The concept of private equity is still nascent in Lebanon, particularly for SMEs. A key challenge that PE companies face in Lebanon revolves around educating entrepreneurs and family businesses on the concept and its benefits to all stakeholders. PE professionals spend a fair share of time introducing the process of private equity, its structure, and its benefits to potential partner companies, all of which can substantially prolong the transaction time for all parties.
The second challenge PE investors face is finding companies with the right profile and attractive growth prospects. Given the small size of the country, in most cases, "growth prospects" translate to regional expansion potential. The key is to find companies with attractive regional growth prospects that haven't yet fully realized their potential and hence need the help of growth capital and PE to give them that extra push. Moreover, many of the Lebanese entrepreneurs who venture into launching a new business decide to establish it in neighboring countries like the UAE or KSA given the larger market size and the availability of adequate infrastructure in those countries. As such, the majority of SME businesses that remain in Lebanon tend to be of a much smaller size catering for local demand, or established family businesses that are on the verge of going regional.
With family businesses comes the third challenge, which is convincing the owners to bring new partners into their business. Although this is not specific to Lebanese family businesses, it remains a key hurdle for PE investors to cross. Since a lot of these successful family businesses have healthy financials and access to cheap debt, the key attractiveness for them in partnering with a PE firm is the business development support and institutionalization initiatives that these investment companies bring to the table. Quite often, these family businesses tend to be second or third generation businesses where the new young managers who have been educated abroad return to take over the business and propel it to the next level after it has been stalling for a number of years. Although getting over the sentimental aspect of the owners bringing in new partners remains a challenge, these dynamics of the new generation taking over also present an opportunity for PE investors to come in at the right time to push these companies into their next level of development.
Although the Lebanese SME private equity market proves to be a challenging one, there are also ample opportunities in the country for those who are willing to venture into that space. During our work through Abraaj Capital's Lebanon Growth Capital Fund, which focuses solely on Lebanese SMEs, we have found that Lebanese companies do have a unique advantage when it comes to creative businesses. Such sectors include Food and Beverage, Fashion, Media, etc, all of which are industries that have blossomed both in Lebanon and regionally. It is very common to find Lebanese concepts across all of these sectors that were launched locally and then expanded to become regional and in some cases global successes. In a sense, Lebanon has served as a launching pad for a large number of such businesses. The opportunity for PE investors is to identify these differentiated SMEs with substantial growth prospects and join hands with them early on in their journey to help them achieve their full potential.
Tarek Kabrit is a member of the investment team of Abraaj Capital's Riyada Enterprise Development Fund.
© Zawya 2012
