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Fund resourcing strategies for private equity and venture capital funds
Practical Law UK Articles 7-564-9245 (Approx. 5 pages)
Fund resourcing strategies for private equity and venture capital funds
by Safak Herdem, Herdem
| Law stated as at 01 Apr 2015 • Turkey |
This article provides an overview of fund resourcing strategies in Turkey, including the different forms of investment in private equity and the use of private equity funds of funds. In addition, this article outlines the effects of the Turkish regulatory framework on the financial management of private equity funds.
The article is part of the global guide to private equity law. For a full list of jurisdictional Q&As visit www.practicallaw.com/privateequity-mjg.
Private equity encompasses investors and funds which either:
- Make investment directly into private companies.
- Conduct buyouts of public companies and then delist the public equity.
The majority of private equity firms conduct leveraged buyouts in which large amounts of debt are issued to fund a large purchase. With respect to this, private equity is raised from retail and institutional investors, and can be used to fund new technologies, expand working capital within an owned company and make acquisitions.
Forms of investment in private equity
Private equity has different forms of investments:
- Leveraged buyout. This is the purchase of all or most of a company or a business unit by using equity from a small group of investors in combination with debt.
- Growth capital. This is minority equity investment in mature companies that need capital to expand or restructure operations.
- Mezzanine capital. This is related to an investment in subordinated debt or preferred stock of a company without taking voting control of the company.
- Venture capital. This is equity investment in less mature non-public companies to fund the launch.
Fund of funds
A private equity fund of funds reinforces investments from many individual and institutional investors, to make investments in a number of distinct private equity funds. This:
- Enables investors to reach certain private equity fund managers that they otherwise may not be able to invest with.
- Diversifies their private equity investment portfolio.
- Enhances their due diligence process in an effort to invest in high quality funds that have a high probability of achieving their investment objectives.
The goal is to acquire undervalued or promising assets, and notice profits in three and five years after the acquisition.
Investing directly in private equity funds can be difficult for individual investors and small institutions, as gaining access to top private equity funds can be difficult in terms of high investor demand. It is vital that private equity generates value through:
- Maximising purchase price and leverage.
- Minimising liabilities purchased.
- Managing transaction costs.
- Improving business operations.
- Maximising tax efficiency.
- Optimising exit.
In addition, private equity provides access to:
- Long-term financing.
- Valuable strategic insights.
- Operational expertise.
- Significant financial discipline.
- Substantial credibility and visibility to the target company and the country.
- Best practices to pursue profitable growth.
Effects of regulatory framework on financial management
The credit usage of private equity investments funds is limited to 50% of the value of the relevant accounting period (Clause 1, Article 26 of Private Equity Investment Funds communique III No: 52.4). If private equity funds use credit, they must inform the Capital Markets Board (CMB) of the total amount of the loan, interest, usage date and redemption date within 30 days following the current accounting period. In addition, 10% of the asset value of a private equity fund can be applied to repurchase agreements within or outside the exchange market (Clause 2, Article 26, Private Equity Investment Funds communique III No: 52.4). Private equity funds can also apply 10% of their asset value to money market transactions. Limitation on bank loans provides a healthy leverage ratio for private equity portfolios in terms of asset allocation. This regulation also puts more restrictions on the Turkish banking system and its credit policies. In addition, limitations on repurchase agreements preserves the liquidity of private equity funds, which is essential for their portfolio management.
Contributor profile
Safak Herdem
Herdem Attorneys at Law
T +90 212 319 7703
E [email protected]
W www.herdem.av.tr
Areas of practice. Corporate; equity markets; energy; aerospace; defence.
Non-professional qualifications. LBA
Recent transactions
- Advising one of the world's largest independent financial advisory groups for their operation in Turkey.
- Providing consultancy services to a private equity house firm for their fund set up matters in Luxembourg.
- M&A of a Belgian diamond company in Turkey.
Languages. Turkish, English
Professional associations/memberships. Istanbul Project Management Association; Global Offset and Counter Trade Association.