Cedar Oxygen: a ventilator for Lebanese industrialists?

Q&A with Alexandre Harkous

Established in early 2020 as a private initiative to address the pressing social and economic difficulties of the Lebanese industrial sector, Cedar Oxygen was later approached by the Lebanese central bank (BDL) which invested $175 million of financing in order to address the need of local industries. In light of the financial crisis in Lebanon and the depreciation of the Lira, which is making it more difficult for the Lebanese to import foreign goods, including raw materials, Executive sat down with Alexandre Harkous, Chairman and Managing Partner of Cedar Oxygen.

Could you please start by introducing yourself and telling us about your background?

I left Lebanon in 1985 and moved to France. I am an engineer, technology oriented, specialized in Finance. All my background is with banks, asset management and capital markets. Then I ventured into startups. I founded my first one, SIP, in 1996, and sold it in 1998 to a very big company in the UK, Mysis UK. For the following three years I was head of wealth and asset management at Deloitte, then my second startup was established in 2000, BI-SAM Technologies, which became a worldwide leader in wealth and asset management systems. Today, more than USD 15 trillion of assets under management use this system. This company was then sold in 2017 to FactSet [and relocated from the UK to Lebanon]. Why Lebanon? I am Lebanese […] I wanted to give back to Lebanon, and even wanted to come back and live in Lebanon. I had prepared everything in Beirut, then we started facing the problems we know. My objective was to help Lebanon and help the Lebanese youth in creating startups.

Could you expand on the genesis of Cedar Oxygen? How was it created? Were institutions such as the Lebanese central bank or expat organizations involved in the design?

[BDL] was talking to different fund managers and counterparties, including the Association of Lebanese Industrialists. The Governor [Riad Salameh] called me in January 2020 and we met. We discussed in length the problems that the industrialists were facing, their increasing need for liquidity as well as the foreign reserves situation and the subsidies issue. He asked me for my opinion. We import between 11 and 14 percent of GDP per year for the industrial sector. We import raw materials for USD 3 billion. We should have a way for industrialists to finance themselves which should be a closed circle.

The other idea was related to the FX, because industrialists selling to the domestic market will collect their money in LBP, and therefore we should have a solution to inject money in the fund in USD. He mentioned that he was talking to different parties. So we started the process in the end of January and early February. After a long procurement process and 11 different meetings, due diligence and compliance processes, our proposed solution (Fund and Digital Fintech Platform) was approved by the Governor and voted by the Central Council members

I had called different partners, from Moscow, Paris, and Beirut, and we worked hard during six weeks and presented this program in March. It has two legs: a fund (a pool of money), and a platform for peer-to-peer FX.

Were there any Lebanese expatriates involved in the process?

All the founding team members are expatriates. We hired a team of seven in Lebanon after we created the company. Today we have two structures, the back office in Paris and a front office team in Beirut.

Did any organization such as Lebanese International Financial Executives (LIFE) take part in this process?

The founding team seeded the initiative, then the BDL was the first anchor investor in the fund. Cedar Oxygen is a private initiative, founded by expatriates. I am a member of Life, and chairman of the technology pillar of LIFE today. Two other members of Cedar Oxygen are members of LIFE. This is how I contacted my partners. It is not a LIFE initiative but an initiative by LIFE members.

In the current situation, Lebanese enterprises are finding difficulties in accessing capital, in paying for imported materials (raw materials and machinery), and the need to activate exports. How will the Cedar Oxygen fund address these issues?

The journey ahead of us is long. We have a pool of capital and a FX platform. Now if you are an industrialist, you need to buy your raw materials let’s say from France or any other country, you can ask for a facility from Cedar Oxygen, you can import through the platform, which is digitalized, with a new way to treat the files. Given that we are in France, we will be talking to Coface and Euler Hermes to help structuring credit insurance for exports.

The process starts by collecting the data from applicants, studying the files, financial statements, and their financial situation. We have a credit team in the Beirut front office that collects and analyses the data, and creates a credit memo for an Investment Committee (IC). The IC is composed of five members; three of them are independent and two are not Lebanese. The idea was to avoid a conflict of interest. There is no decision made in Beirut with regard to how we allocate the funds. Any file we receive is treated in Beirut, a detailed memo is sent to the IC. Every week we have an IC, the vote has to be  unanimous for the file to be approved. Then we deploy the money and pay directly to the sellers of raw materials. The materials are then sent to Beirut.

How would you describe Cedar Oxygen’s business model? Would you qualify it as a private debt fund?

Yes, but for the moment it is not debt for capital expenditures or working capital. It is for buying raw materials. However we are talking to different development finance institutions (DFIs), and we hope to help more by deploying money for capital expenditures and working capital, this will help the industrialists augment their production, especially the exporters. Our target is to improve the balance of payments.

Will this include export support or export activation programs? (For example, participation in trade fairs among others)

You are aware that we have signed a memorandum of understanding with the Association of Lebanese Industrialists (ALI). We are working now with different economic attaches, either Lebanese or non-Lebanese, in different Lebanese embassies, but also the French Chamber of Commerce and the ALI. We are preparing a virtual trade fair for Lebanon that will be held in Paris on April 29 to promote the Made in Lebanon label. It will be the first virtual trade fair where we will expose real Made in Lebanon brands in Europe, and it will be our first occasion to show that.

Is Cedar Oxygen banking on specific key sectors for exports (for example agribusiness and key industries with competitive edges)?  

We are excluding jewelry, due to Know Your Customer (KYC) and Anti-Money Laundering (AML) problems. We were excluding oil because it is not raw materials. But we received a file today, a request for a company that is importing oil for industrial purposes and we will consider it. Other industries, agribusiness, of course, textiles, machinery, and other industries are all eligible.

You mentioned hoping to reach $400 million per fund. How are you segregating the funds?  

When I met Fady Gemayel, the president of the ALI, we were looking at the needs of the Lebanese Industries, and we came to the conclusion that if we reached this number, and we could roll it out once or twice a year, this would be enough to cover the initial demand. This was in February 2020. Afterwards, the government announced their default on Eurobonds, then resigned, then unfortunately the explosion at the port and the COVID-19 lockdown occurred, so we are trying to readapt our strategy to be pragmatic, especially as our stakeholders, the DFIs have two problems today: they have concerns about the political issues, and the country risk. We are trying to reach this amount as a target.

You mentioned before that you were hoping to reach a $2 billion a year financing. How are you segregating the funds?

We are allocating by sector. Our business strategy is to manage risks. We have to manage risks by sector, we will not concentrate our investment on a few sectors. We reallocate things differently, but we are still deploying. We cannot have more than 5 percent concentrated to a single borrower and no more than 30 percent concentration to a sector.

Industrialists have expressed interest. Are they mainly interested in the fund as potential borrowers or recipients? Or are there desires to be part of the financing? 

There is interest in borrowing from the fund, but we have received interest by some of them to invest in the fund. You can use money in the fund, but you cannot obtain any priority to borrow from the fund in that case, or receive any information on your competitors.  It’s a candid answer we need to give to those industrialists; it’s part of the communication.

When we created the IC, we were concerned to receive these calls from Beirut. I have one vote, even if I want to transfer money from the account I cannot sign alone. The signature is done not just by the chairman but also by two external managers that are partners in the corporate service agent that we work with who operate under Luxembourg jurisdiction. We are always under control by the IC for any money in and out.

Has potential funding interest been expressed by other sources? 

Industrialists are interested. DFIs were all interested, but with all that happened last year we have had ups and downs. Since the US elections we are seeing more interest from the American side. In Europe it’s more wait and see, as they wanted us to form our government. Now they are accelerating, since it’s a private initiative and for the private sector. I cannot tell you which country, but I had a meeting with the ambassador from a European country, and he mentioned the need to accelerate. We are accelerating with these DFIs without waiting for the government and waiting time.

In light of the political instability in Lebanon, do you believe Lebanese industries can thrive even if economic instability seems to have become the norm?  

We are looking into the private sector, and our contracts are under Luxembourg and UK laws, if they are under Lebanese law it’s for rare cases like mortgages and guarantees. All the investments are under the UK and Luxembourg laws.

Lebanon is unstable and has always been unstable. Unfortunately the good days of Lebanon are behind us for now, we should wait to get those good days again, and I am optimistic. But we can work without this, we should continue, otherwise we lose a lot of time.

We made studies about what happened in Italy, Germany, and France with regards to lockdowns for example, and we gave the Government the protocols applied there and told them not to lock down the industry, as it is a productive sector. We are trying to help. I don’t think we should be concerned about the government and the reforms; otherwise we lose a lot of time.

It’s an alternative system and an alternative fund; it’s even an alternative economy. It’s a private initiative. Investors have no leverage on us.

True, but Lebanon’s Ease of Doing Business rating is very low, industries are not hit by a lack of financing only, but also by issues related to infrastructure and regulatory issues (for example electricity outages and slow internet). Wouldn’t this be an impediment to the growth of the industrial sector?

Of course, but look, let’s be pragmatic, and let’s consider a moment that Cedar Oxygen was not established and that we are here to build something and come up with solutions. The banking sector won’t recover in the next 18 months, it will take years, and when we say years we say five years minimum. You don’t have a lot of financial solutions. If you wait for the government, who knows?

In my opinion, if we want to rebuild the country we need private initiative, direct to the consumer, direct to the industrialists, to people, to become productive. Cedar Oxygen is one initiative, but we can duplicate this. Even at Cedar Oxygen, we finance trade, but also what else can we do? We are considering Capital Expenditures. If we make our initiative successful, we can duplicate this to other sectors such as technology or agriculture.

You put a lot of emphasis on governance, principles; you have an investment committee with unanimous voting. Do you think you can help promote better governance standards?

That would be our aim. If you asked me this question two years ago I would have told you it’s difficult, due to the fact that Lebanese companies are family businesses, with strong connections. It’s a difficult mission to be honest. We are trying to talk to our industrialists but the road is long, they have to rebuild a lot of things. There are things we can’t address now like pollution or sanctions.

Today I am seeing people more open to equity investments, because they want to save their companies and jobs. I think that implementing new standards is an opportunity, and not just an economic one. It can promote best practices and gender equality, for example.

On our end, we have best practices implemented and corporate governance, including Environmental, Social and Governance (ESG) principles that we review with different experts and asset managers.

I feel I have to take on this mission, and fortunately I have a great team behind me. It was a learning curve. I was naïve when I came to Beirut, I learned a lot from that one year.

Note: We modified this text on March 26 and 27, 2021, based on clarifications from the interviewee, specifically in terms of Cedar Oxygen’s relationship with the Lebanese central bank, its internal structure, and its allocation of funds.