Business

A blossoming business

by Nabila Rahhal
written by Nabila Rahhal

It started out as a fun opportunity but became a real business,” says Mazen Maroun of Lotus Management Group, the hospitality development company which he and his brother Samer founded in 2003 with the launch of a sushi delivery service from La Gondole, their family owned pastry shop in Mar Elias.

Ten years later, it has indeed become a solid business with 300 employees and two successful restaurant chains, Japanese restaurant Soto and Olio pizzeria, with six branches of each spread across Lebanon. Toward the end of 2013 — despite the instability in the country — the brothers launched a new restaurant, Prune, in one of the side streets of Mar Mkhayel, Beirut, which they perceive as a new challenge for their skills in the business.
Their operations began with the concept of high quality, fresh, yet affordable sushi. “At that time, there were only a few and very expensive sushi venues in Lebanon and so we wanted to make it more accessible for everyone,” says Samer Maroun. For eight months, they tested the market through a delivery service launched from La Gondole. Mazen recalls how much attention they paid to the details — clean and neat packaging was as vital as having fresh and safe sushi at an affordable price — all of which created a trustworthy image for Soto — whose average delivery bill is now approximately $32 — when they opened their first venue in Gemmayze at the end of 2003. Two years later, they launched the first Olio right next door, and the company has been expanding and adding branches at an average pace of two venues every two years ever since.

The concept of good quality food at affordable rates resonated with the Lebanese consumer who cannot always afford high-end dining yet appreciates a good meal. It is also a concept that allowed the brothers to keep expanding — reinvesting revenues generated from the preceding venues into their next projects — with no partners to their company save for their venues in Dbayeh and Kaslik.

Although home delivery remains a viable aspect of their operations — accounting for 30 percent of orders — the business has shifted toward the onsite service, with Soto witnessing a yearly footfall of 220,000 and Olio 290,000. At its best performance, Soto serves more than 2.5 tons of fresh fish per month and Olio serves 1.4 tons of mozzarella, both indicators the company uses to illustrate its success.

Lotus Management Group had one misguided venture into Chinese cuisine in 2006, opening a Chinese restaurant in Gemmayze one day before the outbreak of the July 2006 war. The restaurant remained in operation for a year but was later sacrificed to maintain Soto and Olio, according to Samer. “For Chinese food to be [viable], as all our venues are, the average bill has to be between $40 and $50 and the Lebanese are not used to paying this much for Chinese,” rationalizes Mazen.

But despite their successes, the company was not immune to the same challenges faced across the economy in 2013 — making it the worst year in its 10 years of operation, according to Mazen, with a 65 percent drop in sales compared to 2012.

Even though the year started out well — and even outperformed 2012 in the first four months — it ended badly, with only the Gemmayze venues reporting a growth from the previous year. “Economically the year was a disaster but we are not thinking of closing anything: we were living abroad but came back because we believe in the country. Having said that, if [the situation] stays like this for four, five years down the line then who knows? We are still developing and expanding, but cautiously, instead of opening aggressively and creating even more business opportunities,” says Mazen.

Beyond lebanon
Expansion is still on the group’s mind, both domestically and globally. In line with the recent trend in the Lebanese hospitality business, Lotus Management Group is looking to franchise Olio and Soto abroad but is determined to find the right partner with which to do so. “There is a lot of interest but it is not as easy as it sounds because we are not looking just for the money. It is very easy to get capital but the right partner with the right background in the business and good PR is hard to find,” says Mazen. The brothers don’t have a specific region in mind and say they will go with whichever country provides them with the right opportunity.
Domestically, the Marouns have developed a new $300,000 investment in French bistro Prune, born out of Samer’s love for French cuisine and their need for a fresh challenge. While Soto and Olio have a recognizable ‘chain-restaurant’ feel, Prune is meant to be cozier and is where the brothers say they find themselves.

“Olio and Soto are more for the public than for us and there is very little contact with the customer on our part. Prune is us and every detail, from the plate to the kitchen to the customer, is taken care of by us,” says Mazen.

One can immediately sense the warm urban spirit that differentiates Prune from Soto and Olio from the French chic décor — including the mechanic’s rack transformed into a wine display that greets you at the entrance, the sepia class photographs adorning the walls and the black bistro-like wooden chairs and leather couches — and the fact that one of the two brothers is always present to greet patrons as if they were old friends and to ensure they have a pleasant experience.

According to Mazen, the customer profile for Prune is “those who are between the ages of 25 and 65 and are well-travelled, cosmopolitan and appreciate a real and affordable bistro.” Though this describes the typical clientele in the area, Mazen believes they are lucky to be away from the bars on the main street. “It is a plus to be off Mar Mkhayel because usually in Lebanon, streets that blossom quickly attract those looking for easy money and they ruin it for the more established,” elaborates Mazen.

The menu, which includes French staples such as mussels, cassouleh and steaks, is signature Lotus Management Group in that it serves quality food at competitive prices, with the average bill at $50 per person including wine, reasonable relative to prices for French cuisine in the market.

A family affair
The venue has a seating capacity of 45 people and with a turnover of 2.5 tables per shift, the Marouns say they are satisfied with Prune’s performance taking in consideration the situation in the country.

When asked whether Prune will be up for local expansion or franchising, the brothers agreed that they don’t see that happening in the upcoming four years. “It’s not only the décor, it’s the spirit that will be hard to duplicate. Prune is here and only here for now,” says Samer.
Lotus Management Group is not resting on its laurels and is already finishing up construction of a gourmet sandwich shop with a small terrace appropriately called À Côté, as it is adjacent to Prune.

Meanwhile, due to a sentimental value, La Gondole — where it all started with their sushi home delivery operation — remains a base for their businesses and is where their main office and all the accounting, management and purchasing needs of the business are located. “We did not give it a push because my mom and dad consider it their raison d’etre; if we give it new management they will not have a role and we do not want that. We could have developed it to meet the area’s needs but we are enjoying our parents’ pleasure managing it,” says Mazen.

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Society

Downtown, where everything waits

by Nabila Rahhal
written by Nabila Rahhal

Walk into the Beirut Souks in downtown Beirut in the evening lately and there’s a noticeable buzz of activity that’s been long missed from the sometimes eerily quiet shopping area. The Beirut Souks Cinemacity is finally open and the Souks seem primed to receive the benefits.
The cinema is part of the second phase of Solidere’s original plan for the Souks area, explains Rami Ariss, land sales and real estate leasing division manager at Solidere, with the third and final phase being a department store which has been delayed due to “a few complications.”

It’s all in the design
The remaining part of the second phase is an entertainment center whose exterior structure is complete — and can be seen to the left side of the cinema complex — but whose concept is yet to be determined. “We are bidding for a concept but we decelerated work on it because we want something unique and distinguished. Also, we don’t want to open it in the uncertain times the country is facing and risk burning the concept,” explains Ariss, adding that the entertainment center should be open within a year but that for now Solidere is focusing on the new cinema. Solidere’s goal is to have the cinema be an anchor for the mall itself and increase overall footfall to the area.

Cinemacity, a partnership of Empire Cinemas and World Media Holding, a media company operating in the Middle East, collaborated with Solidere on the cinema. Both Empire and World Media Holding have their separate cinema-related operations in Lebanon and the region, with their first partnership being Cinemacity in Dora’s City Mall before moving on to the Beirut Souks.

The cinema is run and operated by Cinemacity with Solidere taking the role of both the landlord and a partner of the operating company.

Hammad Atassi, chairman and general manager of Beirut Souks Cinemacity, says over $25 million was invested into the project — “a big undertaking.” Solidere’s Ariss says that the company ensured no cost was spared to create something iconic that would be sustainable for many years to come. In fact, according to Ariss, one of the reasons for the delay in the theater’s opening date was that there were many details involving the aesthetics of the design to cover.

The multiplex stands apart from most cinema complexes in Lebanon, if only by nature of its size. While typical mall cinemas in Lebanon are 3,500 square meters, Beirut Souks Cinemacity — the only stand-alone multiplex in the country — spans 27,000 square meters and is the largest in the region.

The space is divided into 12 regular theaters and two VIP sections — with an 18 and half meter screen in two of the theaters. There are three food concession areas serving a variety of munchies ranging from typical cinema fare like popcorn and nachos to salads and sandwiches, as well as some shops on Allenby Street and a food court. Despite its size, the cinema does not have the most seats in the region, a trade-off,  Atassi says, for its comfort and aesthetics.

The project’s concept is based on visuals and vibrancy. The exterior architecture was created by Valode et Pistre and is enveloped in LED screens, visible from Allenby Street as one approaches the Souk area. The screen is part of the interactive façade of the cinema and displays ever-changing scenes, such as the Lebanese flag on Independence Day or various holiday images in December.

The interior was designed by Nabil Dada’s Dada and Associates, whose brief says they “worked in response to the distinctive external architecture of the cinema by modifying the internal volumes and seamlessly integrating cutting-edge technology into their design to create a young and vibrant atmosphere.” This is reflected by some interior features such as the vaulted ceiling lined with 256 LED screens and the 50 meter long corridor leading to the lower level theaters, with its projections of animations on both sides and the various uses of lights on the escalators and walkways to create moods within the structure. Aside from its design and technology, Beirut Souks Cinemacity’s location in downtown Beirut and the free use of the Beirut Souks parking for four hours also attract cinemagoers. “A city’s downtown is usually where the major cinemas are located and this was the case in Lebanon before the civil war, but not after it. This project was long overdue and deserves to get the kind of business it is getting now,” says Atassi.

A box office hit
The cinema’s performance has exceeded expectations and Atassi says that in his experience with other cinemas in Beirut new theaters in Lebanon usually take three to four months before they achieve their average ticket sales. Thanks to the project’s visibility, he continues, ticket sales at the Souks rapidly exceeded the 1,000 tickets daily margin and were closer to 3,000 a day, something that no new Lebanese cinema has achieved in such a short space of time. “We expect it to get a third of the share of the Lebanese box office shortly,” says Atassi.
December’s bombing in the downtown area adjacent to the Souks slowed admissions to 450 people but the number shot up to 1,700 the next night.

“Despite it having the same ticket price as other theaters in Lebanon [$8], the Beirut Souks Cinemacity is attracting high-end, mature customers who are drawn more to intellectual films than the latest adventure blockbusters,” says Atassi, adding that since they have so many theaters, they will be playing films for a longer time and also featuring independent films.
While it is too soon to tell whether the cinema has had any major impact on footfall in the Souks, Atassi tentatively attributes the increased activity and longer opening hours in the restaurants around the cinema to its presence. “It is difficult to tell if this is the usual holiday traffic for the Souks or an increase brought on by the cinemas. To be able to have a solid understanding of its impact on the Souks themselves, you need normal circumstances for the Souks. Now we will be able to see,” says Ariss.

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Society

Something to talk about

by Michele Azrak, Zeina Loutfi & Ramsay G. Najjar
written by Michele Azrak, Zeina Loutfi & Ramsay G. Najjar

The single biggest problem with communication is the illusion that it has taken place.” One could easily argue that in this statement George Bernard Shaw aptly described the affliction of the world of corporate communication for the longest time. Communication is the exchange of information between people. Yet most companies have left out the word exchange by talking at people instead of talking with them. In today’s increasingly connected world, the power lies in the hands of consumers, who are inducing change in the communication landscape by demanding less noise and more value. While this does not necessarily imply a drastic departure from what already exists, the coming years will surely see major improvements in how we use what we already have — knowledge, tools and platforms.
What is certain today is that this intrinsically complex communication landscape is forcing companies to look within and refocus on the value they have to offer for a new generation of consumers and stakeholders. Understanding where the future of communication lies is driving companies to improve experiences and relationships, and to do so it has become obvious that companies need to focus on delivering valuable content.

Content is still king
In the increasingly virtually vocal society in which we live, everyone has a voice and wants to use it. The amount of content being published online is growing exponentially; with so much competing for consumers’ attention, companies need to become more relevant and authentic in order to break through all the noise. For this, companies should favor the creation and distribution of valuable and compelling content over controlled messages and fabricated sales pitches. The primary intent of such a content-driven approach is to engage and build meaningful relationships with consumers, rather than to sell to them.

Whereas this approach has been around for a while, the focus had been on the quantity of content, with companies trying to publish as much content as frequently as possible. However, it has become clear that the future lies in quality-driven content. Companies should start creating content that educates, informs, inspires and entertains. This can be in the form of blog posts, newsletters, white papers, live presentations, podcasts, standard and micro-videos, and the list goes on.

There have been several success stories so far, with top global brands leading the pack. Last year, Coca-Cola made the news when it completely revamped its website and re-introduced it as an online magazine entitled the Coca-Cola Journey. It featured articles on entertainment, environment, health and sports, later adding food and music channels. The difference of course is that the content in that “magazine” is subjective, not objective: it is stories that favor Coca-Cola’s brands, products and interests. HSBC is also showing the way with its Global Connections website, which helps in the positioning of the bank as an authority on international business with in-depth articles and strategies for global businesses — rarely mentioning HSBC.

Coming to our part of the world, we have started to see local and regional companies begin to dabble in content creation and publishing, but these fledgling efforts remain far from really delivering brand-agnostic content that is seeded with inspiration and that covers topics customers deeply care about.  Though quality content creation is challenging and time-consuming,  it will allow companies to distance themselves from their competition, attract and maintain an audience, and create and sustain business opportunities.

A shift to more dynamic storytelling
It is important to highlight however that it is not enough to simply create interesting content and put it out there. Without a coherent story that brings together the content, one would just end up with more noise and confusion. The goal is to create a unified and coordinated experience for the audience, and to develop deeper emotional connections with them. This can only be done by storytelling, which should be the thread that links the content together across all channels.

Even then, not just any storytelling will do. The new reality we live in also means a shift from one-way storytelling to dynamic storytelling that factors in the consumers’ voice. Moving away from the traditional in-house generated stories, companies need to now focus on stories that spark a conversation with their consumers as well as encourage and make the most of consumer-generated stories. Following through with the Coca-Cola example, the company has established itself as the leader in storytelling, creating a whole stimulating world around the brand, with compelling stories that strongly involve consumers.

While companies in the region have started to listen to what is being said about their brands, there remains a long road ahead: they need to start having a conversation and get the audience involved in it.

Rethinking the landscape
As companies alter the way they communicate with consumers and increase their focus on content, they will need to rethink many of their channels. The most notable one would be their website, which should now adapt to a more consumer-focused philosophy and accentuate the brand’s story flow through design. Instead of being static, websites are starting to look more like magazine portals with greater focus on the content produced with combinations of rich articles, interviews, opinions, interactive functionality, visuals and videos. Soft drinks leaders such as Coca-Cola, Pepsi and Red Bull are setting the trend and their websites are worth checking out.

This does not mean that the main corporate sections such as investor information, executives’ biographies, and press releases are no longer present on the sites; these are just relegated to the sidelines. And this certainly does not imply that all companies should just stop what they are doing and jump on the bandwagon, especially the less established brands that will continue to need a more business-oriented website for some time to come. They could start with enriching their site with more pictures, sounds and videos, and most importantly thoroughly plan and understand the consumer’s journey through their website before diving into any redesign.

Furthermore, simply creating good content on a visually engaging website is not nearly enough as thousands of pieces of great content go unread every day. The challenge will also be for companies to focus on effectively getting their content outside of their website. They should understand how content spreads across the web and find ways to reach new prospects by amplifying great content through multiple channels. For example, Forbes provides a digital platform for sponsored content, but one that is high in quality and that answers to audiences’ needs. Companies like SAP, Merill Lynch and Microsoft have been writing and distributing thought leadership content that is as interesting as pieces written by reporters and knowledgeable contributors, and their content seems to be viewed for the same amount of time as editorial content.

Content-driven communication does not yield value solely to already established brands. While some companies may be restricted in terms of means or resources, no company is too small to experiment with this approach as long as it crafts a clear communication strategy, evaluates its performance, and makes changes along the way accordingly. With titles such as content marketing manager, director of content, or even chief content officer popping up more than ever before, companies in the years ahead will have to embrace content-focused communication as part of their overall communication strategy. They simply can’t afford to be content (pun intended) with staying on the sidelines in the content world we live in. You can only toe the water so long before you have to dive in headfirst.

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Comment

Uncoiling Iran

by Gareth Smith
written by Gareth Smith

Nothing raises the entrepreneurial juices like the smell of a new market. Last month’s implementation of November’s interim Geneva nuclear deal between Iran and the world powers alerted United States and European companies to the prospect that, sooner or later, sanctions will loosen and Iran will open up.
The business potential is immense. Income that could be generated from the world’s largest gas reserves, at 33.6 trillion cubic meters or 18 percent of the global total, and the fourth largest oil reserves, at 157 billion barrels or 9.4 percent of global reserves, would make the Iranians wealthy.

Lifting sanctions would make possible the 8 percent average annual growth rate envisaged in the Five Year Plan of 2010-15. Iran is like a pent-up spring, pushed back by US and European sanctions which in two years have halved oil exports and obstructed access to both insurance and dollar markets, as well as by older sanctions that stymied the development of gas reserves. The economy contracted 5.6 percent in 2012 and 3 percent in 2013, according to the Economist Intelligence Unit.

But the spring is starting to uncoil. Since November, the clearest excitement has been among car manufacturers, specifically mentioned in the interim Geneva agreement. Peugeot and Renault have led the way, with past experience working with Iranian producers Khodro and Saipa, and envision taking Iran’s annual vehicle production back from 2013’s 385,000 to the peak of 1.6 million reached in 2011.

The agreement also included facilitating financial channels for humanitarian trade, including medicines. Pharmaceutical companies are keen to tap into a market that analysts put at $3 billion annually with 30 percent imports. Germany’s Merck is looking for local manufacturers to co-produce two of its medicines. The French Sanofil, which licenses products to an Iranian manufacturer, is planning new product launches to improve last year’s $3.7 million profit on sales of $10.2 million.

The ‘little Satan’ will not be left behind. British exports to Iran plunged 68.2 percent from 2005 to 2011, the largest fall among leading European Union countries, but during last month’s visit of parliamentarians to Tehran, Lord Lamont, chairman of the British-Iranian Chamber of Commerce and former chancellor of the exchequer, said British pharmaceutical companies and vehicle manufacturers were among those very interested in Iran.

Such companies selling in Iran, or investing in joint production, will have consequences for the country. In the longer term a return to high economic growth, coupled with substantial outside investment, may well transform it. Firstly, high growth and ‘opening up’ imply economic liberalization. Thus far, privatization has been muted and often involved transferring shares to quasi-state bodies or pension funds. This reflects the absence of foreign investment and shortage of domestic private-sector capital. But the 2006 decision by the Ayatollah Khamenei to back privatization of most state-owned industry is compatible with vibrant private banking, more effective capital markets and wider foreign investment.

Secondly, high economic growth is likely to increase Iranians’ expectations for material goods and better job opportunities, especially among the 35 percent of the 77 million population aged 15 ­to 29, the highest proportion recorded worldwide.  Growth may also encourage aspirations for greater social or political freedoms. In all cases, managing expectations will pose a challenge for the leaders of the Islamic Republic. After all, economic growth was high, albeit uneven across sectors, under the Shah prior to 1979.

Thirdly are implications for energy markets. Even a short-term, limited increase in oil exports — given a likely lower OPEC output in 2014, projected to drop 500,000 barrels a day by the US’s Energy Information Administration — implies other OPEC members, notably Saudi Arabia, will be cutting back. Fourthly, are political implications, in central and south Asia, and the Middle East. Supplying energy and simply being richer will enhance Iran’s influence — posing a greater challenge for opponents and critics so far unwilling to accept what the Iranian leadership sees as its legitimate role as a regional power.

Should this be seen as a disaster? Greater trade — especially alongside educational exchanges, more travel for businesspeople and simple citizens — may not just break down barriers set by sanctions. It may enmesh Iran more closely in the outside world, giving all parties more incentives to resolve disputes diplomatically. A more open, richer Iran may be more at peace with the world.

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Finance

Private equity 2014: Room for optimism?

by Imad Ghandour
written by Imad Ghandour

Nouriel Roubini, the famous economist nicknamed Dr. Doom, was predicting the collapse of the world economy in 2013 as he foresaw a perfect “economic storm” for the year. Fortunately, the 2013 storm is turning to an economic spring throughout the globe — the private equity (PE) industry included.  

The Gulf Cooperation Council (GCC) and many other countries in the region have maintained positive economic growth since 2009, although such economic track records have received very little credit so far. This economic growth, coupled with political stability, is starting to receive greater recognition from international institutional investors, who are now trickling back to the Middle East and North Africa.

Most PE fundraisers have mentioned significant interest from a selected group of avant garde international institutional investors — up from almost zero a couple of years ago.  In light of the Brazilian economic winter and the Indian rupee yoyo, the GCC in particular has sharpened its image as an economically stable region. Even American institutional investors are starting to see the virtue of investing in the faraway lands of Arabia, where petro reserves ensure economic stability and local currencies have been eternally pegged to the all mighty United States dollar.

ON THE UP AND UP
Fortunately for the survivors of these grim years, it seems that the investment cycle is on an upturn. Most of the experienced managers blazing on the fundraising trail have reported good traction.  The first to publicly break the good news was NBK Capital, which announced a first closing of $217 million for its second PE fund. Privately, no less than four other funds have disclosed good traction in fundraising and some first-closing of their funds.
The recent string of investments and divestments by the regional PE players have also emphasized to both regional and international investors that the surviving players are the best in class and worthy of their trust. Abraaj Capital, NBK Capital, Gulf Capital, Amwal Khaleej and others do not cease to amaze the investment community by almost monthly exit announcements. The fallacy that there are no exits in the region has been put to rest. The MENA region is a region where you can make money in private equity investments — if you bet on the right manager of course.

Going back to Roubini, his consistent gloomy predictions could not resist the tide of good news. In an interview on CNBC on January 2, Dr Doom was more optimistic: “The advanced economies, benefiting from a half-decade of painful private-sector de-leveraging, a smaller fiscal drag, and maintenance of accommodative monetary policies, will grow.”
Furthermore, should recent political events begin to relieve the accumulated tension in the region, and the war cries be replaced with more peaceful tunes, the good trends will continue. Hopefully, the war in Syria can be contained and move toward a resolution. Whatever the form of the Iranian grand deal or a potential Syrian peace deal, peace with Iran and an end to the in war in Syria are good for business and investment. Stability will bring more prosperity, and more prosperity will bring even further stability.

Happy deal-making in 2014.

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Leaders

Time for a government

by Executive Editors
written by Executive Editors

For the past 10 months, Lebanon has been without a government. The caretaker cabinet has proved completely incapable of responding to the country’s two major ongoing challenges — the influx of 900,000 Syrian refugees fleeing their country’s civil war and a striking downturn in security conditions. Since Christmas alone, Lebanon has seen four car bombs. The political void has also fed into wider inactivity; parliamentary elections have been missed, natural gas tenders repeatedly postponed.
The coming months will see challenges just as daunting. President Michel Sleiman is due to step down in May, while parliamentary elections are scheduled for November. Tenders for natural gas must move forward lest Lebanon risk losing the interest of international oil companies and any hope for energy independence or a balanced budget. Syrian refugees will continue to arrive in Lebanon, putting further strains on state infrastructure. And the rapidly deteriorating security situation demands a strong response by the army and Internal Security Forces, backed up by political consensus.

It is good that leaders seem close to announcing a new government with broad participation. Sleiman and prime minister-designate Tammam Salam have been doggedly pushing for a cabinet. The Future Movement and Hezbollah, protagonists in Lebanon’s most fraught political dispute, have signaled their willingness to share power. As Executive went to press, it appeared that only one card had yet to fall into place: Michel Aoun’s Free Patriotic Movement (FPM).

The party’s major demand is to keep its current portfolios of telecoms and energy. There is some merit in keeping ministries under the same management: often new ministers bring coteries of advisors and erase the painstaking work of their predecessors.
Similarly both Nicholas Sehnaoui and Gebran Bassil, respectively the caretaker ministers of telecoms and of energy and water, have been effective in their roles. The two are among the only ministers that can point to real accomplishments under the last government, the former improving the country’s (still slow) internet networks and the latter pushing forward the oil and gas bids.

But these are hardly good enough reasons to sign over entire ministries to specific political parties in perpetuity. Lebanon has a long history of building political fiefdoms, rather than functioning ministries. Indeed, Bassil’s comments in late January that it was important to keep the energy ministry under the control of Christians smacks of just the kind of self-serving feudalism that has long held the country back.

This thinking must not be tolerated. Sleiman and Salam should not let the FPM get in the way of the formation of new government. Hezbollah and Amal, the FPM’s major coalition partners, shouldn’t either. With weekly car bombs at home and a devastating war still raging next door, the stakes are simply too high.

There are more pressing issues  in Lebanon than telecoms or even energy. It is time for the FPM to apply its competence in these areas as well.

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Finance

Investment banking: Small sector in search of big deals

by Livia Murray
written by Livia Murray

The investment banking sector in Lebanon is staggeringly small. With Lebanon’s history of maintaining a strong financial sector despite periods of crisis, one would expect its finance professionals to be well-versed in the notoriously lucrative industry, which registered revenues of $76 billion globally in 2013. But as the Lebanese market shows, not all financial systems are endowed with the same opportunities. Revenues from investment banking in Lebanon are so marginal that an operation could not even sustain itself if it were to rely solely on investment banking income.

Identity crisis
To compensate for low revenues, institutions that do investment banking are forced to diversify their products. What are referred to as investment banks in Lebanon commonly delve into brokerage, wealth management, long and medium term deposits and lending, alongside their advisory and capital raising services. Though it borders on an identity crisis, this combination of services is feasible and even encouraged by the specialized banking license under which these banks operate.

“This is the model that works,” says Samir Taleb, founder and partner of financial institution Lucid Investment. “It’s the central bank license which allows both together and actually encourages both together.” This specialized bank license issued by Banque du Liban (BDL) gives a wide mandate to the banks for services in corporate finance and private banking.  A total of 17 banks are registered under this license.

Investment banking is still relatively new to Lebanon. As the newest pillar of FFA Private bank, it accounted for only 10 percent of their total revenues in 2013 according to its senior manager and head of investment banking Julien Khabbaz. Their investment banking division carries out corporate finance advisory to regional companies who want to sell, restructure, or carry out a merger or an acquisition, and provides fundraising on a project-by-project basis. With the bulk of their revenues stemming from brokerage and asset management, the money they raise mostly comes from a pool of investors who are clients of the private bank. FFA acquired the specialized banking license in 2007 and has a shareholder equity of $30 million.
Cedrus Invest Bank’s founder and CEO Raed Khoury estimates that a similar 10 percent of the bank’s total revenues stem from investment banking. Out of a total net income of $3 million for 2013, investment banking profits would stand at $300,000, with the lion’s share of the bank’s revenues coming from private banking and wealth management. Established in 2011, the bank has a total paid-up capital of $52 million.

The weak appetite for investment banking in Lebanon has caused investment bank subsidiaries of larger groups to derive a bulk of their investment banking activities from divisions of their parent companies. According to Credit Libanais Investment Bank’s head of corporate finance and economic research Fadlo Choueiri, a great part of the bank’s investment banking activities come from advisory work for the Credit Libanais Group, particularly as it added a number of branches in the Middle East and West Africa.
Blominvest Bank uses a similar model. With parent Blom Bank having branches across Qatar, Saudi Arabia and Jordan, whenever one of these branches identifies a company that needs investment banking services, they outsouce these services them to Blominvest where the manpower is. “Our role will be really to provide services for our subsidiaries outside of Lebanon because this is where the deals are,” Fadi Osseiran, general manager at Blominvest, says.

slim pickings
Investment bankers in Lebanon are forced to diversify their services or outsource because of the barren landscape for such activities in Lebanon. “You might wait two years and have no transactions,” says Lucid’s Taleb. The lack of companies willing to seek investment banking services explains the meager profits of investment banking, and the need for a backup plan. “Because when it dries up, it dries up,” says Khaled Zeidan, who works on the buy-side of deals as general manager of MedSecurities.

Those in the financial sector blame the family ownership structure of Lebanese companies as hampering investment banking activities. “They want to preserve their control and going public or opening up their capital is a much lengthier and difficult process,” says Osseiran. Business owners in Lebanon will opt for taking bank loans when they need capital over selling shares, which would dilute ownership.

Though scepticism is not undue for a sector that does not have the cleanest reputation, those in the industry point to the merits of financial services and advising for a company. “You have shareholders and partners to report to,” says Taleb. In juxtaposition with the family business structure which has a reputation for being shadowy and inefficient in their finances, opening up capital can lead to fiscal transparency and institutionalized management. “Investment funds will be fighting to get a meeting with you as a company to support you, possibly partnering with you, financing the company to expedite growth,” says George Azar, managing director at financial advisory firm GA consult.

Sourcing deals
If Lebanese investment bankers are having trouble sourcing their deals locally, the appetite for Lebanese investment banking services is only slightly better in the region. But sourcing deals from the outside is more difficult than keeping active on the local market because of competition from large regional and international banks. Those who have managed have had to find space in the market. “I believe we sit in a nice niche,” says FFA’s Khabbaz. “We’re kind of in the niche of deal size where you don’t have many investment banks working on that same field,” going for deals in the $5-$50 million range.

Nonetheless, Lebanese investment bankers are forced to look abroad. “In order to be financially solid, if you want to work only in investment banking, [you need] to have deals in the region,” says Khoury. Many of the mandates currently under control of Lebanese investment banks are from Lebanese companies abroad, as regional expansion is the preferred method of scaling for these companies. In 2013, Cedrus worked on acquisitions in the UAE’s insurance sector, Saudi Arabia’s healthcare sector, and Lebanon’s food and beverage sector, with tickets ranging from $5 million to $10 million per deal, as well as smaller advisory deals within Lebanon. They could not disclose the names of the companies because of non-disclosure agreements.

Lebanese investment banks can look at bigger deals by getting work from their parent bank’s regional subsidiaries. Blominvest is currently working on two advisory mandates for a Saudi plastics company at a size of $70-80 million and a Qatari construction company at a size of $300 million, thanks to Blom Bank’s branches in those countries. They raised $100 million in 2013 for investments abroad, $50-60 million of which went to Saudi Arabia, mostly in real estate.

The future
In spite of the current limitations, investment bankers are hopeful that the next couple of decades will see an increase in investment banking activities in Lebanon. “We’re going to see exits in the next few years, people that inherited that business and they don’t want it, or people who inherited and want to grow it or need new partners or cash injection or people that need restructuring or advisory on corporate governance,” says Khabbaz. New management opting to open their capital would give investment bankers the opportunity to structure and plan these exits.

Capitalization would also allow investment bankers to sink their teeth into larger deals. “As the Lebanese companies want to grow and become competitive in the region, they need to re-capitalize. So they might ask for investment banks to advise them how to increase their capital, and find them companies for acquisitions, etc,” says Khoury. “There are a lot of things that need to happen as naturally family businesses grow and become a size where they can be more institutionalized and have a future. Maybe someday we can see some of these companies be publicly listed,” says Khabbaz.

Besides the capitalization of family businesses, some of the major sectors of the economy are still public. Privatization of major sectors of the economy such as telecoms and a major airline would drive demand for investment banking services. “You couldn’t really kick off investment banking in a place where there the sectors of importance are not privatized,” says Osseiran. Investment bankers also see potential in sectors of the economy on the verge of being developed, such as oil and gas.

Capital markets:
no exit in sight
Though investment bankers see prospects in the future for investment banking deals, one of the lingering problems they will face are the underdeveloped capital markets. Very few companies are listed on the Beirut Stock Exchange. With real estate giant Solidere and a handful of banks taking up the majority of the market, it has not seen any new equity listings since the turn of the century.

Weak capital markets provide little exit strategy — dubbed by Zeidan as the “holy grail” of the industry — for investors to sell their shares in a company and capitalize on their gains. But the current political situation has lead to an undervaluation in the price of shares that dissuades investors from buying and companies from selling. “Investors are not willing to pay a premium over and above the book value of the share,” said Choueiri, who claimed that the price of listed shares fell from roughly three times the book value in 2008 to barely over parity today.

Political deadlock limits both investments in companies and the desire for companies to list, take capital injections, and expand, as today’s climate is far from ideal for initial public offerings (IPOs). Khabbaz admitted that some of their mandates for mergers and acquisitions ground to a halt in    2013 because of insecurities relating to the political situation. “They kind of stalled and froze just because people were reluctant to do deals, to execute, to invest, to buy each other out,”he says.

But political deadlock is not the only culprit for lack of deals and IPOs. A regulatory framework has been slow in implementation, despite the establishment of capital markets as early as the 1920s.

These regulations would establish minimum requirements for companies to list and be traded on the stock market that would increase the transparency and accountability to their shareholders.

With the relatively recent formation of the Capital Markets Authority, a regulatory body to oversee Lebanon’s capital markets in 2011, investment bankers are still dubious this will lead to real change any time soon. “We’ve been waiting 10-15 years on the making of it,”   says Osseiran. A high priority in every country that wants to develop serious capital markets, a regulatory agency is a must for a highly functioning and reliable trading environment. Though Lebanese investment bankers may see more deals in the next couple of years, it is important that this is paired with a regulatory framework to limit the potential risks in this industry.

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Leaders

A frontal assault?

by Executive Editors
written by Executive Editors

Saudi Arabia’s pledge to support the Lebanese Armed Forces (LAF) to the tune of $3 billion over the next five years should be cautiously welcomed.

The army is one of the few genuinely cross-sectarian bodies in this divided country and enjoys widespread support. In 2013 a study by the Norwegian research company FAFO found that the LAF was by far the most trusted institution in the country, with over 80 percent support compared with averages of around 50 percent for the parliament and the government. Most significantly, the backing was roughly consistent across all age groups and sects (it was lower among Sunnis, but still the most trusted body).

Despite its reputation, the LAF suffers from chronic underfunding (see main article). Tasked in its mandate with juggling the daunting duties of defending the country against foreign aggressors, reclaiming Lebanese land under Israeli occupation and maintaining internal security; it is clearly incapable of keeping all the balls in the air.

This is partly about technology; while the LAF has plenty of manpower much of its hardware, such as dozens of Soviet-made tanks, are relics from previous eras. The need for investment is clear.

Thus the $3 billion could be a major moment for the country, allowing the military to significantly improve its capabilities. It will not become a regional superpower and will remain incapable of providing a realistic military threat to Israel, but it could get a much firmer grip over internal security and stop the country sliding into further strife. This best-case scenario would be welcome.

But then we return to politics. No one with knowledge of the Middle East will accept that Saudi’s motives are purely philanthropic. Indeed, the deal appears to have as much to do with boosting Riyadh’s relations with France as with concerns about Lebanon’s security.
Those that have cried foul have accused Saudi Arabia of seeking to politicize the army, or to use the funding to create a counterweight to Hezbollah. Indeed, the Hezbollah-leaning Lebanese newspaper Al Akhbar alleged that the deal was contingent on the Shi’ite group being excluded from the next government.

If the Saudis want to be seen as honest brokers — supporting the most beloved of Lebanese institutions out of concern for the country’s stability, rather than sectarian preference — then assurances are needed. Foremost among these would be a guarantee that the leaders of the LAF alone will choose what areas they wish to strengthen and what they wish to buy. Any Saudi interference, whether direct or indirect, will only pour fuel on political fires.

So far transparency has been severely lacking — as yet there are few indications of where the money might end up. To avoid perceptions of favoritism, more clarity is needed from both the Saudis and the LAF.

The widespread support for the military is to be cherished. While the need for new funding is great, it cannot be traded in exchange for independence.

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Leaders

Corporate responsibility is everyone’s duty

by Executive Editors
written by Executive Editors

It is not easy these days to find companies that are expanding in Lebanon. Uncertainty rules the economic climate and the only thing safely said about this year’s business prospects is that there are so many variables that macroeconomic forecasts are even shakier than in ‘normal’ times. But there are corporate examples for optimism — even if some can be described as hoping against probability. There also are companies that tell Executive of investments and expansions that will mean the creation of new jobs in areas such as hospitality and trade.

One company to talk new business last month was Beirut Waterfront Development, which is set to open the Beirut Yacht Club this spring (see story). Another was Spinneys, the retail chain that has more stores and new concepts in the pipeline for Lebanon (see story and interview). The two represent very different corporate narratives. With the Yacht Club, Waterfront Development is invested in a segment of the real estate and hospitality market where exclusivity is the aim and targeted profit margins in the sale of a few super-pricy apartments are a function of scarcity. Spinneys is a mass retailer of fast-moving consumer goods whose daily bread is beating the competition on price and whose mantra is winning on razor-thin margins.

But besides professing corporate optimism, both have another factor in common: they have been targets of huge criticism. Waterfront Development was accused by one media outlet of building a “boardwalk of corruption” in the St. Georges Bay — arguing that the company was part of a scheme to abuse public property for private gain. In 2012 activists attacked the Spinneys chief executive as ‘CEO against freedoms’, with allegations over their working conditions.

Media and activists are important parts of society and as Lebanon matures toward a more open and inclusive society their contributions are important. Similarly, criticism and exposure of corporate ills are an essential feature of their watchdog functions. And when it comes to Lebanon’s huge need for more social equity, the protection of the country from disgraceful private use of public property and the preservation of labor rights are absolute priorities.
However, the virtues of standing up for the little guy and for the public good must preserve the dignity of these causes. The responsibility to present facts and argue with fairness is incumbent not only on news media but also on activists. Even the simplest examination of the accusations against Spinneys and Waterfront Development showed that the companies were often not given a fair hearing.  Most significantly, the attacks against both companies were pushed forward not only by media and activists but also by leading Lebanese politicians, while a politician was also the main target in the attack on Waterfront Development.

The entanglement of political figures points to a major dilemma as the Lebanese wait for a new government to help find a solution to our macroeconomic trough. The dilemma is that the Lebanese need their politicians to be active but that the political class is perceived, often with good reason, as producing more problems than solutions.

Politicians should speak out against abuse of public properties and scrutinize economic actors for treating their employees fairly. But if politicians single out one and keep silent about all the others, they raise suspicion that their motives are not pure. And by damaging companies that otherwise would grow, it loads another straw onto the back of this heavily burdened camel that is the Lebanese economy.

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Comment

A foul reminder

by Yasser Akkaoui
written by Yasser Akkaoui

The Lebanese civil war of 1975 to 1990 did more than destroy the country — it made it impossible to put it back together again. Institutions were demolished, corruption was normalized and, most importantly, a generation of militiamen rose to power who cared little about unity.

The founding fathers of Lebanon — those brave men (for they were sadly all men) who formed the country on the basis of independence, tolerance and moderation — were sidelined, never to return.

In their place the very same militiamen who fought each other for over a decade swapped the sword for the suit and learned to call each other statesmen. But clothes do not make the man and the majority of them have not changed one bit. They claim their share of the pie and keep their foreign masters happy but do nothing to help the country develop independently.
Since 2005, Hezbollah has become the latest party to be transformed from militia to pseudo-statesman, with the 2008 Doha Accords effectively offering them a seat at the top table. And in the past year we have seen a new player on the ground — the Salafis and Al-Qaeda affiliates — pushing for influence. They may be easy to dismiss but make no mistake; they are a rising force and are looking for their share. It is clear that any global agreement over Syria, which will impact Lebanon, will include them.

For those moderates that survived the civil war, it has been a cold winter as the rule of the gun has taken hold. We have been isolated and ignored; condemned as traitors for refusing to pledge allegiance to one foreign power or another.

But we may be seeing the first signs of spring. Prominent businessman Farid Chehab and others have launched the Blue Gold project, which aims to claim the country’s vast and deeply politicized water resources for the Lebanese people. In the process they aim to nurture a strong, independent civil society that puts the country first.

Their plans are grand, utopian some might say, and they are certainly flawed. But they are laudable. Civil society has to demand the impossible, if only to force action from the political class.

The rule of the gun never lasts. One day we will get our country back, and when we do we need a strong civil society to help us move forward.

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