese central bank Banque Du Liban are at an impasse.
“The first five years of the Circular 331 initiative have been great for the ecosystem, including venture capital,” Walid Hanna, founder and CEO of Middle East Venture Partners, told Arab News.
The circular published by BDL at the end of 2013 injected nearly 400 million dollars into the entrepreneurial sector to build a Lebanese knowledge economy.
“The initiative strengthened the ecosystem until the financial crisis happened in 2019. Problems arose when venture capital fueled by the circular received calls for capital from their banks and the BDL, i.e. in Lebanese liras, or US dollars,” Hanna said.
A call for funds is a legal right by which a fund manager asks investors or shareholders of the fund to pay their share in proportion to their fund commitments.
“The devaluation of the lira, which has lost more than 90% of its value, has made the situation complicated and problematic,” Hanna added.
After local banks decided to withhold savings from individuals and institutions at the start of the financial crisis in October 2019, most venture capitalists lost a significant amount of money. Worse still, the banks blocked the capital of their startups.
Another problem was that venture capitalists received their capital calls – their due from investors – in Lebanese dollars or “lollars”.
A “lollar” is an American dollar stuck 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 overseas. The fact that BDL required startups and VCs not to spend “circular 331 money” outside of Lebanon didn’t help matters, Hanna explained.
“So it’s a triple problem for banks, startups and BDL. This is where the decline started,” Hanna concluded.
Amounts stashed in banks
When asked how much money MEVP had tied up in local banks, Hanna replied that the Impact Fund, MEVP’s Lebanon-based fund, had $7 million in banks. The company launched the fund in 2014 with an initial value of $70 million, most of which was invested in 29 Lebanese startups.
“A number of these startups have already closed over the past three years,” Hanna said dryly.
While the VC relies on three other regional funds in the Middle East and North Africa to sustain itself and is doing quite well, the current situation in Lebanon has become a thorny issue for them, other investors and fund managers. funds.
“The main thing that affected us was our inability to distribute money to our startups, most of which are in their early stages,” Fawzi Rahal, general manager of Fla6Labs Beirut, told Arab News. “It also interrupted our appeal and fundraising process.”
Flat6Labs Beirut, which manages a $20 million fund, had planned to launch Cycle 5 of its program, which involved investing in 8-10 startups. However, the bootcamp was interrupted when the crisis hit at the end of 2019 and Rahal and his team were unable to complete the shortlisting of startups in cycle 5.
“Of course, later on we realized that even if we had made a pre-selection, we could not have continued the investments because our capital call had been delayed,” Rahal said.
BDL prevented all Lebanese startups from relocating abroad, thus restricting their mobility and access to foreign funding, which led to many startups going bankrupt and ceasing their activities.
BDL also said that it would not accept that startups “exit” in Lebanese liras or “lollars” but wants each startup to “exit” in fresh dollars, i.e. it or purchased by companies abroad with greenbacks.
“That’s ridiculous,” Hanna said scathingly. “We have a country that is regressing with a contraction in GDP over the past three years and reigning inflation, currency devaluation, brain drain and trauma from the Beirut port explosion. Why would anyone invest in Lebanon under such circumstances?
However, according to a senior investment source who chose to remain anonymous, the central bank has a different view.
Under the then-functional Circular 331, BDL had given a lot of money to the banks, and the banks had invested that money as shareholders or limited partners in the VCs. More importantly, they invested the money when the exchange rate for 1 dollar was 1,500 Lebanese liras. Today it is 25,300 Lebanese liras.
This is one of the reasons why BDL does not accept exits from startups in “lollars” or Lebanese liras and instead demands new dollars.
“Basically, the BDL is asking if they are being cheated on their part. ‘Cause that’s how it looks [to them]an informed source told Arab News.
He added that to make matters worse, there is no legal difference today between a “lollar” and a dollar in Lebanon.
The “lollar” stuck in banks is legally the same as a fresh dollar “so you can’t sue someone and ask them to pay your dues in fresh dollars,” the source said.
“And because the law doesn’t distinguish between the two, the law can’t protect you or BDL in this case.”
Getting out of the impasse
“I think it’s about aligning our interests as fund managers, BDL, banks and holding companies,” another senior banking source told Arab News.
“The bank’s fund managers and shareholders are aligned in that they both want the best possible price for their exits.”
The source continued to say that with no follow-on investments and most funds coming to the end of their five-year investment period, a realistic approach is needed regarding the best exit in the difficult circumstances. current.
“The ecosystem requires an update to the current 331 regulatory framework that considers new challenges, allowing us to break this impasse.”
Our source reminded us that “the positive impact of Circular 331 far outweighs the challenges we face today.”
Arab News contacted other venture capital firms for this article, such as Berytech, BY Venture Partners and Cedar Mundi, but received no response.