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Motivations and Limitations of Private Equity Investment Funds in Turkey

02 January, 2014

Turkey provides substantial opportunities for private equities with rapidly developing sectors, liberalization policies in state-owned areas and corporate tax benefits. The attractiveness of Turkish economy is based on stable economic growth and restructuring potential of family-owned companies parallel with global developments. Besides, Turkish financial system is mainly dependent to banking sector which is a very crucial drawback for small and medium sized enterprises (SMEs) with respect to create alternative fund resources. Private equity investments funds are highly expected to meet this deficit in consideration of latest foreign inflows. SMEs are also able to take advantage of operational and technological support of private equities that will pioneer to increase gross margin profit amongst these companies.

Challenges

  • Valuation is an essential issue particularly on investment decisions as a consequence of high expectations of Turkish companies.
  • International funds are not favored as much as it should be implemented.
  • Political concerns trigger uncertainties in Turkish economy.
  • Conservative managerial approach of Turkish companies to investment funds.
  • Turkish companies are not aware of exit strategies such as IPOs and strategic sales.

Regulatory Framework

Tax Deduction Benefit

According to clause 325/A of article 15 on Law Code 6322 private equity investment partnerships enable to allocate tax deductible private equity funds which shall be less than 20% of shareholder's equity and should not exceed 10% of annual declared income in current fiscal year.

Limitations

In accordance with article 19 of Private Equity Investment Funds Communiqué III No:52.4, 80 % of fund's total value shall be comprised of more than one private equity investments. In case private equities' investment amount for SME’s exceeds 10% of total fund value, the maximum investment shall be 51% of total fund.

Furthermore, article 23 reiterated restraints on private equity investment funds' investment strategies regarding financial strategies that could be implemented.

  • Private equities are not allowed to invest in commodities and gold or forwards that are based on these materials.
  • Short selling is not applicable that obstructs speculations linked to price volatility.
  • Private equity investment funds are able to take advantage of derivatives for the purpose of hedging the currency and interest rate risks which is limited with 20% of total fund amount.
  • Any security transaction on credit is not possible for private equity funds.
  • Fund information document is binding for managing the other assets of fund which are not connected to private equity investments.

Exit strategy could be bolstered with additional bankruptcy time opportunity

On condition that private equity investment funds face with bankruptcy or exit decision has been given, Capital Markets Board ("CMB") may give additional time with the object of meeting minimum investment amount criteria that has been mentioned under article 19. This time period could be maximum 2 years and may be applied once in last five years of Private Equities' operations start. Thus, private equities are capable of constitute different types of investment strategies with respect to market conditions within proper time frame.

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