Why Libya? A Follow-up

Our friend Kevin Virgil is still on the ground in Libya, assessing the situation.

Last week, in Libya – The Real Story we got an update from him which proved to be right on. Let’s hear what else Kevin has to say on Libya, which is a country he’s betting big on.

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Mark: Kevin, remind us once again why you are so enthusiastic about the “new” Libya

Kevin: Mark, last year I attended an event in Washington DC where Libyan National Transitional Council (NTC) leaders met with elected leaders in the US government.  The Libyan delegation was in the midst of a ‘road show’ to several Western capitals in order to solicit support for the rebels who, at that time, were locked in a struggle with the Qaddafi regime.  I found their story to be compelling and decided that I wanted to see the place for myself.

Soon after that meeting the world learned that Qaddafi had been captured and killed, and that the Libyan people had taken control of their country. I realize that this was a unique opportunity to watch history unfold, and I departed immediately.  I was in Tunisia less than 48 hours later – I had to enter Libya through the western border since the NATO no-fly zone was still in effect.  Entry was challenging because the border and the visa issuance system were in disarray, but after a couple of days I made it in and arrived into Tripoli while celebrations were still ongoing.

Mark: That must have been pretty unbelievable.

Kevin: It was awesome, and I very quickly discovered how momentous the Arab Spring will be for Libya’s future.

Mark: Give us the obvious, low-hanging fruit.

Kevin: The country has many outstanding attributes – significant hydrocarbon reserves, over 1,800km of amazing undeveloped Mediterranean coastline, and a highly entrepreneurial populace. This is a city with the potential wealth of Doha or Dubai, but Qaddafi’s reign of oppression and theft has trapped it in a time warp while the rest of the world has advanced.

As an observer, it is heartbreaking to visit Tripoli now and see so many decrepit buildings and the woeful state of infrastructure.  On the other hand, as an entrepreneur and frontier market investor, that emotion is overcome by the sense of enormous opportunity and the realization that Libya represents a “deep-value” play that may have no other parallel in today’s world.

Mark: Chris and I agree with you Kevin. That coastline alone screams to be explored. Plus, as you pointed out to us in Mongolia, the Libyan people are pretty intrepid and entrepreneurial.

Kevin: That’s absolutely right. I have never been to Cuba, but I have heard various narratives regarding how a half-century of socialism has destroyed the entrepreneurial spirit there.  In Libya, this is far from the case. Even though Libyans were forbidden from setting up companies until 2003 – and the corporate governance laws were designed to act as barriers rather than incentives – many local businesses have done very well.

For example, I have met a successful businessman in Tripoli who opened a water bottling facility in 2003 with a $40,000 loan. He sold it (fortuitously, it turns out) in 2010 for over $2 million. He only did so because the business had grown to the point where it had begun to attract attention from government thugs. His success, which would have been impressive in California or Cape Town, is even more remarkable when considering the onerous business climate under which he was forced to operate.

Mark: And he did that under the Qaddafi regime and stayed under the radar. That is impressive!

Kevin: Another contact, who has built several successful companies, intends to open a chain of scuba shops throughout Libya. As an avid diver, I find this to be very intriguing. Libya’s coastline is world-class and in close proximity to wrecks that are literally thousands of years old. There are numerous Roman ruins on the coastline that sit underneath a few meters of water. (Though divers should be forewarned that some local fishermen prefer to use dynamite instead of nets and lines, and don’t always grasp the meaning of a ‘diver down’ flag!)

Those are just two examples of small businesses that I am seeing at the grass-roots level.

Mark: I think you need to join us in Fiji if you want some great diving Kevin… and maybe a bit safer yet!

Kevin: That’s fair enough (laughs)…

Mark: What about the overall economy?

Kevin: The economy is improving on a larger scale as well.  Crude oil production has recently surpassed 2010 levels – an accomplishment that the most optimistic observer would never have imagined nine months ago. Construction projects are re-starting after months of inactivity. We are beginning to see more government and private-sector tenders being released now as well. In short, Libya has dusted itself off after last year’s conflict and is beginning to rebuild.

Mark: And the government? I read an encouraging article in the BBC this past weekend about how most Libyans are supporting the peace, and condemning the attacks on the US embassy.

Kevin: I believe that the foundation will be entrepreneurial local businessmen playing a key role in Libya’s resurgence.  However, in order for them to succeed the new government’s role will be even more important. It must accomplish several daunting goals such as: implementation of law and order, protection of human rights, drafting of a new national constitution, re-writing of property rights and corporate governance laws, and promotion of regulations which facilitate foreign investment while promoting transparency and efficiency.

Corruption is everywhere (though in the US we have simply re-branded it as “lobbying” and legalized it) and frontier markets are certainly no exception. I have found, though, that after 40 years of the Qaddafi kleptocracy, your average Libyan now takes a dim view toward overt corruption. For the time being at least, Libyans genuinely want to see a fair and transparent government that is free of the problems they have suffered through for so long.

Mark: We’re seeing this in a lot of places Kevin. We were just in Myanmar, which is making an unbelievable transition. And, we heard from our sources in Mongolia last week as well that the new DP government there has listed some really compelling and positive reforms. All great news for foreign investors.
We often say that perceived risk is usually greater than actual risk (not always, but very often). What “perceived” risks are people articulating right now?

Kevin: For the past year I have sent periodic updates on my findings in Libya to a growing list of readers. A frequently asked question involves the likelihood that the eastern region of Libya, historically referred to as ‘Cyrenaica’, will pursue autonomy. While there was certainly much discussion and stirring debate about this before the election, it appears now that this was mostly political theater, intended as a ploy to maximize Benghazi’s leverage within the new government.

Despite the mainstream media’s dire predictions of violence and chaos, Libya’s elections were a great success. Over 98% of all voting stations remained open, and nationwide voter turnout was 63% – of which 50% were women. That compares favorably to average US voter turnout of 43-47% in presidential elections.

Mark: That should tell us all something right there (laughs). I’ll let our readers make their own determination on that one. Outside of the recent unfortunate events in the country, what else has been happening on the ground?

Kevin: Summer in Libya has been slow; businesses did not want to make hiring or investment decisions until after the elections in July. Ramadan began a few days afterward, which was also a very quiet period. We have begun to see an increase in activity since the Eid (end of Ramadan) in mid-August and expect that trend to continue.

The newly formed government has two critical tasks ahead; they must draft a new constitution within the next 60 days (a very aggressive goal, in my opinion), and they must select a prime minister. Both tasks, if performed well, will do much to improve the business climate in Libya and encourage more activity.

The country’s most important challenge, however, will be to establish rule of law and security internally. There are still dozens of militia brigades that operate with impunity in the major cities and operate as de facto gangs, as we saw in Benghazi two weeks ago. The national government and local councils must deal with this issue as soon as possible, either through negotiation or by force.

Mark: Let’s hope it’s the former. If violence continues foreign investment will be slow to come in, am I right? Or, is it coming regardless?

Kevin: Most foreign investors will wait to enter the country until a perceived benchmark event happens; maybe they want to see establishment of consumer credit, or for Goldman Sachs to open a Tripoli office. Our opinion is that, if you remain ‘in the herd’ and wait for whatever you perceive optimal conditions to be, then the best opportunities for significant wealth creation will be gone by the time you finally enter that market.

We are in Libya for the long term and have firm conviction in the growth story of this amazing country. I arrived when the ashes were still smoldering and have continued to build relationships and identify opportunities during the past year. Our goal is to work with trusted and vetted local partners to build a series of businesses in non-correlated industries, and to help in building them so that we may play an integral role in Libya’s reconstruction.

Mark: We talked about a couple of the projects you are looking at, which really did intrigue us. Tell us a bit more.

Kevin: After several months of planning, we are about to open our first business in the new Libya. We are very excited about this and have already received a lot of interest.

We expect that this new company, which will focus on professional services for foreign business travelers and expats, will “go live” in November 2012. We are talking to investors now about a limited equity investment. We currently have commitments for about 40% of our initial capital requirement, and hope to lock in the remainder within the next 30 days so that we can adhere to our intentions of a November opening.

We are keeping the balance sheet very lean on this one so as to keep our startup costs low; therefore the required capital is small. I do not expect that we will pursue additional funding rounds as this business will generate more than enough cash flow for rapid organic growth.

Mark: Any room left in that one Kevin?

Kevin: There is room for a small group of accredited investors in this round. In addition to a very attractive exit plan, we’re extending right of first refusal on all future activity that we pursue in Libya. We have very aggressive growth intentions across multiple industries and we will be looking at many attractive opportunities in the future.

Mark: Any final thoughts Kevin?

Kevin: I just want to remind your readers, many of whom I know realize this already, but it bears reminding. You will NEVER obtain the true story if you rely on media outlets for your facts, as most of them have their own agendas.

As with most frontier markets, the best way to learn the ‘ground truth’ is to go see the ground for yourself. It’s what you and Chris are doing, it’s what I continue to do, and am sharing my findings with anyone who cares to listen.

Mark: Amen to that Kevin. God speed and keep safe out there!

Kevin: Thanks Mark, let’s chat again soon.

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Chris and I are happy to pass along Kevin’s contact information to any of our readers who want to find out more about Libya, what Kevin is up to and/or how you might also capitalize on the “new” Libya. Just drop us a note here.

Kevin is a sharp guy, and we’ll be hearing a lot more from him over the coming months, you can count on it!

– Mark

“If you look at the demographic development, during the next decades, Egypt will be bigger than Russia and there will be two additional Egypts added from the populations of the south of the Mediterranean. So the challenges in terms of reforms over the next years and decades are ominous.” – Swedish Foreign Minister Carl Bildt

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