The best is yet to come

By Ruth Gillbe

9 Jan 2012

The Lebanese fund space has never looked more promising. Although it has a long way to go to catch up with the likes of the DIFC, Beirut is steadily positioning itself as Mena’s next big domicile, taking advantage of a rare period of relative stability to showcase its strengths to an increasingly curious international investment community.

The government has clearly been prioritising certain areas of investment above others, with property development coming to the fore, paving the way for an expected boom in private equity deals. However, it is its natural resources that may help set Lebanon apart. A recent World Bank report stated that in order to protect the welfare and the quality of life of present and future generations, Lebanon needs to build its economy around and not against its natural resources. Some local funds are already heavily weighted towards the basic industries, which have borne out several decades of unrest in the country and the wider Levant.“Regardless of the political situation in the country, consumption and medical sectors are the most commonly invested in,” says Romen Mathieu, managing director of EuroMena funds at Capital Trust.

As in most Mena markets, equities feature heavily in Lebanon’s fund space, and there are some indications that the industry is modernising. Tim Buckley, a partner at leading regional law firm Walkers, said that his firm has recently taken instructions for hedge funds generated by Lebanese asset managers, which are now focusing on Mena equity markets. “We are also seeing some of the banks now show an interest in developing their own investment fund platforms,” he adds.

“I think Lebanon certainly has an interesting proposition in terms of financial services,” says James Martinson, senior executive officer and senior vice-president of Maples Financial Services, Middle East. “It has a very mature banking sector. The government has various incentives to encourage investment into Lebanon, the banks are very mature and quite established, and have been applying international practice for some years.”

Lebanese banks have historically had a strong treasury function, and have been investing in sovereign debt, with interest rates varying wildly over the last few years. There is now a growing asset management function within banks and start-up managers to diversify away from that product. Alongside this, US dollar Lebanese Government Eurobonds provide good investment opportunities, according to Bechara Bardawil, deputy head of asset management at Lebanese asset manager BlomInvest. “CDS levels have been improving, despite the obvious political risks, and due to strong demands from local banks as well as improving fiscal outlooks,” he explains.

Growing sophistication

The Lebanese market is arguably only really sophisticated at the banking level, with bigger banks able to issue their own bonds. In general, however, the debt market lags. “Very few organisations other than banks have issued bonds so the market is not sophisticated,” says Mathieu. “It is difficult to go into a bank to set up structured financing without giving land in mortgage or cash as collateral.”

Despite this, the banking sector remains strong and is widely considered to be a liquid and conservative market. Banks themselves have been very liquid, cash rich and conservative in their approach. “In relation to the fund sector, we have recently seen that there have been some new structures to replace and regulate the securities markets in Lebanon, including asset management and fundraising,” says Buckley.

However, the equities market is racing, with a number of banks and companies listed, and opportunities are abundant in the non-listed space. “It is really quite comfortable to invest in Lebanon as a fund manager,” says Mathieu. “The problem is where to invest and how to exit – to succeed, you have to select  a few different sectors.” This is where private equity investments may run into problems. The Lebanese market is not particularly deep or liquid at the moment, so there is always a risk that you may be stuck with an unwanted investment. But on the other hand, the country’s strong economic fundamentals suggest that finding companies which are capable of regional growth is a definite possibility.

Bardawil agrees that the lack of depth in the market can be problematic. “The lack of depth and breadth would be the biggest challenge facing a fund  manager investing in Lebanon at present, with regard to securities,” he says. “Similarly, the lack of adequate diversification opportunities would also play a part in this.”

Uncertain period

The Lebanese economy is very cash rich, so there is a huge potential for liquiditywithin the banks. In fact, there has never been a bank default within Lebanon. But the economy needs something more to set itself apart in a region where banking wealth and personal wealth have never been a problem. Lebanon has no oil, and the economy is largely based on tourism and services. “The economy needs to wean itself off the sovereign debt and broaden the investment products that are available,” says Buckley. “This will take time and infrastructure, and banks will need to get teams together to do that.”

Asset managers are beginning to do this, and, according to Buckley, like anywhere in this part of the world, there is a lean towards property. “Whether or not this is a weakness or just the beginning is unclear,” he says. “The glass is half full, which would suggest that this is just the beginning, therefore it needs to put together the infrastrucre to gain some international credibility, because it is a country which has come out of the civil war and has had political struggles – up until recently the country has not had a government and needs to gain some credibility as well.”

“We are living in a very uncertain period today,” adds Mathieu. “You can take it as a starter that the Lebanese stock market is quite correlated with the regional stock markets, and even the international stock markets.”

While Lebanon’s fund industry has yet to find its ‘x factor’, the fundamentals are certainly in place to facilitate future growth. Although it is unlikely to pose a threat to the more established fund domiciles such as the DIFC, with improved regulation and ongoing economic stability, Beirut has the potential to give the likes of Bahrain something to really worry about.