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Stunted growth

Financial services remain small and personal

by Livia Murray

As Lebanon’s banking sector continues to be as solid as a rock the financial sector is perhaps its deprived younger cousin. However, many financial firms and boutiques do stake it out from their headquarters in the heart of glossy downtown, adding to a space already crowded by investment units of commercial banks and financial advisory firms.

[pullquote]There seems to be a lot of Lebanese money lying around … merely gathering dust[/pullquote]

Crowded, that is, because there is not too much action in Lebanon on the financial services front, despite an estimated untapped offshore Lebanese wealth of $120 billion in assets, according to Philippe Sednaoui, chief executive officer of Audi Private Bank, in addition to our $150 billion in commercial banks deposits as of mid-Q3. In other words there seems to be a lot of Lebanese money lying around, which, at least concerning the money sitting in Lebanon, is not being propelled into investment ventures, but is merely gathering dust alongside its dues of roughly 3 percent annual interest, which it has a claim to by virtue of being a bank deposit.

Though the offerings in the financial service sector delve into wealth management, brokerage, advisory services, private placements, and even long and medium term deposits and lending to name a few, there is not much traffic in any of these financial lanes, and by all accounts, deals in this line of work in Lebanon frequently remain on the small and personal side.

Small and personal, however, is not something which even the brokers and wealth managers, so keen to see a pickup in deals for the financial sector, are able to quantify. Little data is available on the profits and turnovers of the financial sectors industries, which, unlike some of the big commercial banks listed on the Beirut Stock Exchange (BSE), are forced to be transparent.

Raed Khoury, General Manager of Cedrus Invest Bank, reflecting the general attitude of those working in Lebanese financial markets, says that he has “no idea” regarding the size of the market for financial services in Lebanon, as no statistics are made available, but that it certainly is “not a mature market.”

Missing in action

The fact that no financial firms are listed on the stock exchange is not only detrimental for our data collection purposes. In a life sized economy, not being listed on the stock exchange correlates to being small in size, whether in terms of revenue or turnover. Although in Lebanon the financial service business is unquantifiable but small from a macroeconomic perspective, the lack of listed companies in this sphere is due to a wider and more general trend among companies to not list. That is to say that in Lebanon there is little incentive for companies to list, making for rather inactive capital markets.

To get into details there are a grand total of 11 companies listed on the BSE, with a market cap of $11.3 billion as of October 31, 2014, up from $10.6 billion from the start of the year, according to EconoMena. The BSE’s average daily traded volume in the first 10 months of 2014 stood at 393,000 shares, up 80 percent from 218,000 shares in the full 12 months of 2013, according to calculations based on data provided by EconoMena on the Beirut Stock Exchange. The average value of traded shares was $2.7 million in the first 10 months of 2014, up 70 percent from $1.6 million in 2013, extrapolated from EconoMena’s data on the BSE.

[pullquote]Lebanon is far from having functional capital markets[/pullquote]

Though these may seem like impressive increases, the amounts under consideration are small compared to their regional stock exchange equivalents, and therefore likely to greatly fluctuate as far as year on year percentage increases go. Lebanon is far from having truly functional capital markets, something which is of great detriment to the financial industry. Capital markets, naturally the go-to place to buy and sell financial products, are an obviously necessary component of any healthy and booming financial services sector. As long as there are no serious capital markets, there will be little room for a financial services industry in Lebanon.

While the Capital Markets Authority (CMA), whose mandate is to regulate and oversee financial markets, has recently started to step up its game now that it has taken over regulation activities from Banque du Liban (BDL), it is not what you might call omnipresent and omnipotent. The Capital Markets law, passed in 2011, brought capital market activities under the control of an independent overseeing body, which was an upgrade from their former status as a peripheral activity of the BDL. But they are still facing enforcement and regulation issues as they have not yet established a sanctions committee.

Besides some enforcement issues, the problem with capital markets is still one of supply and demand. Investors and companies alike remain unconvinced of the stock exchange as a vehicle to list and to invest. Unsurprisingly, investors are largely unimpressed with Lebanon’s stagnant growth, whereas Lebanese businesses, for the most part family owned, largely rely on money from relatives, friends and bank loans, rather than capital increases for a percent of ownership.

Money managed

All in all, the financial services industry remains small. When Executive sat down with bankers for our wealth management special report at the end of Q3, none of them registered assets under management in Lebanon of over a few billion dollars, mere crumbs compared to global Lebanese wealth. And the total number remains an unknown quantity, even to those who would benefit from such knowledge. But though estimates of total Lebanese wealth are not clear, one thing that is clear is that wealth managers in Lebanon have not been able to capture a large slice of Lebanese wealth. Assets Under Managements (AuM) booked in Lebanon at Audi Private Bank, the largest Lebanese wealth management operation according to BankData’s Dany Baz, stand at around $3 million says Philippe Sednaoui, chief executive officer of Audi Private Bank, which has offices in several Middle Eastern and European cities.

Reeling more money in is a challenge that, beyond Q3 of 2014, continues to be an issue for your typical money manager with any concern for seeing turnover increase in the coming years. High net worth individuals (HNWIs) have yet to be wooed en masse to throw their money into wealth management. Bank deposit interests in Lebanon have been historically higher but still hover around 3 to 4 percent, and seem to be the preferred location for loose money.

But wealth managers interviewed in Q3 stated an increasing appetite among investors to diversify their placements, as well as an increasing general awareness of finances. According to Roula Habis, managing partner at Optimum Invest, HNWIs are beginning to better understand the advantages of riskier, long term investments with the potential of greater returns as an advantageous vehicle through which to store their wealth.

[pullquote]Private equity is another vehicle for HNWIs to make higher returns on their cash[/pullquote]

Investment ideas

Private equity is another vehicle for HNWIs to make higher returns on their cash. But without counting venture capital funds which fall into a different value and risk range, private equity firms in Lebanon, according to both Zawya’s private equity department and other sources consulted by Executive, can be counted by the loneliest number, one.

That is not to say that the one known firm managing private equity funds in Lebanon is lonely in the sense that its fund managers wish for friendly competition. On the contrary, the EuroMena funds belonging to Capital Trust Group, which are managed from Lebanon’s very own Starco, are benefitting from little competition at least at the local level by having a large deal flow at their disposal, according to Romen Mathieu, fund manager of the EuroMena funds.

Regionally, there have been about a dozen or so funds raised each year since 2009, according to data provided by Zawya, with 2011 and 2012 seeing the largest increase in the number of funds raised, with 20 in both years. Amounts of money raised, however, have stagnated close to $1 billion each year, with the exception of 2014, in which by October the eight funds had raised $1.9 billion, more than double 2013’s $859 million, according to Zawya.

Concerning EuroMena, their funds keep getting bigger and bigger. Their first EuroMena fund raised $63 million in 2006. In 2009 they launched EuroMena II which received $91 million of committed capital. Their EuroMena III fund had its first closing of $100 million in June, and is preparing for a second closing in Q1 of 2015 according to Mathieu.

EuroMena III will invest in six to eight investments if they close between $100–$150 million, and seven to nine investments if they close at $200 million, according to Mathieu, focusing on companies in the MENA but excluding the Gulf Cooperation Council (GCC), as well as a new regional addition that wasn’t covered in the previous funds: Africa. While the fund managers concede that the bigger reason for them operating in Lebanon is that they are Lebanese, they also noted advantages to being in a region that is central to their investors and ripe for their investments.

Beyond private equity, a more ordinary channel to funnel money for the future — and in this case not only reserved for the uber rich — is the investment component from life insurance policies. Here, life policy buyers at insurance firms can choose between a savings component to their life insurance policies, with rates above 4 percent as a standard in Lebanon for the initial years, or they can opt for unit linked products managed by the investment managers, which would have a higher return.

[pullquote]The financial service sector in many ways has yet to fully take off in Lebanon[/pullquote]

According to ACAL (Association des Compagnies d’Assurances au Liban), life insurance premiums with a saving component made up 65 percent of a total of $228.4 million worth of life premiums for the first six months of 2014, with the remaining 35 percent being premium-only policies. Out of these 65 percent, $59.5 million were in policies with a unit-linked saving component, and $89 million in protection with savings contracts.

If you are an institutional investor, a HNWI, or a regular middle class person with an appetite to save, Lebanon’s fine wealth managers, brokers, and insurance fund managers are more than happy to sell products catering to the needs of your category. However, the country’s talent in the global financial industry far surpasses local Lebanese demands for financial products — and despite the fact that there are many Lebanese working in finance around the world, the financial service sector in many ways has yet to fully take off in Lebanon.

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Livia Murray

Livia covers business, finance and economic policy for Executive.

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