Mezzanine Capital in Turkey; A Breakthrough Growth or A Simple Alternative in Financing
Financial system is wide range of new alternative instrument for developing countries and Turkey heads toward new financial system in this regard. Particularly, the private equity potential has been thriving over the recent years and it purveys different kinds of opportunities for new initiatives since it gains popularity in Turkey and majority of companies commence to utilize private equity. There are distinctive investment strategies in private equity which are leveraged buyouts, venture capital, growth capital, distressed investments and mezzanine capital. Nevertheless, mezzanine capital is the most preferred for corporations since it is a long term and flexible instrument for investors.
Mezzanine Capital in Financial Structure Mezzanine involves in sources of finance during bank debt is unavailable or unsuitable because mezzanine is less restrictive according to bank debt and it enables the funders to support the company’s growth. This system generally used as a way for companies in order to finance their expansion costs. In this context, mezzanine capital shall deem as a different form of capital available to enlarge stage companies, especially pre-IPO and there is relationship between bank loan which is related to repayment in the financial difficulty and equity capital. Mezzanine capital comprises abroad array of financing methods. It indicates the significance in practice that are subordinate loans, dormant partner and also profit-sharing rights as mezzanine financing methods. Moreover, in terms of risk, mezzanine capital holds an intermediate position between senior debt and equity, so this is generally used in conjunction with both so as to enhance the total loan without importantly diluting ownership. Benefiting from the Opportunities of Mezzanine Capital There is medium risk and appropriate for private and also public companies. In particular, mezzanine capital has different kinds of advantages in terms of longer term, fixed rate capital, flexible transaction structures and subordinated debt. Mezzanine capital plays a crucial role for the investors since it reduces the equity requirement and its interest is generally tax deductible. It provides equity investors to fund a higher number of transactions from a given set of resources.
There is a great vantage of mezzanine which is flexibility because this circumstance can be structured as a secured subordinated loan with equity warrants yet it can take the form of preference shares or a convertible loan. It is clear that this financing method contributes to risk management and make an investment can be confidential through risk management. Mezzanine is charming option when bank financing is limited since the deal exceeds the credit the banks would expand by reason of a lack of tangible assets. This financial system has no risk for small companies and risk management assists the funders to develop a business. Thus, mezzanine is lower than unquoted equity and permits the existing shareholders to sustain a higher percentage of the ownership. Legal Framework Since Turkey attracts investment in high volume industries such of energy throughout worldwide corporate financing models the mezzanine funds do not have any legal framework setting the rules of implementation. Besides, still in Turkey the legal framework of alternative corporate financing models of private equities and venture capital are regulated in same legislation that harms to construe the provisions in effective way in case of any dispute.
Bridge Financing for Turkish Private Equity Market
Turkey is emerging market’s dynamism and is a suitable area for future factors in the traditional market. Turkey tenders’ different kinds of investment projects which is long term allocation of funds so as to carry an investment idea. In respect to this, financial tools have a powerful influence on economy and assist to sustain projects successfully, so there are new opportunities for investors and many projects become to enhance in Turkish market through private equity funds.
Integration of Private Equity in Turkey
Private equity increases the importance of funds which form a basis for idea of security offering and it encompasses securities which invested in operating companies with a view to generating value. It is vital that investment typically last between 3-7 years depending on the investment focus of the company. There are different kinds of industry players. To start with, fund of funds means that pool funds together on the behalf of institutional investors in order to invest in PE funds. Secondly, there is institutional investor which is also called limited partners and covers insurance companies, pension funds, and family offices seeking portfolio diversification. Thirdly, general partners consist of private equity fund managers.
Turkish market has revealed for the resale of shares in nonpublic companies so as to provide liquidity to holders in the absence of public trading markets. As a result of this, private equity sorts out in three ways which are financial engineering, earning enhancement and external factors. Private equity is beneficial for companies in progress since it offers to alter in management, disposal of unprofitable business and cost cutting, also contributes to arise new products.
How does exit strategy work in Private Equity?
Nowadays, majority of capital markets can encounter challenges in terms of financial and practical reasons. Exit routes are possible to sale via equity markets and self-liquidating instruments which means convertible debt or redeemable preference shares. In addition to this, there is sale of shares to management and leveraged refinancing or another option is secondary sale to other PE firms. Under these circumstances, making the decision play a crucial role in private equity exit strategies because the owners exist become to determine best exit strategy and right type of buyer. Moreover, finding the right buyer can be second option how their value rivers fit the seller’s personal and financial goals. Providing that these factors cannot works, there will be preparing for life after the deal since they need to find right way how to protect and transfer the wealth generated by the exit from their business. There is controversial issue for the best choice in the private equity company owner because exit strategy will depend on distinctive factors such as personal goals, financial need of the owner and the business, the state of the industry to name a few.
The Pros and Cos for Exit Strategy in PE
In order to find the right way, making decision has a powerful influence on exit strategy since the right buyer is prominent to determine the exit strategy so that it will best accomplish purposes. Due to the fact that full or partial sale to a third party with or without an auction can be useful way. Other options involve in corporate partnership, joint venture. Additively, selling the company to employees and transferring ownership to family members and an initial public offering. Particularly, initial public offering has both adverse and favorable results because going public can allow an owner to free up merely a portion of the personal wealth which is tied up in the company. In the market structure, there two types of buyers which are strategic and financial buyers. To begin with, strategic buyers may provide highest valuation for shareholders and potential operating association may develop the business as they are knowledge in terms of operational and business perspectives, so they are able to close much faster than financial buyers. On the contrary, strategic buyers can pose a problem because their management can lose autonomy and lose their jobs, so this circumstance impact customer loyalty. Secondly, financial buyers have advantages for current management because it sustains important involvement in direction and operation of the business and also can provide owner with ability to notice additional returns, yet this can bring negative results. In regard to this, heavy debt requirement can limit capital available for growth.
New Funding Opportunity: Bridge Financing
Bridge financing system has prominent role when private equity exit strategies are incapable of initial public offering since bridge financing is a method of financing so as to maintain liquidity in the course of waiting for anticipated and reasonably expected inflow of cash. Especially, bridge financing is become to more popular in initial public offering (IPO) because it is used by companies before their IPO in order to receive essential cash for maintenance of operations. As a result of this, bridge financing enables funders to secure their cost during IPO and this new system is attractive for new investors in terms of security how finance costs. This strategy has fewer risks since bridge financing system enable funders to protect final costs and this period covers approximately between one and three years. Bridge financing system is important finance tool in Turkey and enables investors to increase rate of private equity and make room for new investment projects, so the rate of investment projects rises via bridge financing method and there is crucial method for investors as bridge financing is major opportunities in terms of less risk in the new investment projects.