Private equity and venture
capital in Turkey
by Levent Bosut, PDF Corporate Finance
As a promising emerging market,Turkey provides unique investment
opportunities for private equity investments primarily because of its investor
friendly liberalisation, deregulation, and privatisation policies, fast growing
business environment, and scarcity of capital. However, figures show that the
industry has not grown to expectations. In this article, you may find the
reasons and misconceptions leading to a sluggish private equity market in
Turkey as well as attempts to improve the industry and the recent legislation
for setting up local funds.
Turkey offers promising private If Turkey had the same PE investment to GDP
equity opportunities ratio of Europe, PE investments in 2001 alone would
The fast growing domestic market, entrepreneurial have been close to US$500m. However, the numbers
spirit, competitive workforce, and unique location of are not even close to this, as illustrated below.
Turkey, coupled with liberalisation, deregulation and Insignificant PE activity in Turkey
privatisation policies create a significant demand for One would expect the PE activity in Turkey to follow
private capital. Due to insufficient capital formation, the this surge due to substantial capital formation in the
crowding out effect of high government debt and high world; saturation of PE deals in the developed markets
interest rates, resulting inadequate banking system, relative to the ones in Turkey; mismatch of abundant
companies find it extremely hard to finance expansion, deal flow and capital scarcity in Turkey implying low
let alone buy-outs, startups or seed capital. Credit valuations and high expected returns; and significant
markets are available only to the largest companies and increase in PE activity in similar emerging markets.
to a few who can provide collateral, rather than future However, institutional PE activity in Turkey has
cash flows. been limited, excluding corporate venturing. Until
In addition, political and economical instability 1995, there was no significant PE activity.Total
have resulted in economic crisis every four to five invested capital reached approximately US$100m at
years, eroding already weak financial structure of the end of 1999. In 2000 alone, close to US$100m
private companies, along with the financial system. was invested following the trends in the world and
The public equity markets are not sufficient to fill as a response to the positive developments in
the gap either.The window of opportunity in the Turkey. Even this record performance is small as
IPO market remains open only for limited periods of compared to the country’s potential.
time.The companies usually issue a symbolic After the 2001 crisis, the PE activity almost
percentage of shares to the public and most ceased to exist and many newly founded PE funds
companies are not large, attractive and institutional pulled out. In the following years, the activity has
enough to float shares in the domestic and continued at a rate less than US$40m a year. As of
international stock markets. the beginning of 2003, we predict that slightly less
High growth in global PE activity than US$250m PE capital has been cumulatively
Global PE fundraising has grown from a mere US$18bn invested and there is about US$250m of committed
in 1990 to US$250bn by the end of the decade. In the capital seeking PE deals in Turkey.
US, this fast growth was one of the major driving
forces behind the fast growth in the technology Difficulties in PE market in Turkey
sectors.The surge in the US was followed by Europe Considering the availability of funds for PE globally and
and, to a great extent, by the emerging markets in Latin scarcity of capital in Turkey along with expected
America,Asia and Eastern Europe. abundant deal flow, one would wonder why PE is not
In 2001, after its peak in 2000, PE investment was so developed in Turkey. In this section, the difficulties in
0.25% of GDP in Europe and 0.60% in the US. For the Turkish PE market are presented covering the
example, this ratio was 0.13% in Ireland, 0.18% in issues of:
Spain, 0.25% in Hungary, 0.44% in Netherlands, 0.65% • fund raising;
in UK and 0.87% in Sweden. • interest of existing funds;
• quantity and quality of deal flow; • Most family-owned companies are too small for a
• legal issues; meaningful exit in terms of trade sale or IPO.
• macroeconomic and political issues; and Many industries are fragmented with over
• exit opportunities. capacity consisting of a large number of players
Fund raising with insignificant market shares competing
Domestic capital formation is insignificant and a fiercely with each other.Though the lack of large
substantial capital of Turkish nationals is kept outside of players with significant market share presents a
the country due to past gains from unregistered problem, it also presents an opportunity to do
economic activity and somewhat distrust to the roll-up deals in Turkey.
system.The local institutional investors do not play a • Many companies are unfocused, diversified
significant role due to immature private pension fund businesses with no clear core competencies that
and insurance markets.The funds that would be make it difficult to envisage an exit in the form of
employed in the PE market are predominantly raised a targeted trade sale.
from international investors. Despite its huge potential • Many companies do not have aggressive growth
and fundamental promises,Turkey has not enjoyed the plans, as they have been tired of ups and downs
FDI flows that it deserves. and leverage and fixed costs could be deadly in
While the total FDI flows in the world have crisis.
increased from US$57bn in 1982 and US$200bn in • Many lack effective corporate governance,
1990 to US$1,300bn in 2000 (the record year), management information systems and
during this period FDI inflows to Turkey were management accounting standards. Ownership
consistently less than US$1bn or less than 0.4% of and management are mostly intermingled.
GDP.The FDI flows in similar markets have been • It is hard to evaluate past performance of
10 times this ratio. companies due to high inflation, volatility, poor
Some institutional investors require a track bookkeeping, and inter company transactions.
record of PE activity before investing into the • Many companies keep different sets of accounting
country. Many investors shy away from Turkey due to books, for tax, banking and management
persistent high inflation, high government deficit, purposes. In certain industries a portion of sales
macroeconomic and political instability and slow are unregistered.
progress in the long expected reforms and • Large conglomerates create tough competition in
privatisation. However, many other emerging markets many areas due to their ability to transfer huge
with similar flaws enjoyed substantial FDI growth in resources eliminating the significance of players
the same period. likely to be PE targets.
Interest of existing funds • Up until recently, valuation expectations have
The funds which cover Turkey from abroad, without been quite high in spite of scarcity of capital.
allocating substantial local resources, find it hard to Despite these problems, we believe there is
close deals due to long lasting evaluation, negotiation, significant deal flow in Turkey that is more than
due diligence, deal structuring stages as a result of enough to feed the existing funds.
complications with availability and accuracy of Language skills, quality of senior and middle
information, legal difficulties and cultural dissimilarity of management, availability of chief financial officers,
local companies.As a result, international PE funds third party providers like corporate finance, legal
often lose interest after facing difficult local conditions. and accounting advice is quite strong in Turkey that
Quantity and quality of deal flow improves the quality of deal flow as well as the ease
This section is partly based on presentations by market of closing, monitoring and exiting.
participants like Commercial Capital,Turkven and PDF There are positive developments to improve the
in TurkVCa events. In Turkey there are more than corporate governance standards. A new code of
30,000 companies with sales of more than US$2m, standards was prepared with the cooperation of
2,500 companies with sales of more than US$10m, and business associations and universities.
close to 1,000 with sales of more than US$25m. Fierce competition forces holding companies to
As explained earlier, one would expect abundant reconsider their focus on core competencies,
deal flow due to local opportunities and scarcity of creating spin-off opportunities.While limiting the
capital. In reality there are difficulties in the quantity numbers of sizeable attractive targets, the
and the quality of deal flow: fragmented nature of many sectors also present deal
• Many owner managers are not aware of the PE flow in the form of roll-up opportunities, though no
process and are not ready for the idea of sharing PE financed roll-up has taken place yet.
control and full transparency. The funds have to be patient, flexible and need to
learn and adapt to local practices, rather than fund and the target company. Financial advisors also
applying generic approaches. play a major role during the exit stage. Corporate
Legal issues finance advisors know that they are in a multi-
Making minority investments in Turkey could be a period game and they have to be fair to the
difficult task due to insufficient minority rights and investors while protecting the rights of their clients.
enforcement of contracts. Long and complicated M&A International Inc., which is the world’s
shareholder agreements increase the closing time and leading network for mergers and acquisitions in mid
transaction costs. market, has been involved with PE industry by
Macroeconomic and political issues assisting companies during PE financing stage and
Ups and downs in the growth rate and recent crises during the exit stage. During 2002, out of 161 deals
may force companies to recapitalise with lower with a total deal size of US$9.2bn that M&A
valuations, presenting lucrative PE opportunities. International Inc. were involved in, in 33 deals a PE
However, at the same time, this instability shies away element was present, whether fundraising or exit of
investors with the fear of devaluation that would erode PE funds.
the capital gains in real currency, as well as lack of M&A International Inc., along with Acquisitions
growth, profitability and timely exit in the weak Monthly organised M&A Mid-Market Forums in
markets. Rome (2001), Prague (2002), and will organise the
Exit opportunities upcoming forum in Dublin (2003), all of which aim
Fundamentally, there should be sufficient exit to bring practitioners from around the world in
opportunities in Turkey, considering the relatively one-to-one meetings and workshops to discuss
effective stock market and attractive positioning of current issues, trends and business opportunities.
Turkish companies for multinationals. Private equity has been one of the key topics in
There are 262 listed companies at the Istanbul these events in which major PE funds were present
Stock Exchange (ISE) with a market capitalisation of discussing the trends on fund raising, investing and
US$35bn as of April 2003 and an average daily exiting stages, as well as meeting M&A specialists.
trading volume of US$281m during 2002. However,
most of the trading takes place in the very large Cooperation attempts:
issues. Venture Capital Association
In most of the emerging markets, an IPO has The cooperation of market participants is important to
hardly been the exit route. For example, in 1998 and promote PE activity and protect the rights of the
1999, only 3% of all private equity exits in Eastern participants.Turkish Venture Capital and Private Equity
Europe were IPO exits. Association,TurkVCa (www.turkvca.org), aims to
In Turkey, PE funds experienced only two enhance the development of venture capital in Turkey
successful exits in the form of IPO – exit of Sparx by increasing the interaction among the market
from Unal Tarim and Arat Tekstil.The other exit participants, organising events and encouraging and
mechanism – trade sales – require the attention of commencing research and lobbying activities.TurkVCa
multinationals into Turkey. As stated earlier, the FDI has contributed in the areas of the minority
flows into the country has been insignificant as shareholder rights, deal flow generation and legal
compared to the potential of the country.The only framework issues.
track record of a successful exit of PE funds is the TurkVCa played an important role at the
sale of Termoteknik, an aluminum radiator initiation of a new Venture Capital Investment Trusts
manufacturer to UK based Caradon after the (“VCIT”) legislation. As a result of fruitful discussions
investment of Merrill Lynch. during the TurkVCa events, Capital Markets Board
(“CMB”) first allowed options and futures contracts
Role of advisors in PE investments.Then the discussions led to a
Corporate finance advisors contribute to a great report on deficiencies of the former VCIT
extent to the establishment of the PE market by legislation. In early 2003, incorporating the
convincing international players to include Turkey in suggestions by TurkVCa along with a number of
their investment focus; generating abundant deal flow players, CMB passed a new VCIT legislation, which is
to novice regional or local funds helping them to highlighted in the next section.
convince investors during fund raising; educating the
market participants about PE; identifying, screening and PE fund legal structures
preparing attractive deal flow. The following are types of PE investors in Turkey
Advisors support the deals by closing the categorised by structure:
information and expectation gap between the PE • Independent, dedicated country funds with
Limited Partnership (LP) structures and local The tax incentive provided to VCITs allows them
management teams, such as Turkven Private to operate totally free of corporate tax from all
Equity.Turkven manages a fund with institutional activities including dividends from portfolio
investors and is an affiliate of Advent companies and capital gains from investments in
International. Fund size of US$88m including the portfolio companies.
co-investment intention of Advent. In 2003, CMB passed a new VCIT legislation
• Dedicated country funds with LP structures that allowing VCITs to be established with less strict
are subsidiaries of MNCs, such as the AIG fund of conditions.
US$85m dedicated to Turkey.The AIG Blue Prior to the new legislation of 2003, in order to
Voyage Fund has a local advisory team in Turkey. qualify for these incentives,VCITs were required to
An early example of this type was the Sparx fund fulfil certain obligations including listing minimum
sponsored by Nomura, investing both in public 49% of shares in the stock exchange in five years,
and private equity. starting with a minimum 10% in the end of the first
• Regional funds that are subsidiaries of year.The floatation could take place only after
multinational/regional commercial/investment making first portfolio investments.There were also
banks or asset management companies, such as strict disclosure requirements about the portfolio
Citibank, Merrill Lynch, and Commercial Capital companies.The minimum life of a VCIT was
managed from their headquarters, Com Cap restricted to be 10 years. Since the issuance of this
having a liaison office.These funds invest from legislation first in 1993, only two local VCITs were
regional funds and do not have specific dedicated founded.
capital for the Turkish market.The Soros Based on the types of investors that can invest in
Southeastern European fund sponsored by OPIC the fund, the new legislation of 2003 defined two
is an exception with a team in Turkey. different types of VCITs: one that can sell shares to
• Independent regional funds with LP structures the public and one that can issue shares only to
managed from London or another financial centre, accredited investors such as local and international
like Safron sponsored by Middle Eastern and US institutional investors.The restrictions related to the
investors and Investment companies like EMEA latter were significantly reduced.This type of VCITs
sponsored by EFG Hermes of Egypt, investing are no longer required to list shares in the stock
Middle Eastern capital with local representatives. market, disclose detailed information on the
• Development banks and multilaterals such as the portfolio companies, and make investments in
IFC, FMO, DEG covering Turkey from their portfolio companies prior to issuing shares to
respective headquarters, providing equity, accredited investors.The minimum capital
mezzanine and debt instruments. requirement for this type of VCITs is also currently
• Venture Capital Investment Trusts (VCITs) one fifth of the capital requirement of VCITs that
operating in Turkish jurisdiction under the can sell shares to the public.The restriction about
legislation from Capital Markets Board (CMB), the minimum life of a VCIT was also removed with
like Vakif and Is Risk. the new legislation.
• Last but not the least, holding companies mostly
acquiring the majority of target companies with
no explicit exit strategy. Corporate venturing has Author:
played a significant role and substituted Levent Bosut (Managing Partner)
institutional PE investments in Turkey. Holding PDF Corporate Finance,
groups in Turkey have enjoyed possession of member of M&A International Inc.
substantial capital, human resources, technical Harmanci Giz Plaza 10A
skills, good relations with government, economies Levent 80640
of scope in management functions and synergies Istanbul
to offer with other group companies. Turkey
Local legislation to promote PE Tel: +90 212 280 9313
In 1993,Venture Capital Investment Trusts legislation Fax: +90 212 280 7701
was passed by the Capital Markets Board to promote Email: firstname.lastname@example.org
PE in Turkey by giving tax breaks to these types of Web: www.pdf.com.tr
special companies. www.mergers.net