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26 July 2007
BEIRUT: The first Beirut-based private-equity fund geared specifically toward Lebanese companies was launched this week in a move that will hopefully encourage the private sector to provide more capital to develop local businesses. The European Investment Bank (EIB) (Related) European Investment Bank (EIB)European Investment Bank (EIB) (Related) European Investment Bank (EIB) , eight Lebanese banks, and the commercial arm of the French Development Agency invested $20 million in the Building Block Equity Fund, which will provide medium-term loans of between $1 million and $5 million for up to ten Small and Medium Enterprises (SME) in value-added sectors of the economy.
Nagy Rizk - one of the three fund managers from the Bader Group - said Building Block aims to fill "the very big gap in equity financing for SMEs" in the Lebanese market.
Insufficient capital is second only to the "political situation" as the biggest obstacle to growth for local companies, said Rizk.
"Until now there was a healthy supply of subsidized loans for SMEs on the market, but there were no institutions offering equity financing, and we have a lot of companies that are undercapitalized," Rizk added.
"For SMEs with no collateral it is very difficult to go above a certain ceiling in debt financing. You go to Kafalat once and get a subsidized loan once, but then you go back and they say 'hold on you need more capital.' You need to have access to debt at competitive interest rates and equity financing."
Lebanon's risk-averse, cash-flush banking sector - accustomed to safer investments in government bonds and real-estate - were initially reluctant to contribute to a fund for SMEs, said Rizk.
But once the EIB got involved, there was a "bandwagon" effect, he added.
About six companies involved in new technology, telecommunications, and bio-technology have been identified as potential recipients of a three-year loan from Building Block, said EIB vice president, Philippe de Fontaine Vivre. Business models can differ from one company to another, with no minimal employment or capital requirements, but he expects the fund to focus on the development of value added products.
"The one common element is a good management team with prospects for growth within the country and abroad. We are looking for the beginnings of success stories that lack the capital to grow," he said.
"What is most striking for a new investment fund is that for the first time we have a real business-community link with the Lebanese new generation," de Fontaine Vivre added.
Though age is not part of the selection criteria, de Fontaine Vivre concedes that there is "some relationship between modern behavior and the young generation."
"The goal is to shift the mentality from a family-oriented mindset to a more market-oriented one, so people accept that as an equity fund we are there to support you not take over the company," he said.
EIB got on board around 18 months ago, after meeting with the 40 members of Bader, reassuring some banks who were skittish about lending to risky start-ups - though one bank decided to contribute $1 million from the outset. De Fontaine Vivre said the current project is a pilot case, and its success will determine whether investment banks will honor their foundations and start to loosen their purse strings by loaning to the private sector.
"Banks in Lebanon have a high volume of deposits which they are able to invest in government bonds with very low level of risk, so we are trying to encourage the banking sector to develop risk capital activity," de Fontaine Vivre said.
Apparently Lebanon's Central Bank (Related) Central BankCentral Bank (Related) Central Bank followed suit, issuing "Circular 125" to prompt investment banks to offer private equity financing to the SMEs they lend money to.
De Fontaine Vivre said he had asked the Bader managers to speed up the process so the recipients are finalized by next year and the money can be invested as soon as possible.
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