Investing in a venture capital (VC) fund is a bit like betting on a horse. The gambler can choose a horse carefully, looking at the animal’s past performance and even evaluating the jockey, but once the race starts and the money’s laid down, all the gambler can do is sit back, watch the race and hope for a big payday. Risk is high, but promise of a windfall is higher. Georges Hajj does not look like a gambler. Nor does he talk like one.
Hajj is the head of the CEO’s office at Banque Libano-Française (BLF) and speaks to Executive about the bank’s VC bets under central bank circular 331. He says BLF invested $8 million each into Berytech’s Fund II, Middle East Venture Partners’ Impact Fund, and Leap Ventures’ first fund, commonly referred to as the “Leap fund” (although the company doesn’t mention a name for the fund on its website). He says the bank also put a total of $4 million into the Cedar Mundi fund (a joint-venture between Kuwait’s International Financial Advisors KPSC and Spain’s Mundi Ventures SL) the Division I fund managed by B and Y Venture Partners and the Azure fund, the latter two of which do not seem to have yet publically launched. In industry parlance, BLF is a limited partner (LP) in each fund in which they’ve invested. The managers of each fund are its general partners (GPs). Outside of Lebanon, the horse betting analogy is apt. Limited partners have no influence on how general partners make investments. They put up the vast majority of a fund’s capital and then sit back to watch the race (which can last 10 years or more), hoping their investments come back in multiples. In Lebanon though, that’s not exactly the case.
[pullquote]Unlike most other markets, bank representatives sit on the boards of the funds into which they’ve invested[/pullquote]
A dozen or so commercial banks are taking advantage of circular 331 (which guarantees 75 percent of their investments into VC funds and startup companies) and are currently LPs in one or more of the local VCs. (As no database tracking 331 money exists, specificity is difficult.) Unlike in most other markets, bank representatives sit on the boards of the funds into which they’ve invested. Hajj explains that, because some funds have many banks as LPs (Berytech boasted 19 when it launched Fund II), not every LP has a seat, but all of the funds managing 331 money have bankers on their boards. He doesn’t specify how many boards BLF sits on, but does note it offers the bank at least a voice in decision making (a no-no in other markets, see PE law article). “We, as BLF, believe that being part of the board of directors is good for us to follow [up] on all these investments,” he says, noting that while a fund’s investment committee takes final, independent investment decisions, the board approves and can influence a fund’s general investment strategy. Not exactly as passive as our gambler. Nor, Hajj says, does the bank hope for a big profit. Asked what return BLF is anticipating, Hajj explains that a return of the initial investment makes it a successful venture for the bank. Though he points out that should the investment prove profitable, gains are split 50-50 with the central bank, not 25-75 the way the risk is divided.
Off to the races
IN THE PIPELINE
Of the handful of projects in Lebanon’s startup ecosystem that have received a 100 percent guarantee from Banque du Liban (BDL), Lebanon’s central bank, only the UK-Lebanon Tech Hub (UKLTH) lacks a revenue model (i.e., they are not taking equity in the startups they assist nor charging any fees). That, however, should soon change, according to Marwan Kheireddine, chairman of Al-Mawarid Bank, which is invested in the UKLTH. Asked if taxpayers will end up paying for the UKLTH, Kheireddine says: “We’re changing the model exactly for that. The original intent of the UKLTH [when it opened in June 2015] was to serve the space for two years.” The new plan is to ditch the two-year timeframe. “Our decision is for it to continue,” he explains. “We are re-visiting the model and saying, ‘Ok, now, if we’re going to continue that effort and make sure UKLTH has enough funds to go forward, we cannot rely 100 percent on the funding from the central bank.’ Obviously, we can expect that the central bank will continue to support UKLTH somehow, but UKLTH needs to look at other sources of funding, and we are. We’re looking at funding from the European Union, from interested entities, be it NGOs or companies that have a budget within their CSR to contribute to UKLTH, and, obviously, we have to turn to the companies that we are accelerating and say, hey guys, we can really be of service to you, we have been of service to you, we can’t do it for free. You have to give us something in return somehow. And this whole re-visiting is being done as we speak, so I cannot confirm now exactly how and what we’ll be doing, but I can confirm we’re looking.”
While Executive did not interview every bank making use of 331, BLF’s approach seems to be industry standard. Indeed, only three of the country’s banks are either known in the market to be direct investors or have publicly announced such equity participations. (Again, the lack of a database means these figures are based on Executive’s open source research and interviews, meaning there may be a direct bank investment or two we missed). Of those three, Executive was only able to arrange an interview with Al-Mawarid Bank, which got the 331 party started back in June 2014 by making the first compliant investment into Presella, an “online e-ticketing platform,” according to its website. Since then, Mawarid has made eight more direct investments (the value of which the bank did not disclose). Seven of them basically fell into the bank’s lap, explains Marwan Kheireddine, the bank’s chairman. In addition to being active in directly deploying 331 money, Mawarid has its fingers in a few more pies. Banque du Liban (BDL), Lebanon’s central bank, is giving 100 percent guarantees to Mawarid investments into the UK-Lebanon Tech Hub (UKLTH) – the result of a partnership between the central bank and the UK Government – as well as Bootcamp (which describes itself as the place “where ideas become startups”). Kheireddine explains that seven of the young ventures Bootcamp has worked with could not find the small ticket investments they were seeking, so Mawarid stepped in. (The bank provided a list of the companies it invested in but not the exact ticket sizes.)
These Bootcamp opportunities, however, may not be around for very long. Two new funds – Division I from B and Y Ventures, which Executive covered in April – and the Phoenician Fund I, managed by Phoenician Funds, will be focusing on seed investments. Phoenicia, however, will generally only invest in companies dealing with financial technology (FinTech), health care and e-government, explains Jad Salame, one of the fund’s five GPs. He notes the managers are open to opportunistic investments larger than seed and in other sectors. In addition to the two soon-to-launch funds, Kafalat is running an equity investment program (iSME) that is funded via a World Bank loan to the Lebanese government. Part of the program includes giving $15,000 grants (with no equity participation) to entrepreneurs directly as well as startups, explains Bassel Aoun, the project manager. Aoun says that since iSME began disbursing grants in Q3 2015, 46 were given as of May 24. While iSME’s website is not up to date (less than 30 grantees are listed), many grant recipients have also passed through Bootcamp, the UKLTH or Speed@BDD, an accelerator run out of the Beirut Digital District.
Outside looking in
[pullquote]Three of the country’s banks are either known in the market to be direct investors or have publicly announced such equity participations[/pullquote]
Raed Khoury, chairman and general manager of Cedrus Invest Bank, is taking a conservative approach to making use of 331 money. He says the bank generally would prefer doing a direct investment as opposed to investing in a fund, but notes he has not had the time to find the right opportunity. Khoury admits that lack of centralized data on new companies being created and deals being signed makes the task of finding a good investment more difficult, but he has no fear of missing out. Instead of rushing to enter promising companies as soon as possible (with the associated risk), he says he’d rather let the ecosystem develop more before jumping in. “I’d rather go at a later stage with a higher valuation and more visibility,” he explains.
This article was amended on October 27, 2016. Executive misspelled the name of Phoenician Fund I and manager Phoenician Funds. We regret the error.