26 February 2014 ANGEL INVESTMENT, PRIVATE EQUITY AND VENTURE CAPITAL IN TURKEY

26 February 2014 ANGEL INVESTMENT, PRIVATE EQUITY AND VENTURE CAPITAL IN TURKEY ANGEL INVESTMENT, PRIVATE EQUITY AND VENTURE CAPITAL IN TURKEY Con...
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26 February 2014

ANGEL INVESTMENT, PRIVATE EQUITY AND VENTURE CAPITAL IN TURKEY

ANGEL INVESTMENT, PRIVATE EQUITY AND VENTURE CAPITAL IN TURKEY

Contents Introduction .................................................................................................................................................. 4 Angel Investment in Turkey ................................................................................................................... 5 Legal Framework of Angel Investment .............................................................................................. 5 1.1 Who Can Be A Business Angel In Turkey? ............................................................................ 5 High Income Earner: ............................................................................................................................. 5 Experienced: ............................................................................................................................................ 5 1.2 Which Companies Are Qualified To Be Invested In? ......................................................... 6 1.3 Limitations to Investors ............................................................................................................... 6 1.4 General Principles of Partnership Structure ........................................................................ 6 1.5 Business Angel Networks ............................................................................................................ 6 1.6 Market Outlook ................................................................................................................................ 7 Angel Investors License Applications Annual Review............................................................. 7 1.7 Applicability of Seed and Crowd Funding ............................................................................. 9 1.8 Taxation and Incentives ............................................................................................................ 10 Venture Capital in Turkey .................................................................................................................... 11 1.1 Legal Framework ......................................................................................................................... 11 a. Restrictions ....................................................................................................................................... 11 b. Licensing/Organisation ............................................................................................................... 12 i. Licensing ............................................................................................................................................. 12 ii. Organization ..................................................................................................................................... 12 Venture Capital Investment Trust Structure ............................................................................ 13 c. Typical Fund and Deal Structuring(procedure of venture capital) ............................. 13 Venture Capital Fund Structure .................................................................................................... 14 1.2 Market Overlook .......................................................................................................................... 15 a. Level of Venture Capitals ............................................................................................................. 15 b. Local Interests and Opportunities ........................................................................................... 15 c. Market Trends .................................................................................................................................. 15 1.3 Taxation and Incentives ............................................................................................................ 16 a. General Incentives .......................................................................................................................... 16 b. Tax Incentives .................................................................................................................................. 16 Private Equity in Turkey ....................................................................................................................... 17 1.1 Legal Framework ......................................................................................................................... 17 Herdem Attorneys at Law | 2013 Angel Investment, PE and VC in Turkey 2

1.2 Restrictions .................................................................................................................................... 17 a. Transference of Equity Restrictions ........................................................................................ 17 b. Selling Restrictions ........................................................................................................................ 18 c. Share Transfer Restrictions ........................................................................................................ 18 d. Restrictions on Investors in Private Equity Funds ............................................................ 18 1.3 Licensing/Organization............................................................................................................. 19 1.4 Organization .................................................................................................................................. 19 1.5 Typical Fund and Deal Structuring (Procedure of Private Equity) .......................... 19 a. Private Equity Fund ....................................................................................................................... 19 b. Limited Partners:............................................................................................................................ 20 c. General Partners: ............................................................................................................................ 20 1.6 Investor-Lender Protection ..................................................................................................... 20 1.7 Market Overlook .......................................................................................................................... 21 a. Level of Private Equity.................................................................................................................. 21 b. Local Interests and Opportunities ........................................................................................... 21 c. Taxation and Incentives ............................................................................................................... 22 Exit Strategies ........................................................................................................................................... 22 1.1 Private Equity Exit Alternatives ............................................................................................. 22 a. Trade Sales ........................................................................................................................................ 22 b. Strategic Buyer Vs. Financial Buyer ........................................................................................ 23 c. Advantages of IPO exit .................................................................................................................. 23 d. Disadvantages of IPO Exit ........................................................................................................... 23 e. Secondary Buyouts ........................................................................................................................ 24 1.2 Turkey Private Equity Outlook 2013 ................................................................................... 24 1.3 2013 Turkey Private Equity Exits ......................................................................................... 25 1.4 Venture Capital Exits .................................................................................................................. 25 1.5 Venture Capital Exit Strategies ............................................................................................... 26 1.6 Exit Opportunities for Angel Investors ............................................................................... 26 Disclaimer ................................................................................................................................................... 28

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Introduction Throughout the last decade Turkey had managed to transform itself in to an economic hub in its region. Its high rates of economic growth combined with a stable social and political environment had generated an investor friendly atmosphere. As a result of its economic clout Turkey had managed to attract high volumes of foreign direct investments and have increasingly been associated with the emerging markets of BRIC. This report is intended to provide an analysis of three investment tools; angel investment, private equity and venture capital in this bourgeoning economy. Basic premise of this report is its stress on the connection between the legal side of these investment tools and the market dynamics that they will have to operate. Hence this report neither focuses only on the legal matters pertaining these three investment tools nor only on the market dynamics but analyzes both dimensions in connection to one another.

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Angel Investment in Turkey Legal Framework of Angel Investment 1.1 Who Can Be A Business Angel In Turkey?

Under the terms of the Regulation on Angel Investment dated February 15, 2013 to become an angel investor it is required to obtain an Angel Investor Licence, which is valid for 5 years, from the Undersecretariat of Treasury. There are two main criteria to assess business angels which are: high income earner and experience. In order to gain business angel licence, an angel investor should possess either one of the qualifications listed below.

High Income Earner:

Investors whose annual income is at least TL 200,000 within the last two fiscal years before obtaining the licence or, investor, whose total amount of personal wealth including every type of movable and immovable assets is at least TL 1.000.000 are entitled to apply for business angel licence. On the other hand, person’s residence or house which is habitually resided or acquired with a mortgage, rights arising from insurance contracts, pension rights, life insurance payments are not included to personal wealth value.

Experienced:

Investors who have at least 2 years experience as a fund manager in financial institutions or manager and/or likewise position in SMEs finance department of a financial institution or in private venture companies or; investors who work at least as deputy general manager/or equivalent or a higher position in a company with the annual turnover of at least TL 25.000.000 within the last 5 years before obtaining the licence, or; investors who have been a member of a business angel network for a year before getting a licence and who have been shareholders in non-public companies as angel investor for 3 years are also entitled to apply for business angel licence.

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1.2 Which Companies Are Qualified To Be Invested In?

There are certain requirements defined by law that companies to be invested in should meet. Accordingly, business angels can only benefit from the tax incentives if they invest in qualified private venture companies. Companies that business angels desire to invest in should be established as Joint Stock Company as per Turkish Commercial Code and the total value of its assets should not be more than TL 10.000.000 before the date of investment. In addition, net selling amount of the venture capital company for two fiscal years before the investment is made cannot be higher than TL 5.000.000. Employees should not be more than 50. The company should be non public, engage in activities defined by the Undersecretariat of Treasury and not controlled by another company. In addition to all qualifications mentioned, business angels are forbidden to invest in any kind of business that is considered as illegal.

1.3 Limitations to Investors

In order to benefit from tax incentives, the capital to be invested into each individual qualifying private venture company cannot be less than TL 20.000 and more than TL 1.000.000 annually. In case of investments in different venture capital companies, the maximum total investment amount of TL 1.000.000 can exceed. However, when we consider co-investments, the capital to be invested in each venture capital company can be maximum TL 2.000.000.

1.4 General Principles of Partnership Structure

Business angels cannot be the controlling shareholder of the venture capital company thus; they cannot hold the shares more than 50%. A business angel can only participate in the management of a venture capital company such as board of directors audit committee advisory board. Apart from these, business angels cannot be a personnel of venture capital company and cannot be paid or receive salary. Investors cannot appoint more than 50% members of board of directors, but can have privileged shares. Moreover, business angels cannot be shareholders of companies that are under the control of the business angel’s itself or its relatives’ control or supervision.

1.5 Business Angel Networks

In order to benefit from government support regarding tax incentives, business angels should make their application through an Accredited Business Angels Network. Accredited Business Angels Networks are aiming to bring investors together with entrepreneurs and they are licensed and regulated by the Treasury.

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1.6 Market Outlook

The Regulation on Angel Investment in Turkey enters in force on February 15, 2013. Since then, the number of applications to obtain angel investor license are increasing day by day. Considering the application rates till 30 November, there are 123 applicants who already gained an angel investor license. 70 applications are still in process.

Angel Investors License Applications Annual Review

250 200 150 100

Application Amount Cummulative Sum

50 0

Angel Investors in Turkey generally consist of economists, business administrators, lawyers and international relation specialists.

engineers,

Angel Investors usually choose to be a part of management side of the company. Although, angel investors in Turkey usually choose to be on the management side of the company, they may sometimes take a part as a consultant or remain as solely an investor as well.

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Positions of Angel Investors Chairman of the Board of Directors

1% 11%

15%

18%

1%

Member of the Board of Directors 18%

General Manager/Assistant Financial Consultant/Legal Consultant

7% 30%

Engineer Shareholder/Investor Manager/Director

Classification of Angel Investors

Angel Investor Qualifications Experienced 42%

High Income Earner 22%

High Wealth Value 36%

Among all applicants in Turkey, the major investors with the highest percentage of 42% are the experienced investors. High wealth value owners are following them with 36%. High income earners have smallest piece in the pie with 22%. From the date of 15 February, 80 experienced, 67 high wealth value owner and 41 high income earner became an angel investor in Turkey. Herdem Attorneys at Law | 2013 Angel Investment, PE and VC in Turkey 8

Angel Investments City Based

İSTANBUL 76%

ANKARA 9%

ESKİŞEHİR 1%

BURSA 4%

ANTALYA 1%

İZMİR 3%

DENİZLİ 1%

DÜZCE 2% ADANA 2%

KOCAELİ 1%

CALIFORNIA 1%

AMSTERDAM 1% AFYON 1% ÇANAKKALE 1%

The major industry that all investments desired to be a part of in Turkey is clearly ecommerce. There are numbers of projects connected to IT sector and considerable amount of those projects are able find an investor that enable them to be in practice.

1.7 Applicability of Seed and Crowd Funding

Crowdfunding is the practice of funding a project by raising many small amounts of money from a large number of people via internet. There are several crowdfunding platforms where consumers can ask for or donate money such as Kickstarter, Indiegogo, RocketHub in the USA and Ortagiz.com, crowdFON, Fongogo in Turkey. Unlike traditional investors, crowdfunding campaigns are funded by the general public. Entrepreneurs can use social media, alongside traditional networks of friends, family and work acquaintances, to raise money. There are three different types of crowdfunding which are; donation, debt and equity. Donation/Reward Crowdfunding is in fact based on the cause of interest. People invest simply because they believe in the project, although rewards can be offered such as free gifts, tickets, regular news updates etc. On the other hand, in debt funding investors Herdem Attorneys at Law | 2013 Angel Investment, PE and VC in Turkey 9

receive their money back with interest, which is also called peer-to-peer (p2p) lending. It enables entrepreneurs lending money while bypassing traditional banks. In addition to debt funding, equity crowdfunding has another angle. People invest in an opportunity in exchange for equity shares. As with other types of shares, apart from community shares, if it is successful the value increases and if not, the value will go down accordingly. Since, donation funding is all about gifts given to investors which are attractive enough for investors apart from the project whether it will be successful or not, it does not have the traditional investor-entrepreneur relation. With the new regulation regarding crowdfunding in the USA, crowdfunding gains a new perspective as a commercial investment instrument. Regulations in Turkey quite differ from the USA. Although, it is always possible to invest in a start-up business whether with a donation or in exchange for shares, in order to benefit from tax incentives, investor are required to invest via accredited business angels network. In terms of tax incentives, Government would obviously like to remain as control mechanism for accreditation of business angel networks, which may have restrictive impacts on angel investment side in Turkey.

1.8 Taxation and Incentives

Under the terms of Turkish Legislation, certain number of tax incentives provided for angel investors. In that respect, the total amount of 75% of the shares invested into qualified Turkish resident joint stock companies can be deducted from the angel investor’s annual income tax base in the calendar year such investment is made. In order to do so, the shares should be held for at least two years. If the angel investor participates in private venture companies whose projects are related to research, development and innovations programs that are supported for five years before the investment by Scientific and Technological Research Council of Turkey, Small and Medium Enterprises Development Organization and the Ministry of Science, Industry and Technology, then the applicable incentive rate will increase to 100%. However, the annual deduction from income tax cannot be higher than TL 1.000.000.

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Venture Capital in Turkey Venture capital may be defined as a financing method which is provided to projects of enterprises at early stage. Pursuant to the legislation, venture capital investment trust is a joint stock company which is established within the purpose of management of its portfolio consisting of capital market instruments and other assets determined by the Capital Markets Board. More clearly, venture capital funds finance dynamic and new established enterprises with a big profitability and growth potential through a partnership with these enterprises.

1.1 Legal Framework

In Turkish Law, the Venture Capital has been regulated by the Communiqué on Principles of Venture Capital Investment Trusts ("Communiqué") which has entered into force on 09.10.2013. Moreover, the principles in Capital Markets Law and Turkish Commercial Code regarding the joint stock companies may also come into question for Venture Capital Trusts.

a. Restrictions

Under the principles of above mentioned legislation, a venture capital investment trust shall be established in form of a joint stock company with registered capital. The paidin or initial capital must be minimum TL 20.000.000 and one of the founding partners must be a leading partner. Moreover, shareholders or founding partners which may be persons or legal entities shall fulfill the requirements stated in the Regulation such as honesty and reputation. Apart from above mentioned establishment requirements, there are restrictions for venture capital investment trusts regarding their activities and their portfolio. Venture capital investment trusts may operate in start-up enterprises within the frame of the related legislation. The sale and purchase of the capital market instruments shall be made through the stock exchange. However, venture capital investment trusts may provide security, warrant, put lien or give a mortgage on the portfolio assets in favor of third parties only: 

To provide security, put lien or give a mortgage in favor of the venture capital companies which have the characteristics of the small or medium sized enterprises.



To contract for pledge or hypothecate of shares on the venture capital companies in its portfolio which belong or will belong to the venture capital investment trust. Herdem Attorneys at Law | 2013 Angel Investment, PE and VC in Turkey 11

Venture capital investment trusts may provide only short term finance for the enterprises in their portfolio as operation capital. The restrictions regarding the portfolio of venture capital investment trusts have also been stated in the Communiqué. Within these restrictions, the investment limits of venture capital investment trusts have been regulated. Following portfolio restrictions have been stated in the Communiqué:    

Investment amount shall be minimum 51% of venture capital investment trust's assets, Security investments shall amount to at least 10% of its assets, Partnership interest with the consulting companies shall amount to minimum 10% of its assets, Rate of the securities and warrants shall be at least 10% of its assets.

b. Licensing/Organisation

i. Licensing

There are no licensing requirements for the venture capital funds in Turkey. However, the incorporation of the venture capital investment trusts is subject to the authorization of the Capital Market Board. Moreover, transactions such as capital increase of these trusts are subject to the authorization of the Capital Market Board, whereas the managers and promoters do not require licenses. Moreover, a venture capital investment trust's trade name shall include the term of "Venture Capital Investment Trust".

ii. Organization

Organization of a venture capital investment trust has been regulated by the Communiqué. Since the venture capital investment trusts are joint stock companies at the same time, their structure shall be similar to the structure of a joint stock company. Venture capital investment trusts may vary from the joint stock companies in Turkish Commercial Code on some points such as management structure. Organization scheme of a venture capital investment trust in Turkey may be as follows:

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Venture Capital Investment Trust Structure Leading Shareholder > May be legal entites or persons > Reputation and honesty > Experience in areas stated in the Communiqué > Certain amount of assets > Solvency and financial power

Founding Shareholders > May be legal entities or persons > Reputation and honesty > Solvency

General Manager > University degree > Experience > Reputation and honesty

Board of Directors > Experience > Solvency > University degree

Other Personnel > Shall not be restricted for transactions in stock exchange

c. Typical Fund and Deal Structuring(procedure of venture capital)

Investment strategy of a venture capital fund is the purchase of a equity or equity linked securities in a company and to realize profits 5-7 years after this acquisition. Funding sources are banks, insurance companies, foreign investors, foundations, universities and public authorities. It is also possible that venture capital funds invest with other funds. There is no legal restriction regarding investment of venture capital funds with other funds in Turkey. Funds which are created in order to invest in venture capital funds ("funds of funds, FoF") minimizes its risk through investing in different funds. This system has been implemented in Turkey within the establishment of iVCi (Istanbul Venture Capital Initiative) for the first time in the year of 2007. The general size of venture capital investments vary between USD 2 - 15 million. Venture capital funds' structure may be as follows:

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Venture Capital Fund Structure

Venture Capital Firm (General Partner)

Limited Partner (Investor)

Venture Capital Fund (Limited Partnership)

Investment

Investment

Investment

Limited Partners are investors which are mostly insurance companies, pension funds, banks and high net worth individuals. Limited partners have no other liability and role apart from commit a certain amount to the fund. General Partner has the liability to manage the investments against a management fee and receives profit interests. This is the decision maker for the fund. The lifetime of a venture capital fund is contractually fixed and the capital is invested during the first 3-5 years and average funding term is 7 years. After the growth of the investment company, the venture capital investment fund floats shares which it owns in stock exchange in order to make profit. The investment companies may be limited liability or joint stock companies. At all events, these companies are obligated to be transformed into joint stock companies. Financing methods of venture capital funds are seed capital, start-up capital, early stage and gate financing, bridge financing and management buyout. Management buyout is the most preferred financing method in the world since it is less risky than other financing methods.

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1.2 Market Overlook

a. Level of Venture Capitals

Venture capital has been used in Turkey since 1990's and first venture capital investments have been made by banks. Venture capital has been regulated by Turkish law at first time in 1993 and venture capital investment trusts investment funds and venture capital management companies are controlled by the Capital Market Board. First venture capital investment has been made in Turkey in 1991. There are more than 5 domestic and foreign venture capital companies. Venture capital investments amount to approximately USD 100.000.000 and the venture capital investments are made in start-up enterprises with a growth potential. In Turkey, venture capital funds are generally interested in enterprises in a growth phase.

b. Local Interests and Opportunities

According to the Communiqué on Venture Capital Investment Trusts, venture capital funds may invest in joint stock companies or limited liability companies. There are several factors such as investee's sector, its growth potential which play a role in the investment decision of venture capital funds. According to the statistics, manufacturing and service sectors are the both sectors which attracted the venture capital investors mostly. Logistics, telecommunication, trade and construction sectors follow manufacturing and service sectors in the statistics. If the statistics are analyzed more detailed, in descending order, food and beverage products manufacturing, activities regarding medical, chemical products and computers, entertainment and arts, telecommunication and wearing have been mostly preferred by venture capital investors.

c. Market Trends

In Turkey, venture capital investments are principally made in established companies in growth trend instead of start-up companies. The number of investees have been increasing since 2007. As from 2012, number of total investees in Turkey approximated 150 and the biggest part of these investees were located in Istanbul. Ankara and Izmir come are the both cities after Istanbul where companies with venture capital investment are located.

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1.3 Taxation and Incentives

In Turkish Law, the incentives for investments may be divided into two types depending on the incentive subjects.

a. General Incentives

Accordingly, there are general incentives provided by the Council of Ministers in accordance with the Resolution from 2012. These general incentives are provided regardless the investment company type and they may vary on the point what the subject and where the location and region of the investment is. These incentives have been stated by the Investment Incentives Law and Resolution of the Council of Ministers. The venture capital trusts may benefit from these incentives under certain conditions.

b. Tax Incentives

In order to support the venture capital investments, several tax incentives have been provided within the frame of including of the venture capital funds into Tax Process Law on 15.06.2012. The tax incentives are corporate tax and withholding tax exemptions. The tax incentive scheme below may be given as an example for venture capital taxation. Name scheme

of

Corporate Tax and Withholding Exemption

At whom are the schemes directed?

Venture Capital Investment Trusts or Funds

What conditions must be met?

What benefits conferred?

The venture capital investment trust shall be established in Turkey.

The revenue of venture capital funds or venture capital investment trusts are exempted from corporate tax and withholding tax rate is 0 %.

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are

Private Equity in Turkey In order to establish a private equity, it must be incorporated, as a registered capital corporation in form of Joint Stock Company and shares must be issued in return for cash. Paid-in or initial capital must be minimum TL 20.000.000 having the phrase of “Private Equity Investment Trust” on its commercial title. According to the Turkish law, at least one of the founders must be a leading shareholder. The company before established or transformed to a private equity should submit all relevant information together with financial statements of last three years audited by independent auditors and proposed portfolio to the Capital Markets Board. Within maximum 30 days of the approval of the Capital Market Board, the company must be registered to the trade registry. In transforming companies, general assembly should be convened within 30 days following to the approval of the Capital Market Board and register the resolution of transformation within maximum 15 days.

1.1 Legal Framework

Private Equity has been regulated by the Communiqué on Principles of Venture Capital Investment Trusts ("Communiqué") which has entered into force on 09.10.2013. and Private Equity Funds has been regulated by the Communiqué on Principle of Venture Capital Funds. Besides, Turkish Capital Market Law and Commercial Code are also another legislations which have been affecting Private Equity companies in Turkey.

1.2 Restrictions

There is no legal restriction regarding investment of venture capital funds with other funds. Funds which are created in order to invest in venture capital funds ("funds of funds, FoF") minimize its risk through investing in different funds. This system has been implemented in Turkey within the establishment of iVCi (Istanbul Venture Capital Initiative) for the first time in the year of 2007.

a. Transference of Equity Restrictions

Principally, there is no restriction for transference of equity and/or debt interests in companies incorporated in Turkey. However, it is possible that transfer of debt or equity interests are restricted in articles of association or by the Turkish Commercial Code. In joint stock companies, transference of unpaid registered stocks is subject to approval of the company. The transference of registered stocks which are not quoted on the stock exchange may be restricted due to a valid reason such as financial Herdem Attorneys at Law | 2013 Angel Investment, PE and VC in Turkey 17

interests of the company. In the event that the company has set forth a limit for the transference of stocks quoted on the stock exchange, the transfer of these stocks may be restricted if the transfer amount exceeds this limit

b. Selling Restrictions

Pursuant to the article 15 of the Communiqué III-48.3 on Private Equity Investment Trusts, The private equities cannot issue any securities providing privileges other than privilege to nominate 2/3 of candidates for members of the board of directors or privilege for dividend. After public offering, no privilege, including nominating members for the board of directors and dividend, can be created. Shares constituting the 10% of the capital or more and the preferred shares whatsoever the ratio are subject approval of the Capital Markets Board.

c. Share Transfer Restrictions

The following restrictions on the transfer of shares by shareholders are commonly contained in the investment documentation: Pre-emption rights: The articles of association will contain pre-emption rights preventing shareholders from transferring their shares to third parties, unless they have first offered those shares to existing shareholders on the same terms. Tag-along: The articles often prohibit share transfers to third parties that would result in a third party holding a controlling interest in the investee company, unless that third party has offered to acquire all shareholders' shares on the same terms. Co-sale: These prevent a shareholder from transferring a proportion of his or her shareholding to a third party, unless all shareholders have been given the right to transfer a similar proportion of their shares to that buyer on the same terms.

d. Restrictions on Investors in Private Equity Funds

The Communiqué on Venture Capital Investment Trusts regulates the restrictions on the shareholders and managers of private equity investment trusts. Accordingly, a leader shareholder shall fulfill the conditions such as honesty and reputation, not being insolvent, minimum 5 years experience in law, finance, banking, industry and trade, an assets amount of minimum TL 10.000.000. The same conditions apart from the minimum assets worth are applicable also for general manager

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1.3 Licensing/Organization

There are no license requirements for Private Equity Fund’s promoter, manager and principals in Turkish law. However, the permission of the Capital Markets Board is required for the establishment of Venture Capital Investment Trusts. Several transactions such as capital increase of the trust are subject to the approval of Capital Market Board. A Private Equity investment trust's trade name, on the other hand, shall include the term of "Venture Capital Investment Trust".

1.4 Organization

As it is regulated under the “The Communiqué on Venture Capital Investment Trusts”, a private equity investment trust is allowed to be established in form of Joint Stock Company. Because organizations of joint stock companies have been regulated by Turkish Commercial Code, the private equity invest companies have also been subject to Turkish Commercial Code provisions.

1.5 Typical Fund and Deal Structuring (Procedure of Private Equity)

a. Private Equity Fund

A private equity fund is usually structured as a limited partnership that is owned jointly by a private equity firm (General Partner) and other investors such as pension funds, insurance companies, high net-worth individuals, family offices, endowments, foundations, fund of funds and sovereign wealth funds (all of which are Limited Partners).The General Partner manages and controls the private equity fund. The proceeds of the debt and equity capital received by investee are then used to acquire the target company.

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Private Equity Fund Limited Partners (Fund of funds, public and corporate pension funds, insurance companies, endowments foundations, high net-worth individuals, family offices, banks, etc. )

General Partners (Private Equity Firm) (Manages the fund)

Private Equity Fund

NewCo (Investment)

NewCo (Investment)

NewCo (Investment)

NewCo (Investment)

b. Limited Partners: During the period of time that capital is invested, Limited Partners

have very limited influence on how the capital is spent as long as the fund adheres to the basic covenants of the fund agreement. Some of these covenants relate to restrictions on how much capital can be invested in any one company and the types of securities in which the fund can invest. In addition to management fees and carried interest, the General Partner sometimes receives deal and monitoring fees from portfolio companies in which the fund has invested. c. General Partners: General partners establish the fund and collect capital from investors

(generally known as limited partners or LPs) General partners also manages the fund. Generally, in Turkey private companies tend to do management and leveraged buy outs rather than other transactions. Because Turkish private equity companies do not want to exit within 2-6 years, management buy-outs are more popular than other types of transactions.

1.6 Investor-Lender Protection



The relationship between the investor and the fund is governed in Turkish law through certain rules regarding corporate management:

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The founders and portfolio managers shall look after investors' interests by managing the fund's assets and the management shall be in accordance with the management principles regulated by laws,



The private equity investment trusts shall send their documents regarding their articles of association, their investments and board resolutions to the Capital Market Board.



Moreover, private equity investment trusts are subject to the governance principles regulated by Capital Market Law. For example, several financial information regarding the investee and portfolio shall be announced in the KAP (Public Disclosure Platform).



According to the Capital Market Law, the portfolio manager has been separated from the private equity investment trust.

1.7 Market Overlook

a. Level of Private Equity

Generally, Private Equity Fund sources obtain their funding from investors with high purchasing power, insurance companies and banks to a certain extent. In the other hand, mainly Turkish Private Equities obtain their funding from some sources such as International Finance Corporate, European Investment Bank, Dutch Development. Private Equity investors increasingly hold a favourable perception of Turkey, because of Turkey’s growing economy and market size. Private Equity and Venture capital are emerging as popular capital raising and partnership strategies. There has not been major activity from the small sized Turkish funds. However, some big investor companies are continuing to look for new investments in the Turkish market.

b. Local Interests and Opportunities

Generally, private equity investments have focused on the healthcare and consumer sectors. In 2010 and 2011, private equity investments by sector in Turkey were as follows;    

Healthcare and life sciences, Consumer, Industrial and manufacturing, Services and media and telecommunications. Herdem Attorneys at Law | 2013 Angel Investment, PE and VC in Turkey 21

c. Taxation and Incentives

There is no specific incentive regarding private equity investors except provisions in Turkish Corporate Tax Legislation. Domestic tax legislation is the biggest incentive for private equity investors, which also encourages them. Under Turkish Tax Legislation, private equities do not pay corporate tax on income or capital gains. But they have to invest in Turkish companies at least % 50 of portfolio value. If not, they have one- year recovery period to invest in at that rate. Besides, dividend distributions of private equity companies are exempt from withholding tax. Only Private Equity Investments Trust and Private Equity Companies which are established in Turkey are allowed to benefit these incentives.

Exit Strategies Exits are mainstream of private equity business. This is not a negative indicator that private equity investment funds are only interested in short term returns. The fundamental strategy of private equity industry is develop a business that will enable the company dispose easily of part of its shares.

1.1 Private Equity Exit Alternatives a. Trade Sales

This is one of the most popular exit strategy may be existed as a strategic sales that are being seeking by investors who want to benefit from synergy of seller's company. On the other hand, financial buyers may be interested in buyouts as a consequence of their short term high return expectations.

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b. Strategic Buyer Vs. Financial Buyer

Financial Buyer

Strategic Buyer -Provides liquidity - Enable to hedge risk against to industrial changes -Limitation on management team - Risky for company's identity and legacy

-Provides

substantial liquidity - Remaining maangement sustainibility - Loss of managerial control risk - Premimum valuation oblivion due to lack of synergy

c. Advantages of IPO exit



 

IPO exits result with higher valuations rather than other exit strategies. Mostly, private equities do not prefer to apply complete exit which provides opportunity to benefit from post IPO value of portfolio company. Providing that sponsored company's shares are issued for public trade, this will enable to reach more liquidity in a short time with an appropriate price. IPO brings prestige and awareness to the company through stock market transactions and investor relations.

d. Disadvantages of IPO Exit

 

  

The selling price of shares mostly is not desirable at the time of IPO as a consequence of large volume. IPO process takes a long time which will result in four to six months by and large. Regarding this period, investor may be concerned about sensivity of the market due to the fact market players notice the private equity exit that will trigger a downward on share prices. That is also called "Market Overhang" The complete exit may give investors wrong signal about company's future projection and potential upside. The fund which is obtained by IPO, should be applied to decrease the debt of the company for the purpose of better leverage ratio. An IPO process can be also very costly since the management team will spend great effort on which will cause time and capital cost. Additionally, the

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underwriters' compensation fees will be a large portion of IPO decision expenditure.

e. Secondary Buyouts

   

The transaction is based upon sales of a portfolio company by a private equity to another private equity fund. It was a quite preferred strategy before the 2008 financial crisis due to the exit opportunities with higher purchase price multiples. Private equity funds are mostly resourced by debt financing. Thus, the fundamental factor for secondary buyouts is accessibility to credits. Dry Powder Fact: Despite the time constraints both for private equity sellers and buyers, secondary buyouts may be very attractive for creating capital with the intention of new investments. This exit period generally completes within 5 years and called dry powder which is lack of capital for new investments due to the ongoing portfolio companies.

1.2 Turkey Private Equity Outlook 2013





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In comparison with 2012, the number of private equity transactions reduced from 57 to 35. However, the volume of private equity deals increased from US$ 1.6 billion to US$ 2.1 billion. Turkey seems to many private equity firms very inviting so as to exploit from several promising sectors such as energy, retail, e-commerce, healthcare and financial services. 15 exit transactions substantiated in 2013 that reached to maturity in different sectors including healthcare, retail, technology and logistics. In general, strategic sales are taken place in Turkish market as an exit opportunity.

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1.3 2013 Turkey Private Equity Exits

Seller ADM Capital Ahlström Capital Ashmore Bancroft Private Equity, IFC CVCI CVCI Esas Holding GMR Group İş Girişim NBK Capital Qatar Investment Authority The Abraaj Group The Carlyle Group The Carlyle Group Turkven

Target Penkon Gıda ELBI Elektrik Arzum Standard Profil Beymen Mağazacılık Boyner Büyük Mağazacılık Electro World İstanbul Sabiha Gökçen Airport Aras Kargo Dünya Göz Hastaneleri Turkuvaz Media Group Acıbadem Sağlık ve Hayat Sigorta TVK Shipyard Medical Park Provus

Acquirer Anadolu Etap Tarım ABB Mediterra Capital Actera Group Altınyıldız Mensucat Altınyıldız Mensucat Dixons Retail Malaysia Airport Holdings Austria Post Private Investor Çalık Holding Khazanah Nasional Berhad Fiba Holding, Palmali Group Turkven Master Card Worldwide

1.4 Venture Capital Exits









Trade Sales: Trade sales may be significantly beneficial if a competitor is willing to purchase shares of the company from higher prices. On the other hand, if the acquirer company is larger than the target company, they may apply to amend all the management team with the intent of transformation the target company for their own business purposes. Buyout: Venture capital funds are able to take advantage of raising new cash for reinvestment opportunities in new companies. However, a more uncertainty may be existed in comparison with trade sales. IPO is a much longer choice than other exit strategies which requires for completion of the all transaction and determination of the real prices of the shares. The fundamental benefits of IPO are; Management do not loss control of the company.

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A partial refinancing of the company can be provided without any complete exit.

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Venture capital (VC) funds mostly execute successful exit strategies through IPOs Acceptable VC returns 20% per year on average for the aiming of reaching approximately 15x returns at the exit time. Since high tech investments came into prominence for VC funds, exit times climbed to 7 years on average. Young VC firms are keen to carry out their exit strategies with respect to their future fund raising requirements. Solvent Liquidation: A wind up decision may be given to provide company liquidation of its assets following the transactions related to debt discharging to creditors. After all the debt is paid off, the cash is distributed to shareholders. Insolvent liquidation: Likewise solvent liquidation, company's assets are disposed for the purpose of immediate liquidation. However, there is a threat that the company is taken out of venture capital fund's hand. Sales to specialist investors: In case of a financial distress, venture capital funds sell their shares to some strategic investors who are mostly keen on purchasing shares of distressed companies with a lower price.

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1.5 Venture Capital Exit Strategies

Exit strategy shall be determined in consideration of shareholders, investors and creditors. In the beginning of exit negotiations, all the terms of exits should be delivered on agreement. Tag along rights: This is an ultimate protection for minority of shareholders in a company against major shareholders' sales decision. In the event that majority of shareholders decide to sell their shares to a third party, minority shareholders have the right to join the transaction and may sell their shares in the company. Drag along rights: A right is given to majority of shareholders to force minority for the purpose of sales that will bring a appropriate timing on exit decision. Share transfer restrictions: This is a limitation for shareholders to exit without other shareholders. Leaver provisions: Another protection method against to employee shareholders' leaving before the exit is completely achieved.

1.6 Exit Opportunities for Angel Investors

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In general, average multiplier for the angel investor exits is 2.5x Angel investors' approach is entirely different from institutional investors. They are involved in start-up investments which are expected to generate higher Herdem Attorneys at Law | 2013 Angel Investment, PE and VC in Turkey 26





returns in comparison with mature business. Hence, they are more flexible in terms of exit timing. Franchising is one of the most applicable exit strategy through angel investors. By way of franchising, they may increase their liquidity with retaining the ownership of the business. Also it is a very preferable exit for the purpose of large scale growth. In some cases, they prefer to hand down business to another family member.

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Disclaimer This publication contains general information only and is not intended to be comprehensive nor to provide specific accounting, business, financial, investment, legal, tax or other professional advice or services. This publication is not a substitute for such professional advice or services, and it should not be acted on or relied upon or used as a basis for any decision or action that may affect you or your business. Before making any decision or taking any action that may affect you or your business, you should consult a qualified professional advisor. Whilst every effort has been made to ensure the accuracy of the information contained in this publication, this cannot be guaranteed, and neither Herdem Attorneys at Law nor any related entity shall have any liability to any person or entity that relies on the information contained in this publication. Any such reliance is solely at the user’s risk.

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