Taking the middle ground: Significant opportunities open to private equity investors

Private equity investors are increasingly being drawn to Turkey by its fast-growing economy, macroeconomic and political stability, strong demographics and abundance of family-owned businesses. Many large buyout deals have been struck in recent years, but more opportunities for growth may exist for private equity funds that are willing to invest in mid-sized businesses.

Turkey has already attracted some of the biggest names in the field, including Abraaj Capital of Dubai, European fund BC Partners, international private equity firm Bridgepoint, global asset management fund Carlyle Group and US-based TPG Capital. Moreover, some of these private equity funds have been successful in divesting their holdings with handsome profits, including TPG and Abraaj. In February 2011, the former sold its 90% interest in Turkish spirits company Mey Içki Sanayi to Diageo for $2.1bn. TGP had bought its stake in the formerly state-owned enterprise in 2006 for $810m. In January 2012, Abraaj sold its 50% position in Turkish hospital chain Acıbadem, acquired in 2007, for about $1bn to Integrated Healthcare. While Abraaj has not disclosed the amount it paid for its shares in the health care provider, it has publicly said that it made an attractive return on its investment.

MID-SIZED BUSINESSES: While these deals attracted international media attention, Turkey also offers opportunities to invest in mid-market growth companies, according to Serkan Elden, the managing partner of investment management firm capitAlinka.

These are typically first- or second-generation family-owned operations, with an interest in expanding their businesses by attracting new customers and entering markets, acquiring other firms and setting up international partnerships. For medium-sized privately held firms in Turkey, private equity represents an attractive form of financing. These family-owned businesses are generally undercapitalised and cannot attain more credit from banks without an additional injection of equity. Moreover, they are increasingly viewing private equity as an acceptable form of capital and partnership.

However, challenges remain. First, the investor needs to establish trust with the owner. Second, a presence in Turkey is likely required, as much of the deal flow is coming from outside Istanbul, and international firms could find it difficult to access family-owned businesses. Third, most of these owners are keen to work with their financial partners in executing growth strategies.

Therefore, passive minority ownership – the style of private equity deals that was traditionally prevalent in the region – may not be possible when it comes to dealing with Turkish mid-market family-owned businesses.

LEGAL CHANGES: The new Turkish Commercial Code, set to go into effect in July 2012, could also present challenges to private equity firms doing business in Turkey, according to Ismail Esin, managing partner at Esin Attorney Partnership. Private equity investors often use bank loans to help finance buyouts, with the target firm typically providing assets (eg, their receiveables) as collateral. While this form of financial assistance is legal under the current Turkish law, the new Commercial Code prohibits the target from giving collateral to secure acquisition-related loan repayment. This will make it more difficult for the potential acquirer, such as a private equity firm, to secure financing.

However, the Commercial Code will bring some positive changes as well. Tag-along and drag-along rights – both of which are important to private equity investors – will now be included in shareholder agreements rather than in the articles of association for all joint-stock companies. Moreover, minority shareholder rights will in general be enhanced, which is a useful change.

While some of these elements of the new Commercial Code could give some private equity investors pause, it is important to remember that this is an area that is still largely in the early stages of development. The country’s comparative depth in its management talent and private enterprise culture, in addition to its regional economic ties to the Middle East, Russia, Central Asia and North Africa, make local mid-market companies an attractive target for private equity investments.

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The Report: Turkey 2012

Capital Markets chapter from The Report: Turkey 2012

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