UK firm launches fund to invest Lebanon’s ‘trapped dollars’

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• Lundy Lebanon Growth Fund aims to help bank customers in crisis 
• Investing 60% of capital in F&B sector, 20% in hospitality, 20% in tech
• Aims to recycle 75% of trapped dollars into ‘fresh’ dollars

A British asset management firm has launched a fund that enables Lebanese bank customers to reinvest their trapped savings in local exporters, generating new dollars that will be repaid to investors and help ease the country’s yawning current account deficit.

Several Lebanese citizens have taken up arms to withdraw their own savings from local banks after lenders imposed unofficial capital controls following an unravelling of the Lebanese pound’s longstanding dollar peg.

They have lost tens of billions of dollars investing in central bank instruments the regulator can no longer repay. 

The British firm hopes its Lundy Lebanon Growth Fund can provide some succour to Lebanese bank customers who will likely lose much of their deposits in a bank sector restructuring that the World Bank describes as probably one of the three worst economic and financial crises since the mid 19^th century. 

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The open-ended, hybrid fund comprises two parts – private equity and private credit. The structure provides companies with a mix of trapped money and hard currency, acquiring stakes, and also lending to those businesses. 

Each part of the fund has so far committed capital equivalent to $5 million, with a target to double that by mid 2023. Investors in the credit fund are from outside Lebanon and include family offices and wealthy individuals based in the likes of Singapore, Switzerland and the US.

The Lundy Lebanon Growth Fund has so far invested in winery Couvent Rouge, beermaker 961 and e-commerce platform Presentail. It will complete four more acquisitions by the end of the year – an olive producer, an apple grower, plus a hospitality company and a services business. A further five will follow next year. 

The fund aims to invest 60 percent of its capital in the food and beverage sector, 20 percent in hospitality and 20 percent in technology and services. Target companies should be exporters that generate sales in US dollars, can withstand hyperinflation due to the nature of their products and use local raw materials.

“We’re redeploying dollars trapped within the system and investing them in industries and businesses we believe should be a key part of Lebanon’s recovery scenario,” said Wael Menhem, a partner at UK-based Lundy Investors, who runs its Beirut office.

“We’re looking to build something like a mini-Unilever – a synergised ecosystem for the businesses in our portfolio to scale up and be as efficient as they can. 

“Scaling up is one of the biggest challenges that Lebanese companies always face because it’s a small country. So, we’re expanding their market by making them better able to export.

“By producing – and also selling – locally, their products can replace goods that are imported here, which will help improve the balance of payments.”

As of June 30, 77.6 percent of deposits at Lebanese banks were in dollars, according to Bank Audi. Lebanese bank customers can transfer “trapped” dollars to other accounts, but they cannot send these outside the domestic banking system or withdraw them as cash – aside from in very small amounts per month and with a huge “haircut” applied. 

Instead, such customers can transfer dollars to Lundy’s private equity fund, which typically buys significant minority stakes of more than 34 percent in portfolio companies, in order to be able to influence companies’ decision making. 

“Investors can get a return on their dollars, while we can deliver value to them by investing in companies at excellent valuations,” said Menhem.

“As the businesses grow, their exports increase and so generate dollars that can in part be redistributed to fund subscribers.”

The fund aims to recycle around 75 percent of the trapped dollars it receives into “fresh” dollars within eight years, which is the lifespan of the fund. 

Lundy pointed out that this option is preferable to bank account holders losing a large chunk of their savings if Lebanon receives no financial support from the International Monetary Fund or other countries.

According to Lundy calculations, depositors could be facing a “haircut”, or loss, of 70-75 percent on their savings.

In a best-case scenario, where the IMF and foreign donors provide meaningful financial support, it could still leave customers with deposits of less than $100,000 facing haircuts of 55 to 60 percent, while customers with deposits of more than $100,000 would lose 80 to 90 percent, Lundy estimates.

Menhem said the fund had been able to acquire stakes in its portfolio companies at low valuations due to a number of factors.

“The economic situation is bad. A lot of the companies need liquidity, but the banks won’t give them fresh dollar funding,” said Menhem.

“They don’t really have access to finance, which makes it very hard for a business to grow or to remain sustainable.”

Lundy is centralising some of its portfolio companies’ operations, such as marketing, finance, procurement and distribution, rather than each firm having in-house staff to perform these functions, reducing costs. 

“If you say to a distributor, you just have beer to sell, they might charge you a 45 to 65 percent distribution margin, which kills the business, but if you can say you’ve 10 to 12 high-grade products, you can lower that margin to more like the 30 to 40 percent range,” added Menhem.