•Turkish economy is one of the fastest growing and was GDP Real Growth Ratetripled over the past decade reaching US 772 billion in 2011. 12%IMF expects real GDP growth of 4% until 2016. 10%• Liberal and secure investment environment: Post Arab 8%Spring, Turkey emerges as a stable and peaceful Oasis within 6%the regional turbulence 4%•Big population of 75 million people with over 26 million are 2%young, well educated and motivated professionals 0%• Large and Growing Domestic Market equipped with -2% 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012e 2013emodern market tools: 50 mln internet users, 65 mln phone -4%subscribers, 51 million credit card users, 31.5 mln -6%international tourist arrivals, and 18 mln airline passengers(2011 figures) Nominal GDP in $bln• Developed infrastructure: New and highly developed 800technological infrastructure in 700transportation, telecommunications and energy 600•Competitive tax system: Tax was reformed and corporate tax 500was reduced from 35% to 20%. 400•Turkey has customs union with EU countries & mature and 300 200dynamic private sector 100 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Why Turkey ?
Investments in Private Equity in US$mln 4500• Over the past 20 years, almost US$ 7 billion was invested in the 4000 3500Turkish private equity market. 3000• Until 2005, the market was in its infancy stage with few small 2500 2000transactions every year in the range of US$ 2-3 million focusing 1500 1000mainly on small – mid cap consumer sector 500 0• 2006 – 2008 saw the big bang of the market as regional fund Before 99-00 2001-5 2006-7 2008 2009 2010managers and global buyout funds showed interest in big tickets in 1999the range of US$ 100 million – US$500 mln across all sectors of FDI in US$ billionthe economy 25•2009 did not see strong activity as economy contracted by c 204 percent. Only 9 transactions worth of US$ 244 mln were 15executed. 10• In 2010, private equity performance was quite strong with 511 deals worth US$ 411 mln took place. Investments were not 0limited to a single sector but target the companies that 2002 2003 2004 2005 2006 2007 2008 2009 2010underpinned Turkey’s rapid growth. Buyout groups were Private Equity Investments by Sector 2010-2011especially keen to invest in companies that operate in or caterto the country’s booming consumer market. Healthcare &•Valuation climate, overall investor sentiment, exit activity 14% life Sciences Consumer 23%which literally froze from Q4 2008 to Q1 2010 were revived 7% Industrials andin Q2 2010. Manufacturing Infrastrcuture 9% Service 18% 11% Media andPE Dynamics Telecom Others 18%
• FDI in Turkey has shown a steady increase since 2002 due to FDI in US$ billionimproving key macroeconomic indicators in addition to 25enjoying political stability. The value has decreased starting 202008 due to credit crisis and has started the increasing trend in 152010 10 5• With the surge of FDI in 2007, FDI to GDP ratio has stayed 0above those of developing countries, however the decrease 2002 2003 2004 2005 2006 2007 2008 2009 2010thereafter has put Turkey below• Share of energy sector as a percentage of FDI is expected to Ranking in A.T. Kearney FDI Confidence Indexs top 25increase in the near future. Insurance has been one of theactive segments within financial services as it isunderpenetrated while manufacturing is attractive due to 13 13cheap labor for European companies 20 23 23 24 In addition to the robust FDI from international 2001 2003 2005 2007 2010 2012 investors, availability of local finance is one of the key drivers of Private Equity / buyouts. Private equity funds are able to FDI Distribution among major Industries 2006-2009 find local leverage especially to finance large transactions Financial Service such as Migros Manufacturing Transport Whole sale & Retail Electricity, water, gasStrong FDI Real estate others
-In general, all fund raising activity happens outside of Turkey as local investorsLocal Investors- haven’t participated in local private equity market yet. This does not encourageFamily Offices & international investors either Pension Funds -Usually General Partners (GPs) refuse money from local family offices to avoid conflict of interest with rest of Turkish business community. In the near future, family offices should stop considering their investments in PE funds affiliate businesses - On the other hand, family conglomerates predominate privatized assets. In 2010, conglomerate MMEKA Makine bought privatized assets for more than US$ 5.0 billion. There is a room for private equity to grow once local investors are seriously invited to participate. - Historically Development Finance Institutions were the only investors in the Turkish Development Private Equity Funds. The first independent local fund manager Turkven received - Historically Finance commitments from a number of DFIs including IFC, DEG, FMO,..etc for its first fund back in 2002. Institutions - DFIs play an important role as they continue seeding first time fund managers such DFIs as Mediterra Capital which is targeted more than US$ 300 mln for its vantage fund in 2011 -Today foreign pension funds and commercials LPs are playing greater role in the GPsLimited Partners fundraising efforts. LPs -Recently Actera Partners have raised funds from Canada Pension Plans and Ontario Teachers Pension Plan for its first fund Fund Raising
Local Fund Managers have strong and wide network and act on the Local Fund ground, usually present across all market segments – from growth capital to Managers buyouts- and typically write equity tickets ranging from US$ 10 million to US$100 million such as Turkven and Acter Regional Managers access Turkey through a CEE fund (Advent International andRegional Fund Bridgepoint) or a MENA fund (Abraaj Capital and Swicorp). These managers Managers tend to target deals averaging US$ 100 million. They always use local corporate finance companies for local expertise Global Managers are the large buyout firms. They seek out largest deals whichGlobal Fund require US$ 400-US$500 million of equity. They are considered as a second Managers alternative of finance within the lack of bridge finance and buyout debt. Very common in the transportation and infrastructure projectsPE Segments
Deal Flow: Too much money chasing too few deals•There is a clear mismatch between money raised/committed over the past 5 years and investments reallydeployed , as not too many families want to sell their own business.• Capital is overhang in the range of US$100 million. Too many fund managers are competing for deals in thisrange• On the other hand, there are plenty of deal flow in the small to medium size segment as some 60% of Turkishcompanies have fewer than 250 employees where capital is much needed• Also, the European debt crisis will eventually make banks requesting higher equity structure to lend money toTurkish companies. This would represent an opportunity for PE Fund managers to create value by rationalizingfirms’ capital structure and improve cash flow management•Alternatively, large PE Investors monitor Turkey’s active privatization program which aims to scale backgovernment involvement in backbone sectors including Energy and Infrastructure. Turkey privatized domesticassets of US$11bn in 2006 to US$14bn in 2010 through an aggressive auction process.• Privatizations will continue to be a key driver of bringing new assets to investors going forward, withprospective state divestments including additional power generation assets, Istanbul Ferries, the Turkishlottery, and the government’s stake in Turkish Airlines.Deal Flow
Exit Strategy• We noticed that many Fund Managers had a successful full cycle of PE Investments . TheyInvested, managed, exited , made profit, and repatriated principals and profits out. •In 2008, Abraaj Capital invested US$585 million in Acibadem Healthcare and managed to exit in Jan 2012 through a strategic sale.• PE Fund Managers can exit through: • Strategic Sale to International PE Investors: Where GPs play a critical role in professionalizing the Turkish companies and bring them up to international scale and standards and by doing this they create investment opportunities for International investors. In 2006, TPG Capital invested US$ 810 million in Mey Lcki – a Turkish Spirits company. In August 2011, it sold its stake in the company to UK Premium drinks company Diageo for US$ 2.1 billion • Or through an IPO: •If it is US$ 200mln and above - through listing on Istanbul Stock Exchange •If it is less than US$ 200 million – could be through listing on London AIM or NASDAQ • Should the government allow local pension funds to invest in public equities, existing through IPOs would be a very feasible option especially for the lower end segment Improving exit is a key driver for private equity. Increasing FDI has demonstrated trade buyer interest while increasing number of active private equity funds are positive for theExit Strategy secondary market.
•The Current Account Deficit: Turkish economy is structured in a manner that limits the government controlover its current account which expose it to deficit due to a) union customs with EU and b) Turkey’s imports ofraw materials including oil and metals. Recently the current account deficit soared to above the 10% of GDP.This could lead to higher interest rate and dampen domestic demand• Moving towards centralized regulatory framework: Turkey has recently brought banks and capitalmarkets under the direct control of their pertaining ministers. Concerns are now increasing if similar stepscould be taken towards Turkish GPs which would affect the existing Private Equity Funds•Legal environment: Enforceability of contracts, protection of shareholder rights and legal concepts familiarto private equity are not fully covered by the Turkish legal system. Slow moving legal environment is anotherdisadvantage•Outdated commercial law: There are gray areas in terms of taxation and deal structuring. Also, bureaucracyand personal liabilities at the broad level are barriers to invest in•Minority rights issue: Legal framework is not protective of minority shareholders . Private equity fundswilling to invest in minority deals need to carefully draft legal documents and perform personal due diligencefor company owners carefully• Lack of transparency: Cash transactions that stay out of the books are widespread in Turkey, this createsdiscomfort for foreign investors• Lack of human resources: There is scarcity of individuals that have experienced the various stages of theequity transactions. This is especially important for top management positions.Challenges
Opportunities • Focus on small–mid Caps: So far, most of the PE transactions focused mainly on Istanbul. Private Equity investors will likely find better valuations and achieve better return in the lower market segment in small-mid size transactions in the range of US10-20 million in Anatolian, Black sea and AEGON regions. • Economic & Political Stability: Turkey is standing up to its reputation as an island of stability amidst regional economic and political volatility. • Strong Consumers / Healthcare sectors Turkey Private Equity Investments by Sector 2006-2009 Asia Private Equity Investments by sector 2006-2009 0% Transportation TMT 4% 3% Others Retail 22% Retail 9% 32% ManufacturingHealthcare 15% Others 3% 52% Manufacturing 17% TMT Transportation 20% Healthcare 23% 0% Opportunities
• Even though third parties conducting financial and legal due diligence is widely available, parties conducting insightful commercial due diligence, especially for mid-market are scarce • Sector data including market size, market share is hard to find making the due diligence effort more cumbersome Pre-Investing • Increasing multiple expectations by target companies due to a variety reasons including emotional attachment is an obstacle •High level of entrepreneurship in the country is resulting in poor strategic focus and unawareness of global trends •Company owners generally have top- line focus rather than EBITDA focus •Implementing change requires higher level of effort due to resistance from owners and company employees Management •As some business has been conducted off the record reacquisition, transparency in finance and accounting are key issues • Emerging market appetite worldwide needs to be maintained in order for favorable private equity exits to increase • In order to demonstrate companys true value, it is important to increase transparency, implement Exiting management dashboard and perform KPI benchmarkingTips to consider…