May 08 2012
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Flirting with Lebanese SMEs - hype or strategy?
Diversifying away from the big fish, regional private equity groups (PEGs) are channeling serious efforts towards establishing smaller funds that are geared towards Lebanon's small and medium enterprises (SMEs). While SMEs have long been on the periphery of attracting capital, their business case stands lucrative through their proven capabilities represented in innovation, dynamism and flexibility.
The first question that comes to mind is why PEGs would opt for Lebanon. There indeed exists a love-hate relationship between Lebanon and the investment community in the region. Those admire the Lebanese model because successful companies, which originated in the country, have proven capable of exporting their success stories into regional and in some cases global footprints. By virtue of their talented entrepreneurs, companies like Chakib Richani Architects, Karma, Okeili & Co and many others have leaped great strides exporting their products and services beyond Lebanese borders.
Nevertheless, there is a dimmer side to the story. As much as PEGs admire the country and specifically its human capital, they have for so long tried to evade it likewise. Unluckily, the drums of war and political instability continue to rattle and distort their rational decision making. Despite this ongoing dilemma, PEGs seem keener today to bite the bullet and step up their efforts on the Lebanese saga.
The second question that presents itself is why PEGS would pursue SMEs. In recent years, social venture investors have made the case about the profit potential of SMEs in emerging markets. As Lebanese SMEs remain underserved by the investment community in the region, the latter today are eyeing those as low-hanging fruits for numerous factors - such as flexibility, to start with.
While large firms may view flexibility as annoying red tape, SMEs has fully leveraged that weapon in attracting and retaining human capital. Such flexibility has aided their survival and reaped results through evidence as staff retention and reduced absenteeism. Second, SMEs have proven capable of rallying their troops by virtue of owners' proximity. This indeed has yielded increased loyalty, motivation, higher performance and invaluable trust. Moreover, SMEs have extended such proximity upstream and downstream thus establishing personal relationships across the value chain capable of overcoming commercial challenges. Third, capitalizing on their lean models, SMEs have proven the ability to swiftly respond to market signals and industry challenging turnarounds without taking a nosedive.
Lebanese SMEs are opening their ears but not their chests. Cautious and evasive, the dynamics of the game flatter their egos and make them dream of their regional footprints. Yet, they still favor their autonomy and the freedom to experiment over the PEGs promises. Quarterly reporting to a more risk-averse Board of Directors is not their cup of tea and works against their entrepreneurial drive. Despite this fact, the affinity of Lebanese SMEs to PEGS in tearing up their boundaries is underscored by the three key factors.
First, SME owners often possess the entrepreneurial drive but lack formal management tactics, which stands out as a critical barrier obstructing growth and expansion. Second, SMEs may not always operate at the optimal technological level and therefore there is always a case for improvement in leveraging technology to further tighten their belts. Third, SMEs in Lebanon have struggled and continue to struggle in obtaining growth-stage funding.
While Lebanon stands to have the largest share of SME funding in the MENA region, average loan per SME remain too petite to be labeled as growth capital. Indeed, banks remain reluctant to provide SMEs with growth capital perceived as "more than they can chew". They prefer to hedge their bets against SME opacity and the lack of reliable collateral.
WHO IS ON THE RADAR?
As you read, the PEGs radars are switched on and only the winners take it all. Indeed, skiing SMEs are off the hook. With that said, the game is not all about financial stamina. While minimum half a million US dollars in EBITDA is deemed a winning ticket, the SME should also enjoy the luxury of a proactive management team, a potentially broad market and somehow a differentiated value proposition to ensure a path to maximizing the PEGs exit.
As the targeted sectors vary from one PEG to another - some are sector specific and others favor diversification - SMEs with strong positioning within their sectors are eye-catching and surface more as "sexy" transactions for investment committees. Without reluctance, such SMEs are labeled as "worth risking the funds' dry powder".
Yet, bringing down the "sexy" SME Lebanese entrepreneur from his/her ivory tower is not everybody's bread and butter. Engaging, persuading and converging the owner's valuation world with that of the PEG calls for the talented Mr. Ripley.
As fund principles tend to fuel the Lebanese entrepreneurs' ego switching them into defense mode, a capable M&A advisor can put things back into perspective, expedite the process and pull the strings just right to make the sweetheart deal. Until PEGs endorse such profound value adding activity, flirting with Lebanese SMEs tends to remain as hype although it is undeniably an ingenious strategy.
Akram El Okeili is a management advisor with more than 13 years in the domain. He is also a veteran family business expert, a corporate governance expert and a certified mergers and acquisitions advisor.
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