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PRIVATE EQUITY IN TURKEY İlhami Koç June 2008. MAJOR CHARACTERISTICS OF TURKISH FINANCIAL SECTOR. Significant Savings Deficit. Dominated by Banks. Credits are Mainly Short-Term. Public Offering is The Only Financing Source of Capital Markets.
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PRIVATE EQUITY IN TURKEY İlhami Koç June 2008
MAJOR CHARACTERISTICS OF TURKISH FINANCIAL SECTOR Significant Savings Deficit Dominated by Banks Credits are Mainly Short-Term Public Offering is The Only Financing Source of Capital Markets SMEs are having trouble in finding the sources to finance their growth. 2
TURKISH PE INDUSTRY GROWTH Private Equity Investments in Turkey (2003-2007) 2.1% 0.2% 3.2% 6.9% 7.2% 26.6%* 3 2 2 2 PE’s Share in M&A Market Number of Exits Source: Mergermarket, as of 6 June 2008 Industry is growing despite unfavourable market conditions
Office in Turkey with a dedicated fund Opportunistic / Regional with an office in Turkey Does not have an office in Turkey TURKISH PE INDUSTRY GROWTH – Market Position of PE Funds 2002 Bubble size indicates the number of deals done by the fund Only 5 years ago, number of active players in Turkish PE market was limited to 5 4
Office in Turkey with a dedicated fund Opportunistic / Regional with an office in Turkey Does not have an office in Turkey TURKISH PE INDUSTRY GROWTH – Market Position of PE Funds 2008 Bubble size indicates the number of deals done by the fund Turkish private equity market is increasingly attracting significant attention (*) Not drawn to exact scale 5
TURKISH PE INDUSTRY GROWTH –Most Active Players PE Funds’ Activity – Total Number of Deals (2003-2007) PE Funds’ Activity – Total Deal Volume (2003-2007) * Excluding transactions completed by consortiums with strategic players, including leverage Is Private Equity is the market leader in terms of number of deals whereas BC Partners has made the largest investment in Turkish market history. 6
TURKISH PE INDUSTRY GROWTH –Transactions in 2007 Entrance of big players increased size and changed the type of deals 7
TURKISH PE INDUSTRY GROWTH– Top 10 Deals Buyer Size ($mn) Target Sector Stake (%) Date Source: Mergermarket
TRENDS IN THE MARKETS INDUSTRY PARTNERSHIP STRUCTURE INVESTMENT SIZE EXPECTED RETURN EXIT OPTIONS
1995 – 2004 2005 – 2008 TRENDS IN THE MARKET– Industry Source: Private Equity Report in Turkey ,2007 Investments have been focused on mainly consumer goods, services and health industries
2003 2007 2008 2005 TRENDS IN THE MARKET – Investment Size Thanks to newcomers, ticket sizes are growing.
1995 – 2005 2006 – 2008 TRENDS IN THE MARKET– Partnership Structure Source: Private Equity Report in Turkey ,2007 Majority investments become more popular
Beyaz Fleet Leasing 19months 4,0 64,64%* Step Halı 4 years 3,5 19,72%* Cinemars 3 years 11,5 30,25% Tüyap 14 months 26,0 45,75% TRENDS IN THE MARKET – Expected Returns • EBITDA multiples are around 5-8. • During the last a few years, PE funds decreased their IRR expectation. Examples Investment Duration Invt. (mn$) Return (%) * Beyaz Fleet Leasing and Step Halı returns have been calculated from ISE data. Private Equity investments in Turkey generally seek for 15-25% returns on USD terms
TRENDS IN THE MARKET – Exit Options Public Offering Strategic Sale Financial Sale Management / Owner Buyout All exit options are available in the market
EXPECTATIONS FINANCING • As a result of recent global economic developments, financing cost is increasing. NEWCOMERS • Despite market conditions, new funds are coming TRANSACTION VOLUME • Ticket sizes will remain high. EXITS • Because of market conditions, exit will be harder than before. EXPECTED RETURN • An internal rate of return will be around 15%-25%.
LOCAL CHALLENGES TO CONSIDER • Accessing Proprietary Deal Flow • Foreign funds’ need to utilize intermediaries to generate deal flow creates an “auction” environment, high competition resulting in increase in entry prices • Deal Structuring • PE funds’ requirement for risk control mechanisms (exit priorities, drag-along, tag-along rights) and capital protection clauses (dividend privileges, minimum return guarantees) not well understood by founding shareholders • Determining Past Performance of Companies – Due Diligence • Macroeconomic history of high inflation, fluctuating FX rates and volatility • Lack of accounting and IT infrastructure • Business Culture, Corporate Governance and Transparency • Family owned companies reluctant to have an outside shareholder • Complicated shareholding structures, hard to identify “related-parties” • Management Recruiting and Retaining • Scarcity of result-oriented management talent that can deliver PE expectations • Management backgrounds relatively difficult to reference 16
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TURKISH vs. GLOBAL PE INDUSTRY – Share in Total Deal Volume* Global PE Activity Turkish PE Activity Sounce: Mergermarket, Dealwatch Turkish PE industry promises a significant growth potential with 7% weight of PE deals in total deal volume compared to global figure of 45%. 18