Beirut: With their money stuck in banks, the rapid devaluation of the Lebanese lira, the de facto suspension of Circular 331 and rising inflation, investors and the Banque du Lebanon, Lebanon’s central bank, have reached an impasse.
“The first five years of the Circular 331 initiative were great for the ecosystem, including venture capital,” Walid Hanna, founder and CEO of Middle East Venture Partners, told Arab News.
The circular issued by BDL in late 2013 injected nearly $400 million into the enterprise sector to build the Lebanese knowledge economy.
“The initiative powered the ecosystem seamlessly until the financial crisis in 2019. The problems occurred when the venture capital operated by Circular received capital calls from their banks and BDLs in either Lebanese lira or US dollars,” said Hannah .
A capital call is a legal right by which a fund manager asks fund investors or shareholders to pay a proportionate share of their fund commitments.
“The devaluation of the lira, which has lost more than 90 percent of its value, has complicated and problematic the situation,” Hannah said.
After local banks decided to freeze the savings of individuals and institutions at the start of the financial crisis in October 2019, most VCs lost a significant amount. Worse, banks limit their startup capital.
Another problem was that VCs received their capital calls – the money they owed from investors – in Lebanese dollars or “lolars”.
A “lolar” is a US dollar stuck in the Lebanese banking system; In other words, a computer entry with no corresponding tangible currency.
The issue of “Lolar” made it impossible for startups to expand their business overseas. The fact that BDL required startups and VCs not to spend any “circular 331 money” outside Lebanon didn’t help matters, Hannah explained.
“Therefore, it is a triple problem for banks, startups and BDLs. That’s where the decline began,” concluded Hannah.
deposits in banks
When asked how much money MEVP is stuck in local banks, Hannah replied that MEVP’s Lebanese-based fund Impact Fund has $7 million in banks. The company launched the fund in 2014 with an initial value of $70 million, most of which was invested in 29 Lebanese startups.
“Many of these startups have already closed their business in the last three years,” Hannah said dryly.
While the VC relies on three other regional funds in the Middle East and North Africa to sustain itself and is doing quite well, the current situation in Lebanon has become a thorny problem for them, other investors and fund managers.
“The primary thing that impressed us was our lack of ability to spread money to our startups, most of which are in their early stages,” Fawzi Rahal, managing director of Fla6Labs Beirut, told Arab News. “It also disrupted our capital call and fundraising process.”
Flat6Labs Beirut, which manages the $20 million fund, was planning to launch cycle 5 of its program, which included investments in 8 to 10 startups. However, the bootcamp was disrupted in late 2019 when the crisis struck and Rahal and his team could not complete the shortlisting of startups in cycle 5.
“Of course, later on, we realized that even if we had made the shortlisting, we would not have been able to continue investing because our capital call was delayed,” Rahal said.
The BDL has prohibited all Lebanese startups from relocating overseas, restricting their mobility and access to foreign funding, causing many startups to go bankrupt and cease operations.
BDL also said it would not accept startups “exited” in Lebanese liras or “lolars”, but wants each startup to “exit” in new dollars, that is, to be bought with greenbacks by companies abroad.
“That’s ridiculous,” says Hanna in a stern tone. “We have a country that has been lagging behind with GDP contracting over the past three years and reigning inflation, currency devaluation, brain drain and trauma from the Beirut port explosion. Why would anyone invest in Lebanon under such circumstances?”
However, according to a senior investment source, who opted to remain anonymous, the central bank has a different view.
As part of the then functional Circular 331, BDL lent a lot of money to banks, and banks invested this money as shareholders or limited partners in the VC. More importantly, they plowed the money when the $1 exchange rate was 1,500 Lebanese lira. Today, it is 25,300 Lebanese Lira.
This is one reason why BDL is not accepting exits from startups in “lolars” or Lebanese lira and is instead seeking new dollars.
“Basically, BDL is asking if we are cheating on their part. because it looks like [to them]An informed source told Arab News.
To make matters worse, there is no legal distinction today between a “lolar” and a dollar in Lebanon, he said.
The sources said a “lolar” stuck in banks is legally the same as a fresh dollar “so, you can’t take someone to court and ask them to pay their dues in fresh dollars.”
“And because the law does not differentiate between the two, the law cannot protect you or BDL in this case.”
break the deadlock
“I think it’s about aligning our interests as fund managers, BDLs, banks and portfolio companies,” another senior banking source told Arab News.
“The fund manager and the bank shareholder are aligned in that they both want the best value for their exits.”
The source continued to say that, in the absence of follow-on investments and with most funds reaching the end of their five-year investment tenure, there is a need for a realistic approach with regard to the best exit in the current challenging circumstances.
“The ecosystem needs an update to the current 331 regulatory framework that considers new challenges, allowing us to avoid this impasse.”
Our source reminded us that “the positive impact of the 331 circular offsets the challenges we face today.”
Arab News reached out to other venture capitals for this piece, such as BerryTech, Buy Venture Partners and Cedar Mundi, but did not receive a response.