While it is common to use the terms venture capital and private equity interchangeably, in principle there is a clear distinction between these two concepts. Since venture capital investors generally finance seed, start-up or early stage companies with a business or product development plan, whereas private equity investors prefer providing funds to ongoing businesses at later stages.
Private equity is a source of investment capital from high-net worth individuals and institutions aiming to invest and acquire equity ownership in companies having a high-potential for growth which are generally not quoted on a stock market.
Venture capital investments are defined and regulated in Turkish law. "Venture capital is a form of investment enabling dynamic and creative entrepreneurs who don't have adequate financial resources to realise their investment plans that may return profit," according to the Capital Markets Board of Turkey (CMB) regulation.
Although private equity and venture capital invest in companies at different stages of business development, the ultimate ideas and philosophy behind these concepts are similar.
It is worthy to note that venture capital investments are still exceptional in Turkey, and have not provided satisfactory results for the investors due to the fact that the new ideas and early-stage investments are usually funded from personal assets of the entrepreneurs or through bank loans. However, banks such as Is Bank and Vakif Bank have formed their own venture capital investment funds.
Accordingly, this article aims to examine the legal structure of private equity investments, as well as the relevant legislation and samples of private equity investments in Turkey.
Private equity investments are related to financially distressed but operationally viable companies that are unable to process profitable investments due to lack of adequate financial resources, as well as non-distressed companies aiming to develop their existing business. The main private equity investors are high net worth individuals, funds, fund of funds, holdings (which allocate a part of their funds with a private equity strategy), investment trusts (that are formed in accordance with the Capital Market Law and the Communiqué issued by the CMB) and to a certain extent, banks. Under Turkish law, the high-net worth individuals, funds, fund of funds and banks that are aimed to inject capital into a company are not legally obliged to meet any conditions specific to private equity investments. Maybe this is the reason that more private equity than venture capital investments has taken place in Turkey as a result of such unregulated and free legal environment. Nevertheless, private equity investments can be made by acquiring the target companies' shareholding. Such an acquisition can be realised by incorporating a new company or participating to a capital increase, sale of shares, a spin-off or privatisation, subject to the provisions of the Turkish Commercial Code and the Turkish Code of Obligations. However, certain restrictions are born on the investment trusts that are regulated under the Capital Markets Laws and the Communiqué Regarding the Principles on Venture Capital Investment Trusts issued by the CMB on March 20 2003.
It is worthy to underline the investment trusts that are regulated by the Capital Market Law, are not the only investor type that can perform private equity activities. Many other types of investors can also perform private equity activities on the ground that funding into the companies with the private equity philosophy is just a business decision in the sole discretion of the investors, and they are not legally obliged to meet any conditions specific to private equity investments. The Turkish State aimed to establish a publicly beneficial financial system and in this respect regulated venture capital and private equity investment trusts and provided a tax incentive to these publicly held investment trusts subject to the regulations of the CMB by exempting the profits of portfolio management from corporate tax.
While examining the legal background of private equity investors, it is important to emphasise the only legislation that regulates a special type of venture capital or private equity investment trust: the Communiqué.
Although the Communiqué might appear to cover only venture capital investment trusts at the first sight, in fact the Communiqué applies both to the private equity investment trusts and the venture capital investment trusts, on the ground that "the companies to be invested in are defined as the companies to be established or established in Turkey, which have the potential for growth and are in need of financial support" under Article 3/(i) of the Communiqué.
According to Article 4 of the Communiqué, the investment trusts must be incorporated in the form of a joint-stock company with registered capital. The existing joint-stock companies may also apply to the CMB by requesting their conversion to a venture capital or private equity investment trust and by amending their articles of association accordingly, pursuant to the provisions of the Capital Markets Law and the Communiqué. In order to be able to obtain approval of the CMB:
- initial capital of the company (or paid-in capital for the companies in conversion) must be at least TL 5 million (approximately 2.4 million);
- trade name of the company must include the phrase "Girisim Sermayesi Yatırım Ortaklıgı";
- the company shares must be issued against cash contribution;
- the company's articles of association must comply with the provisions of the Turkish Commercial Code, the Capital Market Law and the Communiqué;
- the board members, and the legal person shareholders who own more than 10% of the shares of the company must not have any unpaid and due obligations or other similar debts and must prove the source of their funds;
- a separate application must be made to the CMB for involving the activities listed under portfolio operations; and
- at least one of the founders must be a leading shareholder.
The real person shareholders of the company must not be insolvent and must fulfil the requirements regulated under provisions of the CMB Communiqué numbered V-46. Although the Communiqué strictly regulates the incorporation procedures and obligations, such as disclosure of material information, and restricts the scope of activity, it has to be noted that the abovementioned Communiqué includes less strict conditions than the previous legislation. The Communiqué also includes tax incentive provisions in order to promote the private equity firms. On a different note, the Draft Turkish Commercial Code, which is still being discussed in Parliament, is expected to introduce restrictions on financial assistance and prohibit certain features of the shareholders agreements, while introducing broader rights to minorities. Therefore, one should also bear in mind the significant impact of the Draft Turkish Commercial Code is likely to have on private equity transactions following its enforcement.
In addition, it should be noted that pursuant to the Law on Protection of Competition numbered 4054, mergers and acquisitions are subject to the approval of the Turkish Competition Authority, if the combined turnover of the undertakings concerned exceeds TL 25 Million (11.8 million) or the combined market share of the undertakings involved in the concentration is above 25% of any of the relevant markets.
Furthermore, the taxation considerations generally play an important role in structuring a private equity investment. If the seller is a real person, the income tax shall not apply given that the shares are held for more than one year and for legal entities this term is two years. The tax exemption shall not apply if real persons or legal entities acquire a shareholding in a company and then sell it before the periods. Under such a situation, these real persons and legal entities shall be obliged to pay income tax for the difference between the acquisition price they paid and the transfer price they received regarding such shares.
In addition to the taxes on income, the parties should also pay the stamp duty with respect to the agreements. The stamp duty is 0.75% of the value of the agreement provided that the stamp duty does not exceed TL 1.14 million (approx. 536,279). The stamp duty should be paid for each copy of the executed agreement.
Despite the abovementioned restricting legislation, it should be also underlined that there is no specific regulatory provision that prevents private equity firms from entering into any sector. However, certain sectors, such as the financial services sector, telecoms and media, require the disclosure of the ultimate beneficial owners of the shares. Therefore, private equity investors may have difficulties in explaining their fund structure. Moreover, in certain industries such as radio and television, there are certain ceilings for foreign ownership. Although such restrictions have been overcome by establishing trust relationships with Turkish individuals, such schemes may not be possible under the charter of the private equity investors, and thus prevent such investors from acquiring shares exceeding the statutory limit. However, there are current discussions either to lift such restrictions or at least to increase the ceiling. Finally there are certain restrictions on foreign direct and indirect ownership of real estate. These restrictions do not prohibit foreign ownership, but certain procedures and formalities are required to be followed and fulfilled. These restrictions may also prevent the investment of foreign private equity investors in these sectors.
According to the Draft Turkish Commercial Code, many issues regulated under shareholders agreements shall not be included in the articles of associations of companies. Thus, tag-along rights, drag-alone rights, as well as similar tools used in private equity investments will not be used in the official documents of the companies after the enactment of the Draft Turkish Commercial Code. Furthermore, it should be noted that even under existing Turkish Commercial Code parallel rules in shareholders agreements and articles of associations give rise to parallel procedures since in practice the shareholders agreements and articles of associations are mostly subject to different laws and dispute resolution disciplines, such as litigation and arbitration.
The Communiqué defined two types of investment trusts based on the types of the investors. One of them can make a public offering and the other one can sell shares through private placement diverted to accredited investors such as local and international institutional investors. As mentioned above, the restrictions regarding the second type were significantly reduced and consequently this type of investment trust is no longer required to list shares on the stock market, disclose detailed information on the portfolio companies and make investments in portfolio companies prior to issuing shares to accredited investors. The restriction regarding the minimum life of an investment trust is also removed.
Additionally, it is worthy to state that the main type of private equity transaction experienced in Turkey is a buyout, where investors acquire the actual control of a company which cannot realise its full potential. In terms of buyouts, it should be noted that the acquisition of the control of a company does not necessarily require the acquisition of the majority shareholding in the company. In this regard, control over a company can also be acquired through acquiring minority shares which are equipped with particular privileges that grant control over the company. The investors restructure and manage the company they acquired for few years and then sell it to a strategic purchaser or take it public with high returns under the buyout system.
The investors stay with the company for a short period of time and then prefer to exit from the company they invested in. However, exit plans can be major deal-breaker issues. Apart from this fact, there are four exit options in practice:
- public offering;
- strategic sale to another private equity investor or to another strategic acquirer;
- sale to the existing shareholders; and
- refunding of the invested amount by obtaining dividend payment.
Taking into consideration the history and background of private equity acquisitions in Turkey, there is no specific industry or type of company that is the typical target of the private equity investor. The investments include food and beverages (Mey Içki and Yudum), retail (Beymen, For You and Migros), transportation (UN Ro-Ro), media (Digiturk), pharmaceuticals, IT and real estate. However, there is an evident lack of interest or suitable targets in three main industries: financial services (especially banking), textiles and tourism.
Some of the significant private equity investments are listed below:
- Sparx Investment Company, which is one of the early entrants to the Turkish private equity market, established its Turkish office in 1995 and invested a total of approximately $27 million between 1996 and 1998 in Ünal Tarım (food), Arat Tekstil (textiles), GSD Holding (textiles), Biomar (chemicals), Rant Leasing (leasing), Eka Elektronik (electronics) and Aba Ofset (printing materials).
- Vakıf Risk Sermayesi invested approximately $1 million to a production company called Teknoplazma in 1996.
- Merrill Lynch Global Private Equity invested in Termoteknik, a radiator panel manufacturer in 1997, and BIM, a food retailer, in 1999.
- Citicorp invested approximately $2.4 million in 1999 into Merko Gıda, a frozen food and tomato paste producer which was publicly traded on the Istanbul Stock Exchange at that time.
- Safron Advisors, a London based private equity fund advisor, invested in Jumbo, a silverware sector leader, Alfa Securities, a small Turkish securities firm (1999), and in NetOne, an internet service provider (2000). Its total investment amounted to approximately $15 million.
- Vakıf Risk Sermayesi invested in Innova Bioteknoloji (medical) in 1999, and Ortadogu Yazılım of approximately $2 million, and a company providing internet and IT services in 2000 of approximately $1 million.
- AIG Blue Voyage's investment to Galatasaray Sportif, the sports equipment and accessories company of the football team Galatasaray for an amount of $21 million was recorded as the first private equity investment in Turkey over $20 million. However in 2002, the management of Galatasaray Sportif was changed against the wills of AIG Blue Voyage and then for the first time in Turkey a private equity investor filed a lawsuit against the company it invested in. The lawsuit led the parties to an agreement. As a result of AIG Blue Voyage exited from Galatasaray Sportif. AIG Blue Voyage also invested in AFM, a movie theatre chain.
- A Greek private equity investor, Commercial Capital, invested $10 million in Isıklar Ambalaj, a leading paper sack manufacturer which was a publicly traded company on the Istanbul Stock Exchange.
- EMEA, a subsidiary of Egyptian-based EFG Hermes Group invested $21 million in Probil, the leading systems integrator and $1 million into a ceramic tableware firm namely, Gorbon Isıl.
- Bank of America established Taurus Capital Partners in 2000 and invested in BIM as a co-investor with Merrill Lynch.
- DEG, an industry-focused German investment fund, invested in Penguen, a frozen food manufacturing factory in 2001, and Goldas, the publicly listed jewellery company in 2002.
- Is Girisim Sermayesi Yatırım Ortaklıgı made investments from 2003 to 2005 in; Nevotek, a software developer amounting to $3 million; Cinemars, a movie and theatre chain amounting to $5 million; Step, a carpet retailer amounting to $3 million, TUYAP, a fair and exhibition company amounting to $36 million; acquired the shares of Beyaz Filo Oto Kiralama, the fleet rental and management company for approximately $10 million in 2006; invested approximately $5 million in Ode Yatırım, a company active insulation sector in 2007.
- Turkven Private Equity acquired 50% of the packaged bread producer, UNO for approximately $13 million in 2003; invested in Intercity, the leading car rental company approximately $15 million in 2004; invested approximately $25 million into the leading mobile value added services provider, Trend Tech Group in 2005; and acquired stakes in Provus Bilisim Hizmetleri, an IT company in 2007; Next Generation Media, a media company in 2007; Mavi Jeans and Tekin Acar, a cosmetics company in 2008.
- Soros Investment Capital Management. invested in Unikom Gıda (the Yudum brand) in 2003. In May 2007, NBK Capital Equity Partners acquired 100% of the shares of Yudum Food. In November 2007, Afia International Company acquired shares of Yudum Food from NBK Capital Equity Partners.
- Providence Capital acquired 45% of Digiturk, the digital TV platform for $150 million in 2006.
- TPG acquired 90% of Mey Icki, the leading liqueur manufacturer for $810 million in 2006.
- Bancroft invested $90 million in Standart Profil, a supplier to the automotive industry.
- AIG Global Emerging Markets Fund invested in For You, a drug store.
- Partners in Life Science and Citigroup Venture Capital International invested $240 million in Biofarma, a leading generics pharmaceutical manufacturing company. Global Equities Management bought Emek Sigorta from the SDIF's portfolio of companies in 2006.
- Eastpharma the majority shares (58%) of which is owned by Global Equities Management took control of Deva Ilac, a publicly-listed pharmaceutical company.
- Actera Fund, raised by the Antika Partners invested in Mey Icki as a co-investor with TPG.
- CVCI invested in Boyner and Beymen in 2007.
- Ottoman Fund which is a UK real estate fund invested $110 million in land of 1 million square meters in Riva, Istanbul for development.
- Turkven Private Equity and Advent International Corporation acquired a stake in Roma Plastik in 2006.
- Turkven Private Equity and FMO acquired a stake in Pronet Guvenlik, a securities company in 2006.
- BC Partners, DeA Capital and Turkven Private Equity acquired a majority stake in Migros, a retailer chain in 2008.
|About the author
Ismail G Esin began his legal practice in 1997 as the founding partner of Esin & Co (now Esin Law Firm).
Over the years, Esin has advised various international companies on dispute resolution matters, especially in disputes arising out of joint ventures and M&A transactions in parallel procedures before the arbitral tribunals and Turkish courts.
With seven books published in English, German and Turkish, Esin is a frequently invited speaker to conferences and symposia on international arbitration and litigation as well as on mergers and acquisitions. He was a lecturer in civil law and law of obligations from 1992 to 2004 at Marmara University. Since 2001, he has taught graduate-level courses on M&A, at Bahcesehir University in Istanbul.
Esin is a member of the International Criminal Court Turkish national committee, London Court of International Arbitration, German Arbitration Institute, International Bar Association and German-Turkish Chamber of Industry.
Esin graduated from Istanbul University in 1990 and obtained his LLM degree, summa cum laude, from the University of Tubingen, Germany in 1991. After his graduation, Esin worked as a research assistant at the Marmara University of Istanbul on civil law until 1996. Between 1996 and 1997 he obtained his PhD degree from University of Tubingen. His doctoral thesis, The Liability of the Seller in Enterprise Acquisitions, was published in 1998. Esin is co-author of the Materials and International Arbitration and M&A Transactions Under Turkish Law.
Ismail G Esin
Esin Law Firm
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Esin Law Firm was established in Istanbul in 1997. The consistent delivery of innovative, high-quality legal services commensurate with international standards makes Esin one of Turkey's premiere law firms. The firm's commitment to its clients is clearly understood from its discriminating business approach and tailor-made solutions to legal problems. To this end, Esin takes full advantage of the esteemed academics on its team and concentrates on giving the most effective continuing education to its attorneys in order to achieve the firm's goal of complete client satisfaction. Consequently, it has become the law firm of choice for clients seeking innovative legal solutions.
The firm focuses primarily on M&A, capital markets disputes, real estate law and dispute resolution, including international arbitration.
Areas of practice
M&A; Litigation; Arbitration; Commercial real estate; Compliance; Corporate governance; Capital markets; Competition law; Regulated markets; Energy law; Telecommunication law; Privatisation; Administrative law; Intellectual property; Labour law; Restructuring/insolvency.