In the context of Lebanon’s existential crisis, Executive inquired about the country’s new economic and social barriers – a mountain of problems formed around a nexus of poverty, unemployment, and colossal need for investment, that at first (and second) sight appear impossible to scale. In seeking to chart financial and economic pathways across this agglomeration of challenges, Executive sat down with Romen Mathieu, co-founder and managing partner of regionally active EuroMena Funds.
E From your perspective as an expert on management and investment, is there potential to create jobs in Lebanon given the current situation, or would that be chasing a vain dream?
I do not think the question today is if the country is able to create jobs in the forthcoming period. The real question is whether the country is able to preserve existing jobs. [We need to] forget about creating new jobs and find ways to preserve jobs. With regard to our situation, I believe that we are today in the heart of the storm. The government was due to be formed [in late September]. It didn’t happen. Ad hoc we are hoping that the government will come up. The worst thing that can happen is that this government does not show up for the coming month, [October]. If we live in a country that will have no government in the coming month – which is a possible scenario because in Lebanon anything is possible – and if we see the first rains [of the winter season] and nothing done, I think the country will be in a catastrophe mode.
E What would this scenario of no government imply and what do you see as better, alternative scenarios?
So if there is no government in the month [of October], I think the harm of the coming 30 or 45 days will be tremendous, even if one month from now we have a good government. It will take years to get back to where we are now – which by the way is much lower than where we used to be. If there is a government, and a respectable government as per international standards, [meaning] an independent government that will be able to pull in very quickly the IMF, Cedre, and the international institutions that can bring money and confidence back to the country, then the country will be able to preserve the existing jobs at least for the coming three, four, five months and then eventually be able to create new jobs afterwards.
E Do you regard the need for using this small window to start a recovery more as a mental challenge or a financial challenge?
I am not sure that [the problem] for Lebanese people is mental. I am 50. I have lived 42, no sorry, 47 years of my life in war or a warlike situation. I never knew a Lebanon without a war or a crisis. So my mental [constitution] is very strong. I can assure you. [If we take the situation] after the Beirut blast – and I was there; my family was in it – I am not sure if there are many countries that could [make a comeback] after that. It is a major catastrophe, and insurances are not paying, the government is absent, and officials are not to be seen. And yet, people are starting to build back, shops are opening back up, etcetera. It is not a question of mental [resilience]. No one can say that the Lebanese population have a weak mental constitution. I am sure that we have the most powerful mental [resilience] in the world.
E So the urgent challenge is financial?
What is missing now is solid ground on which to build. If money and support does not come before the first rains to Mar Mikhael, Geitawi, and all those areas, if the port facilities and logistics companies are not supported very quickly, and if the hotels, restaurants and service companies are not supported very quickly to build back, you will have tens of thousands of jobs that will be erased completely. [This is] because these young people that were working there are today either already out [of Lebanon] or applying to be able to leave at the first occasion. And once they leave the country this time, you will not fool them again – they will not come back. So [the challenge] is about bringing very quickly the financial support to these companies, small SMEs, to be able to reopen shop, bring back their employees and start [operating].
E How is that best done from your perspective as a private equity player?
We as EuroMena [Fund] have proposed an initiative to our DFIs, our development finance institutions, that are our shareholders – International Finance Corporation (IFC), the European Investment Bank EIB (EIB), [France’s] AFD Proparco, [Germany’s] KfW [Group], the CDC [Group of the] UK, all of these. We told these DFIs that the businesses which we are talking about do not want grants. Grants are for individuals who have no one to help them. A business in Lebanon doesn’t need a grant. It needs support. These businesses most probably each would need a very-long-term loan with a small interest rate and the possibility to convert [residual debt] into equity. If whatever remains of this loan is not paid back after six or seven years, it is converted into [lenders’] equity in the small businesses. And then we would have a premise for building a stock market for SMEs in Lebanon. That will create liquidity and create the ability for these small companies to take money from the stock market, bring in new investors, etcetera. This is what Lebanon needs today.
This is the proposal that we are working with today with our institutions, in order to be able to take [such long-term lending] very quickly to the largest number of companies. I do not know if it will happen; it depends on the availability of funds and this means it mostly will depend upon if we have a respectable government or not. If we do not have a respectable government, not one dollar will come. If there is a respectable government, there are huge funds that are willing to come to Lebanon with large amounts to support the economy, sustain the existing jobs and create new jobs.
E How far has your proposal been developed? Is this still in the design phase or have the international funds and DFIs received it, and have they responded?
It has been received and has generated a very good echo. I think it now is about waiting to see which track the country will take. Will it take the dark track – then there is nothing – or will it take the track of light? Then we definitely will have the support that we and others can bring. We as EuroMena are committed to [deploy] all the necessary efforts and all the needed human resources to be able to in the first stage maintain [jobs] and then create the largest number of jobs possible. This is how we will keep our Lebanon standing up.
E Do you have a target for how large this investment fund should be?
There is no minimum and no maximum. We know the amounts that are needed. It will take from $50,000 to a few hundred thousand dollars per company, for tens of thousands of companies. When you have a situation like this, you don’t count anymore. Whatever comes is welcome and whatever comes, you employ very quickly and put it to work. With this effort, you will save as many jobs as you can. It also depends on the ability of the [funding] institutions to move quickly.
E Assuming for a moment there is money, a good government, and international institutional support for the scheme that you are advocating, what eligibility criteria would you use for Lebanese companies that want to benefit from a convertible loan?
We talked a lot about that. I think there is no time to make a proper assessment of valuation [of an applicant company] with due diligence, lawyers, etcetera. A normal investment ticket for us is $50 million and above. But for the specific situation, we are looking at investments ranging from $50,000 to a few hundred thousand dollars. You will furthermore have to roll out [these investment amounts] as fast as possible to save the largest number of companies [and] businesses. We found that the best solution would be to make standard agreements whereby you probably would give a convertible loan to these companies, which is a loan with a long-term tenor of perhaps seven years. Also, because you are giving money in dollars, whereas most of these companies are local and their business is in Lebanese lira, or in lollars, they have to pay you in lollar – meaning you give them hard money and they have to pay you grosso modo in monkey money. Since you cannot ask them to pay you back in dollars in two or three years, you have to spread it out, hoping that – in the best case scenario – in the coming two or three years, things get back to normal and the lollar becomes a dollar and that the companies have the means to pay you back.
As they cannot start [making loan payments] immediately, you probably have to give them a holiday period of 12 or 18 months so that they start generating money as the country picks up and they will have the ability to pay you. You would probably charge a small interest, not a large interest.
I do not believe in free money – what comes easy is what you lose easy. So there has to be a small interest [charge of] one, two, [or] three percent. Most importantly, if there is a remaining amount that has not been paid after the [maturing of the loan] – whatever period it is, five, six, or seven years – the entrepreneur should know that this is not forgiven. This means that he will have to give up equity in his company towards the entity that gave him the money. That entity becomes his partner and enters the board.
Meanwhile, throughout this entire period, our duty is to upgrade these companies and [equip] them with an investment grade corporate governance, accounts, transparency, [and compliance with] ESG and AML [standards on environmental, social and governance and anti-money laundering principles], educating them in all this. So that at the end, if you [obtain] equity in these companies, and list this equity on a stock market, [these newly listed companies] are eligible and attractive enough so that investors are coming in and you create liquidity for small enterprises in Lebanon.
E Would this be a singular endeavor and fund where EuroMena would lead or would it be more of a consolidated effort involving everybody in town who has the requisite financial, investment and governance skills? Would a public-private partnership be involved?
EuroMena is a regional private equity fund. We invest in the Middle East and Africa. Lebanon is one of 22 countries that we invest in. But it happens that we are here in Lebanon; we used to be in Lebanon because the environment was good, the sky was blue and you had nice food and nice people around you and a good banking system and a good tax system. Except the people who are still nice, all this is out. There is no banking system, no regulation, the sea is polluted and the mountains are not green; nothing anymore. When you, today. tell people that you are in Lebanon, they look at you [and say hmm, okay]. But we have to give back to the country that has hosted us, for what the country has given us for 15 years. What we can give this country is the platform of EuroMena. We manage hundreds of millions of dollars and so are capable today to manage a specific envelope for the urgent matter of Lebanon. We will enter the special alliances and special partnerships that we need on the ground to do that. But what we are saying is that EuroMena will not make money from this.
E There are capable people in Lebanon who have knowledge and experience in structuring investments, assessing companies and so forth. Would you invite them to be part of the team for this effort of providing convertible loans to a large number of Lebanese enterprises?
We would definitely be partnering with institutions that would be complementary to us and contribute to deploying these amounts in a faster and more efficient way. That is the objective. Again, this does not have the objective of publicity nor of making money. It has the objective of giving support to a country that has given us a lot and giving back to that country whatever is needed, while preserving the financial needs of our shareholders. Again, we are not into grants or throwing money down the drain. We are into investing responsible money with responsible people and responsible investors in order to sustain or create the largest number of jobs possible and make [Lebanon] pull up again.
E How many jobs could a long-term, convertible loan sustain for each $100,000 invested by one of your institutional partners?
One million dollars could save on average 10 companies, and every company within that range would have on average ten jobs. What I am therefore saying is that a million dollars would probably save around 100 direct jobs but these [100] direct jobs would probably save 500 indirect jobs.
E So we are hearing that around 600 jobs, a combination of direct and indirect jobs, could be saved over a period of three to five months, which would be a bridge period to reach a point where these companies will return to operational safe ground in economic terms?
That is one million dollars. So if you think $50 million, you are really talking about something very important.
E How large would an investment team have to be to facilitate this wave of convertible lending, in terms of assessing companies, or even just signing the necessary paperwork? Could the latter process be automated?
It takes a partnership with a law firm with a standard agreement, so that they know as much as possible. And it probably would require another agreement with a financial institution – not a bank but a quasi-bank – to use the IT systems of these [institutions]. We at EuroMena have the DNA of investors and so we are completely capable to serve this task, but we will definitely increase our team by capable young people. I think we have many in the young generation who today cannot find jobs outside [of this country] although all of them have degrees from great universities. They are prisoners today in Lebanon so there will be a great opportunity to put them to work.
E So there would be an element of job creation in this endeavor, generated by your own organization.
I think so, yes.
E Would you have a priority list of eligibile industries or sectors, or would it be across all sectors?
It depends on the willingness of the funders but I think there are no limitations; every dollar that is invested into something that creates a job, is a responsible dollar to invest. You have to see it from this angle. The objective is not the financial return – the objective is to save the largest amount of SMEs and jobs as fast as possible.
E If we were to go below the SME range of enterprises to micro, small, and medium enterprises (MSMEs) and investments by micro-finance institutions (MFIs) into micro and nano businesses – meaning those enterprises that can benefit from micro-finance loans and employ very few or no persons outside the micro-entrepreneur’s family – could micro-finance entities with loans in the range of a few thousand dollars plug into the platform that you are proposing?
I do not know. I cannot answer you on this question today. I think in this situation you have to be open to anything that can create jobs and sustain jobs and preserve at least the capital of the investment, not the financial return. But I would not say yes and would not say no; it depends on who is the counterpart, what is the proposal, and how we can put hands together.
E If a Lebanese saver with many old dollars in their bank account would want to invest with the scheme of convertible loans at low-interest long range tenors, would the platform facilitate this participation?
We will be definitely creative enough to use every single lollar, Lebanese lira, or dollar to save jobs.
