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Big bucks for small business

By Maya Sioufi January 2012

A $50 million fund dedicated to SMEs in Lebanon
Riyada Enterprise Development (RED), a member of Abraaj Capital Group, in December launched a $50 million fund in a partnership with Cisco and European Investment Bank , to invest in Lebanese small and medium enterprises (SMEs). This is the largest fund dedicated to Lebanese SMEs and is the latest venture by Abraaj Capital Group -- the largest emerging markets-based private equity-- aimed at enhancing investment in Middle East and North Africa SMEs. SMEs account for 70 percent of MENA employment and 30 percent of MENA gross domestic product.

"It is a well-known feature of the Lebanese economy that it produces an amazing amount of high-quality and highly talented entrepreneurs, so much so that they end up emigrating and succeed all around the world," said Tom Speechly, chief executive officer of RED. "The aim of this fund is to encourage Lebanese entrepreneurs to stay in the country."

The Lebanese SME fund has an eight-year lifespan, with ticket sizes ranging from $1.5 million to $8 million. The aim of the fund is to invest in 10 to 15 growth companies across various sectors within three to four years, by acquiring between 25 and 40 percent of a company's equity. So far in Lebanon, RED has invested in one company with two in advanced appraisal stages.

With lower economic prospects predicted in Lebanon and uncertainty over the outcome of the uprising in neighboring Syria, the timing of this fund is questionable, but Elie Habib, Lebanon country manager for RED, believes that "it is the best time" to launch. As political transitions occur in the Arab world following the revolutions, there is an increasing interest from the diaspora in coming back. Yet structural issues in Lebanon -- such as lack of access to know-how, distribution channels and financing -- continue to hinder their return, according to Habib.

When asked if RED considered delaying the launch of the fund to wait for more visibility on the economic and political situation in Lebanon, Habib replied: "RED saw an opportunity in 2007 and decided to launch a fund to tap into the SME opportunity in Lebanon. We are long-term investors, we build cyclicality into our business models and we help companies survive in downturns."

In Lebanon, SMEs represent a very substantial portion of economic activity. Bankdata and Sofres have recently released a market study on SMEs in Lebanon that estimates the total annual production of around 17,000 SMEs at $4.4 billion with an average annual turnover of $280,000 per company. The study, undertaken in the spring of 2011, reveals that approximately one fourth of the 300 SMEs interviewed have a turnover in excess of $500,000, and more than three quarters have been in business for more than five years. Two thirds of SMEs have seen their turnover grow year-on-year with more than 75 percent witnessing a double-digit growth over the past year.

The fund is committed to $50 million and has so far closed $30 million through investments of $7 million from Cisco, $7 million from the European Investment Bank and the rest from Abraaj Capital . RED aims to raise another $20 million by the end of 2012 from investors attracted by the growth opportunities for Lebanese SMEs. Habib adds that after tapping into the $50 million fund, the long-term strategy is to launch another fund. It is "certainly not the last fund" that will be dedicated to Lebanon, confirms Speechly.

When asked about their competition, Habib argues that it comes from the banking sector, which "can offer financing at attractive rates but does not offer the value added of a private equity." In the Middle East, venture capital financing is focused on early stage investment, whereas RED is adopting a private equity model, investing in growth companies and undertaking extensive screening and financial modeling, according to Habib. "As far as I am concerned, Berytech, MEVP and a few others are complementary and they are our partners. We don't compete for the same deals."

RED is looking to invest in established and growing companies. "We like proven business models where the business has stabilized itself, they've found their customers, they've got their supply chain worked out and the larger part of their growth is ahead of them," says Speechly. When asked about his concerns regarding the reluctance of Lebanese companies to cede control, he replies, "We really don't want control. These are founder-led businesses where we want the founder to continue operating the business as his or her business." RED wants to grow the business for three to four years and then exit alongside the entrepreneurs, who ideally would start a new business.

In the MENA region, SMEs face three main challenges, according to Speechly. One of these is access to capital, as only 8 percent of bank loans in the MENA region go to SMEs. Speechly does not blame the banks "because a lot of the SMEs are relatively informal and not ready for bank debt. What SMEs really need is equity, longer-term patient capital." The other challenge is access to best practice: "Everything from sophisticated business practice to new networks, corporate governance and financial reporting," Speechly adds, although he stresses that this is the least serious concern, due to the accessibility of information. The third issue is access to markets. The MENA region has 350 million consumers, a sizeable market but "the issue is that companies in individual markets don't necessarily have access to the full market. It is more difficult than it should be to have access to that whole market," he says.

For the Lebanese fund, the target is for a 30 percent annualized return over the lifetime of the investment. While this may seem ambitious in challenging economic times, it leaves hope that newer financing options are being attracted to Lebanon and companies can rely on more than just their family and friends and the banking sector to fuel their expansion.

CNN chose IXSIR's winery as one of the greenest buildings in the world

CNN chose IXSIR's winery in Basbina, Batroun, as one of the greenest buildings in 2011 "that have been recognized not only for their good looks but for their green credentials too."

The Lebanese winery is the only building in the Middle East and North Africa that was featured on the list. Other cited buildings included the Casa Locarno and Swarovski Headquarters in Switzerland, the Sandal Magna School and Velodrome - one of the venues hosting the 2012 Olympic and Paralympic Games - in the United Kingdom, and the Livestrong Foundation in the United States.

"This is a design and architectural achievement that raises Lebanon's profile on the international scene, confirming its high standing in this respect, and reinforcing the world-renowned reputation of Lebanese wine," said IXSIR's General Manager Hady Kahale.

An eco-friendly building with sustainability at its heart, IXSIR's winery won the 2011 Green Good Design Award.

The article underlined the winery's contemporary concept that restores the traditional Lebanese winemaking process. "Overlooking Basbina in northern Lebanon, this winery combines a restored 400-year-old feudal seigniorial house with a modern-built, green-skinned [...] structure," the authors wrote. "Designed by Raed Abillama Architects, its cellar spaces are buried within the ground as a thermal sponge, creating the needed equilibrium of temperature and humidity."

Using innovative skylights, the winery maximizes the use of natural light to illuminate the premises. And with its natural reliance on gravity, it respects the integrity of wine making. In addition to rainwater harvesting for irrigation purposes, it recycles all its outputs such as wastewater, and vegetable residue, which is turned into compost.

IXSIR's winery will be open for the public to enjoy tours and tastings in the spring of 2012.

To learn more about IXSIR, visit IXSIR's official website www.ixsir.com.lb, or Facebook Page www.facebook.com/ixsir.wine.

© Executive 2012