When it comes to political stability, you either drink the Kool-Aid or you don’t,” says Tarek Sadi, managing partner of Middle East Venture Partners (MEVP), using an American adage for wholeheartedly believing in something, as he sips a Nespresso in his office overlooking Martyr’s square. “We drank the Kool-Aid and we are investing in it,” he adds, as his partner Walid Hanna nods in agreement.
The pair and a third partner, Rani Saad, set up operations in Beirut in January when they decided it was time to brave the Lebanese venture capital (VC) market and invest in the county’s virtually nascent asset class.
The idea was the brainchild of Hanna, who previously headed up Dubai International Capital’s Arab Business Angels Network. As the word ‘venture’ became less attractive to a market at a standstill, the imperative to move to greener and, previously, riskier pastures became all the more evident.
“It was very clear that the opportunities — what I do, and what I enjoy in venture capital — were not going to be found in the Gulf and that the real opportunity was in the Levant,” Hanna says. Hanna then convinced Sadi and Saad, who now advises the fund, to leave the ailing emirate and set sail for Lebanon.
That was a little more than a year ago. Today the company has already closed its first fund, the Middle East Venture Fund, at $10 million, and has targeted a treasure chest of $20 million. The partners are hoping to announce their first investments this month, following the approval of their investment committee.
Almost a Greenfield
The hope amongst many is that if MEVP meets its target and invests in its first company within nine months of setting up shop, the company will have set the stage for the revitalization of Lebanon’s relatively dormant VC space. Prior to MEVP entering the market, just three VC funds had operated in the country: the Berytech Fund, the Building Block Fund (BBF) and Byblos VC, Byblos Bank’s VC arm. Byblos VC never really got off the ground and no longer exists.
The BBF, which declined to comment for this article, has been inactive for over a year and recently fired its management over quarrels with its investors, leaving Berytech as the only functioning fund on the market. But even this is relatively small — Berytech Fund currently has only $6 million compared to BBF’s reported $16 million, which sits idly by, waiting to be invested. Nonetheless, the fund is in the process of closing its fourth investment, which had yet to be officially announced as Executive went to print.
Berytech Fund’s managing partner and part shareholder Sami Beydoun said he welcomed the competition that MEVP would bring to the market and does not view the company as a threat to his effective monopoly.
“It’s all about creating the ecosystem,” he says. “If you are a single jeweler on a street you are not going to get a lot of business but if others open up next to you they will spur on more activity, which is a good thing for everyone.”
Indeed, outside of the technology sector where the Berytech Fund focuses its investments, the market for MEVP is wide open. The firm has already looked at some 40 companies and has narrowed the field down to five. If they occur, MEVP’s initial investments will range between $500,000 and $2 million for a period of three to five years and carry a management fee of 2.5 percent, as well as a target gross internal rate of return of 35 percent.
The high-risk-high-return dynamic at the firm is “the nature of the beast,” according to Maurice al-Haddad, financial analyst at MEVP.
“The growth capital that we inject comes at a very crucial point in the company’s history: the first three to five years. These companies experience their highest growth period’s year-on-year during that period so when we exit them, they are moving faster towards their peak and thus valuations are high and we get these high returns.”
While MEVP’s investment targets may be Lebanese for the most part, the target markets of the companies they intend to invest in are not. “We look at businesses that have at least a regional, if not global, offering and Lebanon is a great test bed for that,” says Sadi.
“We wouldn’t invest in a company whose market is just Lebanon because it’s too risky,” adds Hanna.
The target market strategy is understandable considering the multiples that the firm is looking to achieve. According to Hanna, for companies to be shortlisted for possible investment, they must be expected to grow to the point where the firm gets back five to 10 times their original investment. In order to achieve this ambitious aim, the company says it is willing to allocate the resources required to take a “hands on” approach during the investment phase and help organizations structure their financial models before investing.
“It takes much longer here to get to a point of investment than in other places because the entrepreneurs aren’t prepared and the semantics are different,” says Sadi. “We bit the bullet and we are willing to take the risk of the operation until we get our return,” he adds, while insisting that such an approach should be viewed as preferential treatment for favored investment opportunities rather than their standard modus operandi.
That notwithstanding, the firm also minimizes its risk by targeting mainly minority stakes in companies. “We invest in people primarily; so we don’t want to run or manage those companies,” adds Sadi.
MEVP insists that whatever risks it takes during the investment process, it has also taken wide ranging measures to cover its back before plunging into contracts in the murky waters of Lebanon’s infamous legal structures.
The firm’s “bulletproof” shareholder agreements, as Hanna describes them, include several clauses including the right of first refusal, a put option and preemption, and a veto on hiring senior management. For anything else that the law doesn’t cover, “we can always negotiate a shareholder agreement that makes up for all the missing parts of the law,” says Hanna.
Even though the fund has a Lebanese tinge, it took the decision to register in the Cayman Islands because “it’s a tax haven and we want to be tax efficient,” Hanna says, referring to the 10 percent capital gains tax on funds in Lebanon. That has also allowed the fund more leeway to set carried interest of 20 percent, distributed on an exit to the employees.
“Obviously a managing director gets more than others,” says Hanna without divulging the distribution of the carry over at the firm.
Despite the added diversity MEVP may bring to the market in the long term, in the short term the firm is looking to consolidate its position by eyeing up the competition. According to Hanna, since BBF is currently in the doldrums, MEVP has launched a bid to take over management of the fund. If that occurs, it will have around $26 million between its own investors and those of BBF’s to exercise in the market — in effect quadrupling the amount of active capital in the market space.
In addition, the company is also open to syndicated investments, partnering up with other funds to make investments.
What’s more, having already closed its first $10 million, MEVP is looking to close another $10 million in the next three to six months. In order to do so, it is looking to draw on its current investor base comprised of “two of the leading five Lebanese commercial banks, three large Lebanese conglomerates, and six individuals who are mostly Lebanese with a couple of Saudis,” says Hanna.
Both Hanna and Sadi insist that this institutional investor base is what sets them apart from the other VC funds that have operated in the Lebanese market. For instance, Hanna points to the fact that the Berytech Fund is backed by a large enterprise of several firms, which means “they do not have to cover their immediate salaries with management fees because they have the back-up.”
The Berytech Fund is indeed supported by 19 shareholders who include “prominent Lebanese banks, large national corporations, Fortune 500 multinational companies, local NGOs, a university and individuals,” according to its website.
Berytech Fund’s Moubayed, however, disagrees with Hanna and Sadi’s premise, arguing that the fund is a separate operational entity from Berytech — the large entrepreneurship, health and technology incubator which is supported by the European Union — but has a contract with the firm to manage the fund.
“The fund is an institution. It is neither more nor less ‘institutional’ [because of its investor base],” Moubayed insists.
A starry outlook
However “institutional” the firm may be, MEVP has been given a mandate to exercise between $10 and $20 million over three years, starting June 30. If the fund lives up to the promise of its potential, the Lebanese VC may finally emerge from the dark ages into an investment renaissance.
“Today the stars are aligned; the country is growing, the government is behind entrepreneurs, as are the corporates and the academics,” says Sadi.
But whether or not the hoped for renaissance occurs will largely depend on the market and if it takes to the kind of investment that VC entails. In the end, as Sadi concedes, “the more people who get involved the more real it becomes.”