Financial Aspects of Private Equity Investment Funds in Turkey
Private equity encompasses investors and funds which make investment directly into private companies or conduct buy out of public companies that end up with in a delisting of public equity. Particularly, majority of private equity firms conduct what are known as leveraged buy outs 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 also make acquisitions.
Forms of Investment in Private Equity
Private equity has different forms of investments which are leverage buyout, growth capital, mezzanine capital and venture capital. To start with, leverage buyout involves in the purchase of all or most of company or a business unit by using equity from a small group of investors in combination with an importance amount of debt. Secondly, it refers to minority equity investment in mature companies which need capital to expand or restructure operations. Thirdly, mezzanine capital is related to an investment in subordinated debt or preferred stock of a company without taking voting control of the company. Lastly, venture capital 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 in order to make investments in a number of distinct private equity funds. This situation enables investors to reach certain private equity fund managers which they otherwise may not be able to invest with, diversifies their private equity investment portfolio and enhances their due diligence process in an effort so as 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 tough for individual investors and small institutions because gaining access to top private equity funds can be difficult in terms of high investor demand. It is vital that private equity generate value through maximize purchase price, maximize leverage, minimize liabilities purchased, managed transaction costs, improve business operations, maximize tax efficiency and optimize exit. Moreover, private equity provides access to long term financing, valuable strategic insights and operational expertise, significant financial discipline, substantial credibility and visibility to target company and the country and also best practices to pursue profitable growth.
Effects of Regulatory Framework to Financial Management
Enacted clause 1 on article 26 of Private Equity Investment Funds Communique III No: 52.4 limits the credit usage of private equity investments funds with maximum 50% value of accounting period. In case, private equities prefer to use credit, they shall inform Capital Markets Board (CMB) about the total amount of loan, interest, usage date and redemption date within 30 days of following current accounting period. Besides, in accordance with clause 2 of article 26, 10% asset value of private equities may be applied for repurchase agreements inner or outer of exchange market. This regulation also allows private equities to apply money market transactions by 10% of their asset value. As a matter of financial aspect, limitation on bank loans will provide healthy leverage ratio for private equity portfolios in terms of asset allocation. This regulation will also put a tighter leash on Turkish banking system and their credit policies. Apart from credit usage devising, repurchase agreements' limitation will also preserve liquidity of private equities which will be substantially essential for their portfolio management.