PRIVATE EQUITY CAPITAL MARKETS AND FINANCIAL INSTITUTIONS İNGİLİZCE İŞLETME DOKTORA PROGRAMI ALAATTIN YOLAÇTI
PRIVATE EQUITY
CAPITAL MARKETS AND FINANCIAL INSTITUTIONSİNGİLİZCE İŞLETME DOKTORA PROGRAMI
ALAATTIN YOLAÇTI
PRESENTATION LAYOUT
PRIVATE EQUITY – OVERVIEW1
PRIVATE EQUITY FUNDS2
KEY ISSUES IN PRIVATE EQUITY APPLICATIONS3
PRIVATE EQUITY MARKET 4
PRIVATE EQUITY - OVERVIEW
1
WHAT IS PRIVATE EQUITY (PE)?
Financing is a critical key succes of a business
Private Equity (hence on PE) is alternative method to that may meet the needs of entrepreneurs
PE is the provision of equity capital by financial investors over the medium or long term on companies with high growth potential
Equity owner can join in management of the business or can join by information sharing due to reasons ;• The entreprise may have less experience than
the investor• The investor may want to have a control over the
company to lower risk
WHAT IS PRIVATE EQUITY (PE)? -2
The system briefly works as follows ;
Equity owner supplies capital to entrepreneur in return for stocks of project by participating risks of projects in opposition to other financial associations
After 5-10 years when the stocks come into value at the market , equity owner sells them and gains revenue from this investment.
The expected profit rate for the investor is annually %18-%35 or more in developing markets
WHAT IS PRIVATE EQUITY (PE)? -3
PE is largely applied to the companies whose investments arenot quoted to the capital market
It is classified under the title of “ alternative investments”
PE is high-risk high profit class as well as an alternative finance type for the small and medium sized enterprises
PE can also used for buyouts where investor take the controlof the company , reconstruct it and finally sell it to a strategic buyer or offer it to publicBUYOUT : The purchase of the entire holdings or interests of an
owner or investor.
PRIVATE EQUITY VS. LISTED EQUITY
PRIVATE EQUITY
LOW LIQUIDITY
LONG INVESTMENT HORIZON
HIGH ACTIVE INVOLMENT
LOW MARKET EFFECIENCY
NO PUBLISHED INFORMATION LOW REGULATORY OVERSIGHT
LISTED EQUITY
STRONG LIQUIDITY
SHORT OR LONG TERM
LITTLE ACTIVE INVOLVEMENT
HIGHER MARKET EFFECIENCY
PUBLISHED INFORMATION
HIGHLY REGULATED
WHY DO COMPANIES SEEK PE?
Private Equity is an alternative option for a company on similiar cases listed as follows ;
Create a business Improve and develop the export performance Recruit highly qualified personnel Sell part or all of the company Change the size of the business and take one
over competition Launch a new product Improve the management capacity Liquidise some of the assets
WHAT IS A PE FIRM LOOKING FOR?
High growth, competitive products or services In the case of disposal or transfer, a loan
capacity and recurring profits A quality and stable management team, capable
of turning the negotiated goals into reality A solid management procedures either already in
place or able to to be put in place A transparent legal structure where personal and
professionnal assets are not entangled An agreement on the investor’s exit with or with
out the head of company
CONS & PROS
CONS
High Revenues Increases portfolio variety Able to reach the information of the enterprise legally. (Insider trading is not legal in the stock Exchange market)more secure to external economic fluctations than that stock exchange market
PROS
Excessive levels of debt to acquire corporatipns Long term investment (minimum 3 years) Investors rights to exit is restricted within the period High liqudity risk
CONS
High Revenues
Increases portfolio variety
Able to reach the information of the enterprise legally. (Insider trading is not legal in the Stock Exchange Market)
More secure to external economic fluctations than that Stock Exchange Market
PROS
Excessive levels of debt to acquire corporatipns
Long term investment (minimum 3 years)
Investors rights to exit is restricted within the period
High liqudity risk
PRIVATE EQUITY VS. VENTURE CAPITAL-2
THE PHILOSPHY IS SIMILIAR IN NATURE
VENTURE CAPITAL IS THE SUB-BRANCH OF PRIVATE EQUITY BESIDES INVESTING IN EARLY STAGES
Definition of PE by NVCA (Natioanal Private Equity Assosication ) : Venture Capital is the capital provided by investing professionals who have the potential to be a significant participant
Definition by SPK (Turkish Capital Markets Board): Venture Capital is a form of investment which enables dynamic and creative entrepreneurs who don’t have adequate financial power to fullfil their investment ideas.
PRIVATE EQUITY VS. VENTURE CAPITAL
VENTURE CAPITAL
Venture capital investors invest companies at earlier stages Provide an initial capital to an idea or 1-3 years old companies. (Deloitte,2007) Includes the financial support in early stagesIt has a particular emphasis on on entrepreneural undertakings rather than nature of the business.
PRIVATE EQUITY
Investors of private equity generally donot invest on idea or premature companyrequire a background of 3-10 years including operations.Private equity not only includes the financial support in early stages but also in the expansion stagesMore emphasis on business itself
Venture capital and private equity terms are largely used as a substitute
for one another but has slight differences
STAGES OF A COMPANY DEVELOPMENT
SEED : Seed financing is designed to research, asses, an develop an idea before a company has reached start up phase . Investors are mainly business angels .
START UP : Start up financing is used for product development and initial marketing phase . Capital is mainly required for R&D of the product and train personnel. (Especially for electronics, life sciences sectors.)POST CREATION : Business has already developed its product and needs capital to begin manufacturing and sell it. Yet no profit has been created
EXPANSION DEVELOPMENT : Business has approached or near break even point. High growth period, capital is used to increase capacity and sales power
TRANSFER/SUCCESSION : The total or partial retirement of the head of a company is often an opportunity to implement a leveraged operation.
EXPECTED RETURN VS RISK DIAGRAM
PE INVESTMENTS & FUNDS
2
PE INVESTMENT METHODS-1
I. DIRECT INVESTMENT : • The investor himself finds the company to invest• Analysis, invests and terminates it when it is time.• High revenue but has a risk of loosing invested capital• Only suitable for experts in PE / Less used way II. IN HOUSE PE FUND INVESTMENT : • Investors invest their extra funds to a PE investment
fund• Proffesionals in this fund are experts in finding
enterprises which will be invested in • Analysis, investments ,management and time to quit
the investment are done by these professionalsIII. INVESTING IN FUNDS OF FUNDS : • A fund manager evaluates various private equity funds
and chooses among them and distributes the selected funds
• Investors have to pay extra expenses to the manager as a consultancy service fee
PE INVESTMENT METHODS-2
TYPES OF PE INVESTMENTS
Source : M.Yardım,Private Equity as an alternative financial method that support Entrepreneurship: Turkey mcıoğlu, N.Demirel, 2008, “Case”, KMU İİBF Dergisi Yıl: 10 Sayı14 Haziran/2008
HOW DO PE FUNDS WORK?
Source : Guide on Private Equity and Venture Capital for Enterpreneurs, European Venture Capital Assosiation Publications, November 2007
LIFECYCLE OF PE FUND : UNDERWRITINGS-1
1. CREATION OF A FUND AND UNDERWRITING BY PROFFESSIONAL INVESTORS :
• PE management companies (General partners) after obtaining the agreement of controlling authorities establish investment funds that collect capital from investors known as Limited partners
• This capital is used to buy high potential companies known as the portfolio or investee companies
• PE fund managers invite the institutional investors to subscribe an investment fund for a period (usually 10 years)
• The fund raising period lasts for 6 months to one year
LIFECYCLE OF PE FUND : UNDERWRITINGS-1
Usually institutional investors cannot leave the funs before their terms completed
Investors get prenegotiated stake in the equity of the investment and they become fully fledged shared holders, sharing the risks
The investors aim usually is not to take the control of the company (there are exceptions) but to help create value to realise a capital gain.
LIFECYCLE OF PE FUND : INVESTING
2. INVESTING THE FUND :
• Once the target amount of capital has been raised, the subscription is closed
• In some cases (in Europe %30) PE funds come together to form a “financial syndicate” to make an investment in case of large size capital needs and high risk.
• One of the investment company represents the group in the syndicate dealing with the enterpreneur
•The private equity team usually makes the investments in the first five years of the fund
LIFECYCLE OF PE FUND :MANAGING
3. MANAGING THE INVESTMENT
• The fund manager on behalf of the investors is concerned with creating value in the company,
• He will follow the investment over long time period and prepare exit conditions.
LIFECYCLE OF PE FUND : EXIT
4. REDISTRIBUTION :• When the fund manager decides to exit their investment, the capital recovered from the exit is redistributed to the original investors on a pro-rata basis depending on their initial investment
EXIT ROUTES : Trade Sales (Merger & Acquisition trade sales, more common way)Enterpreneur or management team repurchase Sale of the investment to another financial purchaser (Secondary Market Investor) IPO (Initial public offering) : Flotation on a public stock marketLiquidation
TYPES OF PE FUNDS
PE FUNDS CAN BE CLASSIFIED ACCORDING TO THE SHAREHOLDER
PERCENTAGES AS FOLLOWSINDEPENDENT FUNDS : funds which the third parties are the main source of capital and in which no one shareholder holds a majority stake. An independent fund is the most common type .
CAPTIVE PE FUNDS : Funds which one shareholder contributes the most of the capital.
SEMI CAPTIVE FUNDS : Funds in which again the large part of the company belongs to one share holder, but a significant share of the capital is raised from third parties.
KEY ISSUES IN PE APPLICATIONS
3
PROCESS CHART
BUSINESS PLAN •The process of attracting a private equity company starts with a Business Plan•It is the main tool used by financial investor to evaluate business
CONTENTS OF BUSINESS PLAN :Executive Summary Company History Managemet Team Products & Services Analysis of the market & competitors CommercialisationOperational managementFinancial Projections Capital RequiredExit Possibilities
DUE DILLIGENCE
Avabiality of the marketManagement qualityGeographical situationProximity to the marketFinancial ForceSWOT analysisEffeciency of the Project ownerAdvantage over rivalsSharing of stocksPatent rightsLegal infrastructure
COMPANY VALUATION
Valuation between PE Firm and the target company should be covered in the agreement No pure quantitative methods, usually based on hypothesis that may be subjective Diffucult to apply especially for start up companies
GENERAL METHODS USED IN VALUATION
1. Discounted Cash Flow - If company has already has a positive cash flow
2. Comparative Methods – Using similiar price/earning ratios for a similiar company, have wide application areas
3. Opportunity Cost - Opportunity Costs of the investors if they invest in different tools
WHAT DO THE PE FUND MANAGERS DO?
Fund Managers have four principal roles :
1. Fund Raising : Funds are raised from international investments, many of which are pension funds, banks, insurance companies and high networth individuals. The investments are usually as limited partnership.
2. Sourcing investments: A PE found must source and complete succesful transactions to generate profit.
3. Active Management of Investments : PE managers have become hands-on managers of their investments. They don’t involve day to day control, instead actively involved in setting and implementation of the strategy.
4. Releasing Capital Gains : The academic evidence shows that there is a wide variation in the length of time of the PE investment.
HOW ARE PE FUND MANAGERS REWARDED?
SALARY
FEE INCOME : Receive management fees that are expressed as a percentage of the funds raised. Larger the funds greater the income although 3 % in smaller funds, 1-1.5% in larger funds for operating costs (sometimes cause principal agent problems between fund management and investors)
CARRIED INTERESTS : Share in the profits of the of the fund known as carried interest Once the investors have achieved the a certain pre-agreed rate of return (hurdle rate) , the fund managers shared in the excess (usually the %20 of the excess amount) The hurdle rate is around %8 per annum
HOW ARE PE FUND MANAGERS REWARDED?-2
HOW IS PE COMPANY’S SUCCES MEASURED?
SUCCESS
PRIVATE EQUITY MARKET IN THE WORLD AND IN
TURKEY
4
PE APPLICATIONS IN THE WORLD
PE has been a major driving force in technological advance in the USA, Japan, Germany, Canada and England
Historically Digital company was the first one constructed with venture capital.
Constructed with 70,000 $ and in five years time reached a value of 3,5 billion $ sold to Compaq for 10 billion $ in 1998
PE houses announced more than 2,000 deals globally worth a total of over $236 billion in 2010
PE FUNDS RAISING 2005-2010
PE ACQUISITIONS BY REGIONS
PE ACQUISITIONS BY SECTORS IN 2010
PE APPLICATIONS IN TURKEYIn Turkey, financial system mostly depends on banking sector
Especially the SME (KOBİ) cannot benefit from traditionally recognised banking system adequately due to Mc Millan Gap
According to a survey made by ITO and piar among 4671 small enterprises %78 of their capital is provided by themselves, only %7 by short time banking credits
First legal regulations are made by CMB (SPK), after that the first found was constructed by Vakıf Risk Capital established in 1996
MC MILLAN GAP : The name for the research which succeded in detecting the fact that traditional banking system is largely divirted to large well known corporations therefore hindering SMEs
PE INVESTMENTS IN TURKEY (BETWEEN 1996-2007) – CONT.
YEAR BUYER TARGET COMPANY SECTOR OWNERSHIP ESTIMATED INVESTMENT
AMOUNT (million USD )
1995Nomura (Sparx Group) Ünal Tarım Food Minority 21995Nomura (Sparx Group) Arat Tekstil Textile Minority 21995Vakıf Risk Teknoplasma Production Minority 11996Nomura (Sparx Group) Eka Elektronik Elektronics Minority 21996Nomura (Sparx Group) Aba Ambalaj Packaging Minority 61997Nomura (Sparx Group) Rant Leasing Leasing Minority 21997Nomura (Sparx Group) GSD Holding Textile Minority 81997Nomura (Sparx Group) Biomar Biotech Minority 11998Merrill Lynch Investment Termoteknik Radiator Panel Producer Minority 5
1998FMO Tüyap Arts&Entertainment Minority 71999Vakıf Risk Innova Biotechnology Medical Minority 21999Merrill Lynch Investment BIM Retail Minority 151999Citicorp Inv. Services Merko Food Minority 21999Safron Advisors Ltd. Alfa Menkul Brokerage Houes Minority 52000Commercial Capital Işıklar Ambalaj Packaging Minority 102000Safron Advisors Ltd. Net One ISP 42000AIG Blue Voyage Fund Galatasaray Sportif Soccer Marketing Minority 212000AIG Blue Voyage Fund AFM Arts&Entertainment Minority 72000Vakıf Risk Ortadoğu Yazılım Internet, ISP Minority 12000EFG Hermes Group Probil System Integrator Minority 212000EFG Hermes Group Gorbon Işıl Tablewear Minority 12000Taurus/Bank of America BIM Retail Minority 19
PE INVESTMENTS IN TURKEY (BETWEEN 1996-2007) – CONT.
YEAR BUYER TARGET COMPANY SECTOR OWNERSHIP ESTIMATED INVESTMENT AMOUNT (million USD )
2002İş Risk Sermayesi Probil System Integrator Minority 62003İş Risk Sermayesi Nevotek IT Minority 32003Soros Investment Unikom Gıda Food Minority 132003İş Risk Sermayesi Mars Sinema Arts&Entertainment Minority 52003Turkven Private
Equity/AdventUNO Food Minority 13
2003İş Risk Sermayesi ITD IT Minority 42004İş Risk Sermayesi Step Halıcılık Furniture Minority 32004MT Invest Karyateks Textile Minority 12005İş Risk Sermayesi & FMO Tüyap Arts&Entertainment Minority 362005Turkven Private
Equity/Pound CapitalTrendtech and Retomedia
IT Minority 25
2005The International Investors KCSC
Docar Filo Kiralama Real Estate & Leasing Minority 29
2005Turkven Private Equity Intercity Real Estate & Leasing Minority 152006Providence Equity Partners Digiturk Broadcasting Minority 1502006Texas Pasific Group Mey İçki Tobacco Product
Man.Majority 810
2006Partners in Life sciences & Citigroup
Biofarma İlaç Pharmaceyticals Majority 240
2006Turkven & Advent International Group
Roma Plastics Plastics Majority 76
2006AIG Capital For you Retail Minority 252006Global Finance, IDB,
Goldman SachsTAV Airport Operations Minority 650
2006Turkven and FMO Pronet Güvenlik 50-50 102006Bancroft PE Standart Profil Automative Majority 90
PE INVESTMENTS IN TURKEY (BETWEEN 1996-2007) – CONT.
YEAR BUYER TARGET COMPANY SECTOR OWNERSHIP ESTIMATED INVESTMENT AMOUNT (million USD )
2006 İş risk Sermayesi Beyaz Oto Kirlama Rental 10
2006 Ottoman Fund riva (GS) Real Estate & Leasing
110
2006 GEM Global equities Deva Holding Pharmaceuticals Majority 162
2007 Citicorp Inv. Services Boyner Retail Minority 46
2007 Citicorp Inv. Services Beymen Retail 50-50 143
2007 İş Risk Sermayesi Ode Yalıtım Mineral Products Minority 5
2007 National Bank ofKuwait Yudum Oil Majority unknown
Source: Resource: Deloitte, “Private Equity in Turkey – A Practical Guide for Turkish Companies and Investors”, 2007, pp.16-17.
PE INVESTMENTS IN TURKEY (BETWEEN 1996-2007) – CONT.
CONCLUDING REMARKS
Researches show that the countries that have high entrepreneurial activities had provided a growth above avarages
KOBI’s which are supposed to vitalize economy and Industry life has to work out alternative financial methods
Private Equity Applications should be improved to support entrepreneurship in Turkey
THANK YOU FOR YOUR ATTENTION
REFERANCES
1. M.Yardımcıoğlu, N.Demirel, 2008, Private Equity as an alternative financial method that support Entrepreneurship: Turkey “Case”, KMU İİBF Dergisi Yıl: 10 Sayı14 Haziran/2008
2. Akkaya G.C., İçerli, M.Y., 2001, “Kobilerin Finansman çözümünde risk sermayesi finansman modeli”, Dokuz Eylül Üniversitesi Sosyal Bilimler Dergisi, Cilt 3, Sayı 3,2001
3. Guide on Private Equity and Venture Capital for Enterpreneurs, European venture capital Assosiation Publications, November 2007
4. Private Equity Demistified, An Explanatory Guide, J.Gillian, M. Wright, 2nd edition, Corporate Finance Faculty Publications
5. Global Private Equity Watch, Ernst Young Yearly Report, 2011