Turkey: Gaining popularity

Author: | Published: 1 Oct 2010
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On account of a rapid growth in the number and size of deals, private equity is currently emerging as a popular investment concept in Turkey. As the global crisis did not affect Turkey's finance markets, investments by private equity firms increased significantly and more and more private equity investors are becoming interested in investing in Turkey.

In Turkish market practice, private equity capital is primarily used by: (i) companies that are financially distressed but operationally viable and unable to process profitable investments (owing to a lack of adequate financial resources); non-distressed companies aiming to develop their existing business and (iii) entrepreneurs who wish to exit from the companies they have incorporated. Investors usually stay in the company between two and seven years. After restructuring and managing the company for a few years, the investor sells it to a strategic buyer or takes it public with high returns. In some cases, private equity investors are selling the target company to another private equity firm, as is the case in the sale of AFM from AIG to A1, or the sale of Yudum from NBK Capital Equity Partners to Afia International Company.

Although Turkish shareholders traditionally hold skeptical opinions towards private equity firms, Turkish companies are more open to the idea of private equity today. The concept is sometimes misunderstood and it is a common idea that an investor's motive is always to get hold of the joint control of the firm through minority shareholding. This belief causes a mismatch between the shareholders of the target and private equity firms. In fact, private equity investments aim to gain significant control of a company (which is usually a private company) in the hopes of earning a high return. Control is sometimes achieved through acquisition of majority stake in the company or through certain veto rights granted to the investor that has acquired a minority shareholding in the target company. The returns for private equity providers come from the exit of the investor. The exit routes include selling the shares back to other shareholders, selling to other private equity investors or the company achieving a stock market listing.

Foreign interest in Turkish companies has increased significantly since 2006. Recent significant investments like NBK or Carlyle Group in Medical Park and Argus Capital in Memorial Hospitals verify this trend. For the Turkish investment history, the tendencies of private equity firms are pretty much diverse. Investments vary from food and beverages (Mey Icki and Yudum), health sector (Acibadem, Medical Park and Memorial Hospitals), retail (Beymen, For You and Migros), transportation (UN Ro-Ro), media (Digiturk), pharmaceuticals, IT and real estate. However there is a noticeable lack of interest (or suitable targets) in textiles and tourism sectors.

Furthermore, significant private equity firms such as Pinebridge (AIG), NBK, NBGI, Global Investment House, Bancroft Group, Qatar First Investment Bank, Bridgepoint, Carlyle Group are showing their interest in the Turkish market by establishing their liaison offices in Turkey. Moreover, Turkey based funds, such as Turkven Private Equity, are growing their fund sizes. More and more private equity investors that are considered as major actors in the private equity world are pursuing investment opportunities with their Turkish teams.

Legal framework

Under Turkish law, the investors that aim to inject capital into a company are not legally obliged to meet any conditions specific to private equity investments; maybe this unregulated and free legal environment is the reason that more private equity then venture capital investments have taken place in Turkey . Nevertheless, private equity investments can be made by acquiring the target companies' shareholding, and such an acquisition can be realised through incorporating a new company or participating in a capital increase, sale of shares, a spin-off or privatization, especially subject to the provisions of the Turkish Commercial Code and the Turkish Code of Obligations.

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 to prohibit certain features of the shareholders agreements, while introducing broader rights to the minorities. Therefore, one should also bear in mind the significantly positive impact the Draft Turkish Commercial Code is likely to have on private equity transactions, once in force.

Restrictions, limitations and permissions

It should be underlined that even though there is no specific regulatory provision that prevents private equity firms from entering into any sector, certain sectors such as the financial services sector and telecoms, energy 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 some industries, such as radio and television, there are certain ceilings for foreign ownership. These thresholds might be overcome by establishing trust relationships with Turkish individuals (compliance of such with relative regulations may be discussible). Still, this method may not be practicable under the charter of a private equity firm and may thus prevent them from acquiring shares exceeding the statutory limit. There are still ongoing discussions for either removing or decreasing this ceiling.

Finally, there are certain restrictions on foreign direct and indirect ownership of real estate. In this respect, foreign entities are allowed to purchase real estate in Turkey only within the scope of special laws which include Law on Promotion of Tourism, Petroleum Law, and Law on Industrial Zones. In other words, it will not be possible for foreign entities to purchase the targeted real estate directly if they are not within the scope of the abovementioned laws. On the other hand, such acquisition of real estate may be accomplished through a Turkish legal entity in Turkey even with 100% shareholding of a foreign entity. The acquisition of the real estate by the private equity investor through the Turkish legal entity can be achieved in two ways: in the first option, the private equity incorporates a Turkish subsidiary and such subsidiary acquires the real estate after completing a special permission procedure with the Governorship and other relevant authorities to ensure that the real estate does not fall within a military zone, special security zone or a strategic zone. Once that is cleared, there will not be any obstacles to a foreign entity acquiring real estate indirectly through a Turkish subsidiary. In the second option, a Turkish legal entity with 100% domestic capital is established and such legal entity acquires the real estate. After acquisition of the real estate, the private equity investor acquires the shares of the legal entity and the real estate is acquired automatically. In such a case, a special procedure is again followed, but this time the procedure is followed after acquisition of the real estate and therefore, has the character of approval instead of permission. To this effect, the acquired company sends a notification to the Undersecretariat of Treasury stating that the shareholding structure of the company has changed and a foreign shareholder has participated in the company. The Undersecretariat of Treasury notifies this to the land registry. Thereafter, the land registry follows the abovementioned procedure, applied to Turkish subsidiaries with foreign shareholding, and determines with the Governorship, and other relevant authorities, that the real estate does not fall within a military zone, special security zone or a strategic zone. The restriction on acquisition of real estate by foreign entities plays an important role, especially for private equity firms investing in manufacturing and retail sectors, considering the facilities and premises held by the target companies.

In addition to the abovementioned restrictions and limitations, it should be noted that pursuant to the Law on Protection of Competition numbered 4054, regardless of the shareholding structure of the acquirer company, mergers and acquisitions are subject to the approval of the Turkish Competition Authority, if: (i) the combined turnover of the undertakings concerned exceeds TL 25 million ($16.7 Million); or (ii) the combined market share of the undertakings involved in the concentration is above 25% of any of the relevant market(s).

General legal structuring

As mentioned above, owing to the lack of specific legislation regulating private equity investments, those investments are governed by agreements which are comprehensively drafted and negotiated by the parties. Since private equity investments in Turkey are generally realised by acquiring the target company's shareholding, and such acquisition is realised through participating in a capital increase and/or a sale of shares; the main instruments that are used for such acquisitions are share purchase agreements or share subscription agreements. The parties of these agreements may agree to govern these agreements by a law other than Turkish law. However, in Turkish legal practice, local parties prefer to govern the agreements by Turkish law. Turkish law is a modern, solution-based and flexible legal system. On the other hand, the flexibility provided under Turkish law is not unlimited and certain provisions should be drafted in the agreements to ensure their enforceability. Swiss law is also preferred as the governing law since the legal fundamentals of Turkish law are in fact reflected from Swiss law, and the parties are therefore familiar with the provisions of Swiss law.

In addition to the importance of the choice of law in share purchase agreements or share subscription agreements, representation and warranty items are the provisions that are of central importance, since the framework of the liability of the seller towards the private equity investor is determined through these provisions. Under Turkish law, share transfer is considered as a sale of shares (rights) exclusively and is not considered as the sale and transfer of the enterprise in general. Therefore, the liability of the seller is limited with the qualifications of the shares and cannot be extended to the qualifications of the enterprise automatically. In order to extend this liability, representation and warranty provisions are used in agreements. However, the representation and warranty items do not themselves provide this extension. In order to protect private equity investors against any breach of representation and warranty regarding the enterprise, the legal character of representations and warranties should be carefully determined. There are several ways to structure the legal character of representation and warranty items; in Turkish legal practice, however, the legal character of the representations and warranties in many cases are not defined. In our opinion, the representations and warranties provided by the seller can be structured as main obligations of the seller. Although the main obligation of a debtor is dependent on the fault of such debtor under Turkish law, it is possible for parties to agree otherwise. In this respect, structuring of the representations and warranties as the main obligation of the seller will not be sufficient and the parties should also agree that the liability of the seller for his representations and warranties is independent from the seller's fault. Furthermore, for the purpose of overcoming the challenges arising from the provisions of Turkish law regulating the sale of goods, the seller should also guarantee the negative action of a third party, such as a governmental authority, or the third parties with respect to certain representation and warranty items; the seller should guarantee that no tax authority will make any legal or criminal complaint against the company or, if such case occurs, the seller shall fully indemnify and hold harmless the company and its shareholders. Moreover, to strengthen the protection of the private equity investor, it can be agreed by the parties that the conduct of due diligence by the investor does not limit the liability of the seller.

Shareholder agreements are the second other important instrument used in private equity investments. Standard provisions of a shareholders agreement, such as transfer restrictions, board representations, and veto rights of the investor are common features in Turkey as well. Furthermore, as the investors stay with the company for a short period of time, and then prefer to exit from the company that they invested in, exit mechanisms such as tag-along, drag along rights or initiation of a public offering, which can be the major deal breaker issues, are also regulated under shareholder agreements. There are four exit options in practice which are (i) public offering, (ii) strategic sale to another private equity investor or to another strategic acquirer, (iii) sale to the existing shareholders and (iv) refunding of the invested amount by obtaining dividend payment. Moreover, owing to the limited secondary buyout opportunities and the unstable history of the Turkish economy, private equity firms -investing in minority positions- usually insist on put option rights.

On the other hand, specific performance of some provisions may be either too cumbersome or unobtainable under conventional structures. Moreover, certain provisions are generally set forth both in articles of association and the shareholders agreements. In such case, such identical provisions regulated under both the shareholders agreement and articles of association may give rise to parallel procedures since in practice, the shareholders agreements and articles of association are mostly subject to different laws and dispute resolution disciplines, such as local litigation and international arbitration. Such parallel proceedings may further complicate and prolong the process as they lead to parallel proceedings at the courts and the arbitration panel in Turkey.

On a different note, with the expected enactment of the Draft Turkish Commercial Code, companies will no longer be as flexible when entering into shareholders agreements that provide certain rights to the majority shareholders of the company. According to the Draft Turkish Commercial Code, many issues regulated under shareholders agreements shall not be included in the articles of association of companies. Thus, tag-along rights, drag-along 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.

Significant investments

Taking the history and background of the private equity acquisitions in Turkey into consideration, it can be seen that no specific industry or type of company has typically been the target of the private equity transactions. The investments of the investors vary from food and beverages (Mey Icki and Yudum), health sector (Acibadem, Medical Park and Memorial Hospitals), retail (Beymen, For You and Migros), transportation (UN Ro-Ro), media (Digiturk), pharmaceuticals, IT and real estate. However, there seems to be 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:

  • Argus Capital acquired 20% of Memorial Hospital in 2010 together with Qatar First Investment Bank which also acquired 20% of Memorial Hospital.
  • Carlyle Group acquired 40% of Medical Park in 2009.
  • Kerten Private Equity involved in the sale of the new shares of House Apart.
  • Ottoman Fund which is a London based real estate fund invested $110 million in land of one million square meters in Riva, Istanbul for development.
  • BC Partners, DeA Capital and Turkven Private Equity acquired a majority stake in Migros, a retailer chain in 2008.
  • Turkven Private Equity and FMO acquired a stake in Pronet Guvenlik, a securities company in 2006.
  • Turkven Private Equity and Advent International Corporation acquired a stake in Roma Plastik in 2006.
  • CVCI invested in Boyner and Beymen in 2007.
  • Actera Fund, raised by the Antika Partners invested in Mey Icki as a co-investor with TPG.
  • Eastpharma the majority shares (58%) of which is owned by Global Equities Management SA took control of Deva Ilac, a publicly listed pharmaceutical company.
  • AIG Global Emerging Markets Fund invested in For You, a drug store.
  • TPG acquired 90% of Mey Icki, the leading liqueur manufacturer for $810 million in 2006.
  • Providence Capital acquired 45% of Digiturk, the digital TV platform for $150 million in 2006.
  • Soros Investment Capital Management LLC. invested in Unikom Gida (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 % of the shares of Yudum Food from NBK Capital Equity Partners.
  • 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 to 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.
  • Is Girisim Sermayesi Yat¦r¦m Ortakligi 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 Yatirim, a company active insulation sector in 2007.
  • Bank of America established Taurus Capital Partners in 2000 and invested in BIM as a co-investor with Merrill Lynch.
  • 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 which AIG Blue Voyage exited from Galatasaray Sportif. AIG Blue Voyage also invested in AFM, a movie theatre chain.
About the author

Dr. Ismail G. Esin (born 1967) was admitted to the Istanbul Bar in 1998. Following his graduation from the Istanbul University Law School in 1990, he completed his LLM degree at the Tubingen University Law Faculty and wrote a thesis on “The Abuse of Cancellation Lawsuit in Turkish and German Joint Stock Companies Law” in 1991. He completed his Ph.D with a dissertation on “The Liability of the Seller in Mergers and Acquisitions” in 1997. He lectured on civil law and law of obligations between 1992 and 2004 at the Marmara University Law Faculty and gave graduate lectures on M&A at Galatasaray University. Esin’s main practice areas include mergers and acquisitions, dispute resolution and real estate.

Esin authored several publications, including Mergers & Acquisition Transactions under Turkish Law. He has issued some German publications as well. Internationaler Rechtsverkehr in Zivil- und Handelssachen. Loseblatt-Handbuch mit Texten, Kommentierungen und Länderberichten, 31. Auflage, 2007 is one of them.

Esin is fluent in Turkish, German and English. He is a member of the The London Court of International Arbitration; DIS (German Arbitration Institute); ICC Turkish International Committee; AHK (German-Turkish Chamber of Industry and Commerce).

Contact information

Dr. Ismail G. Esin
Esin Law Firm

Levent Caddesi
Yeni Sülün Sokak No:1
34330 1. Levent Besiktas / Istanbul

Tel: +90 (212) 376 64 00
Fax: +90 (212) 376 64 64

About the author


Gozde Erkoc (born 1985) was admitted to Istanbul Bar Association in 2008. She graduated from Istanbul Bilgi University Law Faculty in 2007. She started her law career in 2007 at Esin Law Firm and has been working for the firm since then. Gozde Erkoc has provided a wide range of legal consultancy services to Turkish and international clients with respect to M&A Transactions (representing both the seller and the buyer side), capital markets law, real estate law and energy law.

Certain recent major transactions in which Erkoc was involved was acquisition by Argus Capital and Qatar First Investment Bank of 40% of the shares of Memorial Hospitals; the sale of 40% of the shares of Medical Park to Carlyle; and acquisition by EnBW of 50% of the shares of Borusan Enerji (one of the most important deals in the Turkish energy sector in 2009).

Erkoc speaks Turkish and English and is a member of the Istanbul Bar Association.


Contact information

Gozde Erkoc
Esin Law Firm

Levent Caddesi
Yeni Sülün Sokak No:1
34330 1. Levent Besiktas / Istanbul

Tel: +90 (212) 376 64 00
Fax: +90 (212) 376 64 64