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Challenges, limitations and motivations for private equity funds in Turkey
Practical Law UK Articles 9-565-0025 (Approx. 5 pages)
Challenges, limitations and motivations for private equity funds in Turkey
by Safak Herdem, Herdem
| Law stated as at 01 Apr 2015 • Turkey |
This article provides an overview of the challenges and limitations faced by private equity funds in Turkey, including minimum investment amount requirements and restraints on funds' investment strategies. The article also looks at the motivations for private equity funds, such as tax benefits and advantages on bankruptcy and exit.
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.
Turkey provides substantial opportunities for private equity funds, with rapidly developing sectors, liberalisation policies in state-owned spheres and corporate tax benefits. The Turkish economy's attractiveness is based on stable economic growth and the restructuring potential of family-owned companies parallel with global developments.
The Turkish financial system is mainly dependent on the banking sector. This is a crucial drawback for small and medium sized enterprises (SMEs) in relation to alternative fund resources. Private equity investments funds are expected to meet this deficit due to the latest foreign inflows. SMEs are also able to take advantage of operational and technological support of private equity funds that increase their gross profit margin.
However, private equity funds face a number of challenges in the Turkish market.
Challenges
Private equity funds face the following challenges:
- Valuation is an essential issue, particularly in relation to investment decisions, due to Turkish companies' high expectations. Generally, Turkish family-owned companies are very strict in relation to the valuation of their companies. Therefore, private equity funds have difficulties in leveraged buyouts in Turkey compared to in other jurisdictions.
- International funds are not favoured as much as they should be. Despite the mobility of international funds increasing in recent years, Turkish companies do not tend to interact with these global funds. This is due to their funding preference, which is typically bank loans.
- Political concerns trigger uncertainties in the Turkish economy. Impending local elections will be a key determinant of the stability of the Turkish economy.
- Turkish funds have a conservative managerial approach to investment funds. Investment funds plan their exit strategy in the initial stage of their investment decisions, but despite any exit planning, Turkish firms usually look for permanent joint ventures.
- Turkish companies do not tend to use IPOs or strategic sales as an exit strategy.
Limitations
There are limitations on private equity funds' investment, for example:
- 80% of a fund's total value must comprise more than one private equity investment (Article 19, Private Equity Investment Funds Communiqué III No:52.4). If a private equity fund's investment amount in SMEs exceeds 10% of the total fund value, the maximum investment must be 51% of the total fund.
- Restraints on private equity investment funds' investment strategies (Article 23, Private Equity Investment Funds Communiqué III No:52.4):
- private equity funds must not invest in commodities and gold (or forwards that is, a derivative contract that is similar to a future that are based on these materials);
- short selling is not permitted to prevent insider trading operations and manipulation of stock markets;
- private equity investment funds can take advantage of derivatives for the purpose of hedging the currency and interest rate risks. This is limited to 20% of the total fund amount;
- security transactions on credit are not possible for private equity funds;
- a fund information document is binding for managing the fund's other assets that are not connected to private equity investments.
Tax deduction benefit
Private equity investment partnerships can allocate 20% of their equity and up to 10% of their annual declared income in the current fiscal year tax to tax deductible private equity funds (Clause 325/A, Article 15, Law Code 6322).
Bankruptcy and exit
If a private equity investment fund is faced with bankruptcy or an exit decision has been made, the Capital Markets Board (CMB) can give additional time for the fund to meet the minimum investment amount criteria under Article 19 (see above, Limitations). This time period can be a maximum of two years and can be applied once every five years.
Therefore, private equity funds can have different types of investment strategies with respect to market conditions within proper time frames. If there is uncertainty in the market, private equity funds will be more prudent in their investment decisions. They will prefer to benefit from a favourable announcement time of the transaction, in terms of the market value of the target company.
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.