Turkey: Private Equity In Turkey

Last Updated: 19 February 2019
Article by Seray Özsoy

Despite the economic turmoil that has affected Turkey this year – a sharp decline in the value of the lira which has fallen more than 30% against the US dollar and an inflation rate above 20% – Turkey remains attractive for private equity ("PE") firms seeking to raise funds for investment. Big names, such as the Dubai-based Abraaj Group and Turkven Private Equity, believe that Turkey continues to offer opportunities. Although Turkish PE hit a ten-year low in 2018, according to PitchBook, Abraaj has made ten separate PE investments in the country over the last few years while Turkven has invested $1.5bn in various projects.

Alongside Actera Group, Turkey's other large buyout fund, Turkven is also planning to raise new dollar-denominated Turkey funds that guard against a further fall in the lira: Actera is aiming to raise up to $1.3bn and Turkven towards the $1bn mark. The current uncertainty could potentially work to their advantage if they choose the right time to re-enter the market when Turkish assets offer sufficient value.

So what do investors need to consider from a legal perspective when looking at buying opportunities in Turkey?

The most frequent method of investment for PE transactions in Turkey is for the PE investor to establish a Special Purpose Vehicle ("SPV") in a jurisdiction that is tax efficient, often offshore. The then acquire shares in Turkish companies directly or through a local SPV established by the offshore PE fund in Turkey.

In Turkey, the Capital Markets Law ("CML") and the Capital Markets Board ("CMB") are supplemented by secondary regulations relating to capital markets institutions and instruments. The CMB issued two important communiqués: the Communiqué on Venture Capital Investment Companies ("VCIC" Communiqué) relating to the establishment and operation of venture capital investment companies ("VCICs"), and the Communiqué on Venture Capital Investment Funds ("VCIF" Communiqué), which enables the establishment of venture capital investment funds ("VCIFs") in Turkey.

The CMB is the principal regulatory authority responsible for PE transactions undertaken by VCICs. The VCIC Communiqué offers detailed information for VCICs under the control of the CMB, including the incorporation phase, the realisation of investments, as well as dissolution. CMB involvement is needed for the approval of applications made by a VCIC or through notifications submitted to the CMB with respect to its ongoing activities.

Most VCIC sponsors are legal entities owned by large Turkish companies, or individual shareholders in those companies, while offshore PE funds are principally sponsored by foreign investors, often supported by the International Finance Corporation and the European Investment Bank. The sale process depends on the exit route: either an initial public offering ("IPO") or a private sale chosen by the VCIC, or offshore PE fund.

The CML, the VCIC and VCIF Communiqués are the primary pieces of Turkish legislation. The VCIC Communiqué outlines a framework based on three pillars: venture capital investments, scope of activities of VCICs and investment restrictions. VCICs invest in venture enterprises, defined as 'companies that are incorporated, or to be incorporated, in Turkey, and that have growth potential and are in need of funding'.

These investments are often conducted through shareholders' agreements between the VCIC and existing shareholders of a venture enterprise, which must include references to the VCIC's management, and to the rights and obligations of the venture enterprises and the VCIC. They may also regulate exit rights, rights of first refusal, tag-along and drag-along rights, and dividend distribution policies. VCICs must be domiciled in Turkey, while no such restriction applies to sponsors of VCICs, although they still have to demonstrate financial capacity and previous relevant experience. No such requirements are made of offshore PE funds and their sponsors since they are not subject to CMB regulations.

The Turkish Commercial Code ("TCC") imposes duties on VCICs and sponsors. It regulates the activities of a group of corporations and dominant companies that indirectly manage such groups: a dominant company cannot misuse dominance over a subsidiary to its detriment. VCICs can appoint board members of portfolio companies; sponsors cannot prevent this. Venture enterprises are primarily incorporated as joint stock corporations ("JSCs"). Overall, the TCC is the primary legislation governing their obligations with specific rules on their management and representation, such as duty of care, non-compete and confidentiality.

The VCIC Communiqué requires that before an IPO, sale, or private placement, the transfer of VCIC shares of 10 per cent or more, or the transfer of privileged shares in VCICs, are subject to CMB approval. Should VCIC sponsors wish to transfer their shares in the VCIC beforehand, CMB consent is also required. In exits, withdrawal of funds through dividend distribution by the portfolio company is the most common method, although there can be problems with timing issues in relation to fiscal year rules. For sponsors seeking irregular withdrawals from their investments, the VCIC has to decrease its share capital and distribute the proceeds to shareholders.

In order to overcome this, companies with variable share capital, introduced under the CML, are useful tools for PE investment. Like the VCIC structure, they offer a more flexible capital adjustments mechanism. In 2015, the CMB issued the Communiqué on Securities Investment Companies (the SIC Communiqué) under which the regulatory framework for companies with variable share capital was first stipulated in Turkish Law.

VCIFs have no legal personality: their assets are separate from those of their incorporators, portfolio custodian and portfolio manager. The fund information documents are its by-laws which regulate the VCIF's custody and management – they can only be amended with CMB approval. The VCIF Communiqué regulates investments using restrictions similar to those applied by the VCIC Communiqué. It includes the principles regarding incorporation and the issuance and sale of participation shares in VCIFs, which can be incorporated by portfolio management companies or venture capital portfolio management companies. The term needs to be stated in the VCIF's by-laws and issuance certificates.

The Turkish PE sector is well-regulated to accommodate future foreign investment. It is anticipated that momentum will reappear once stability returns to the domestic economy. Turkey will therefore remain as a major hub for local and international PE funds seeking future investment opportunities.

This article was published in Business Chief Middle East

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions