PRINT THIS PAGE Turkey's private equity market19/03/2003. Source: PDF Corporate Finance. Levent Bosut
Turkey's private equity industry remains a long way behind those in other European countries. Levent Bosut of PDF Corporate Finance discusses the state of the market in Turkey, recent private equity activity and factors that hinder its growth.
Foreign direct investment in Turkey
Young and dynamic population, qualified workforce and improving consumer habits point out Turkey as a country of opportunities; however the absence of capital prevents Turkey from realising its huge growth potential.
The most important bottlenecks for Turkey in the previous years were the lack of capital and the high interest rates. The government's inability to realise the structural reforms and decrease the state budget deficit has led to a high borrowing requirement. Due to the political instability and lack of confidence, the government was borrowing short-term and at high interest rates.
In this environment, domestic capital ignored capital investments and invested in high interest government bonds or transferred their capital to international markets. Foreign capital did not raise much interest and the FDI in Turkey remained below $1bn for a long period. When compared with the other emerging markets and similar countries, the FDI levels in Turkey were much lower than the amount deserved. For instance, in Hungary, where the population is 15 per cent and the GNP is 23 per cent that of Turkey, the foreign investment amount was about 2.5 times that of Turkey's. FDI/GNP ratio is only 0.2 in Turkey, whereas this figure is 1.2 in Poland, 0.5 in Hungary and 2.4 in Mexico. Moreover, if we compare Turkey with other European, Asian and Middle Eastern countries in terms of "FDI/Size of Economy", Turkey performs better only than Pakistan and Syria.
The limited foreign direct investments affected the private equity funds adversely. Even in Romania, where the economy is considerably smaller than Turkey, there's $250m worth of PE funds and this number in troubled Russia is $1,200m compared with the $100m in Turkey.
Private equity and venture capital activities in Turkey
The following examples verify the increasing private equity and venture capital activities in Turkey in recent years:
- The first organised attempt to raise a private equity fund targeting Turkey was undertaken by a joint effort of Bankers Trust and Turkpetrol Holding in 1991. This first attempt failed with the decision of Bankers Trust to return the raised $50m to investors as a result of its changed commitment to Turkey at the time.
- In 1993, legislation was passed to promote venture capital. A few Turkish banks tried to capture the opportunity, but most efforts failed after the 1994 financial crisis. All of the VC funds but "Vakıf RSYO" failed to begin operations. Vakıf RSYO performed an IPO in 1999.
- In 1995, Sparx Asset Management established its Turkish office to make investments in public and private companies. Sparx invested a total of $40m into seven Turkish companies. Sparx finalised two of its investments (Ünal Tarım and Arat Tekstil) after an investment period of two years and achieved remarkable returns in two IPOs. On the other hand, the investment in Aba Ambalaj went sour. Currently, Sparx owns shares in GSD, Tekstilbank, Rantleasing, Eka Elektronik and a biotechnology firm.
- Girişim Holding, which is founded as the PE fund of Fiba Holding, has made only one investment in the retail sector by acquiring the controlling share of Gima from Dedeman Holding. Fiba Holding hasn't made an exit and strengthened its position in the retail sector by taking over Marks&Spencer from Türkpetrol Holding.
- In 1997, Merrill Lynch invested in Termo Teknik (a HVAC firm) and sold its shares for more than double of the acquisition price to a global industry giant, Caradon, in 1998. In 1999 Merrill Lynch initiated its second investment, which was a retailer (BIM).
- A London based PE fund, Safron Partners, whose minority shares are owned by Deutsche Bank, invested in the silverware sector leader Jumbo in 1999, Alfa Securities and NetOne-an Internet Service Provider-in 2000.
- Citicorp Venture Capital's acquisition of 7.5 per cent of Merko can be considered as a private equity investment although Merko is a quoted company.
- AIG Blue Voyage invested in Galatasaray's sports equipment and accessories company (Sportif AS) and a cinema chain (AFM) in 2000. AIG continues operations in Turkey since 1999 and has analysed more than one hundred companies.
- EMEA, a subsidiary of Egyptian-based EFG Hermes Group, invested in internet technology firm Probil in 2000, and ceramic tableware firm Gorbon Işıl in 2001.
- FMO, Dutch direct investment company, invested in TUYAP, one of the Turkey's leading exhibition organisers in 2000. FMO is in the late stage of negotiations for a minority stake in one of the leading processed food manufacturers in Turkey, Penguen.
- In 2002, DEG, a globally active, real sector focused German investment fund, invested in the leading public jewellery company, Goldaş.
- Is Venture invested in system integrator Probil in late 2002 and ITD, a company providing services in payment and voice systems in early 2003.
The difficulties facing the VC/PE market in Turkey can be summarised as follows:
1. Scarcity of capital in domestic market
2. Lack of interested international VC/PE funds
3. Limited deal flow (limited deals with quality projects, focused institutionalised firms / uninformed market)
4. Problems and weaknesses in legislative environment
5. Limited exit opportunities (volatile capital markets, limited M&A activity)
6. Not enough cooperation (among market participants; among academy and practitioners)
The role of the corporate finance advisors in developing the investment environment is crucial.
We as advisors:
1. Attract foreign investors and international funds by our articles, road shows, presentations about Turkey.
2. Create awareness in the Turkish market through media, presentations, road-shows
3. Increase the deal flow by:
- Spotting deals and opportunities in which VC / PE funds would be interested
- Screening companies, which are not ready for the process thus reducing the work of VC/PE people.
- Preparing the companies for the VC / PE process by helping them to form reasonable expectations about valuation, method of exit, minority rights and by sharing our expertise in preparing the required documentation.
Copyright © 2003 PDF Corporate Finance
Established in 1995, PDF is a financial advisory firm specialised in providing a broad range of corporate finance services to Turkish and international clientele. PDF's business activities encompass mergers and acquisitions, private equity, project finance and other financial analysis and advisory services. PDF is the exclusive member of M&A International since 1998, an established network of 41 independently owned merger & acquisition consulting firms and private investment banking firms located in key financial centres throughout Europe, North and South America and the Pacific Rim. For more information please visit www.pdf.com.tr
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