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Agenda
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Turkey has had growing volume of private equity transactions with market growth as the most important value creation lever
Characteristics of private equity in Turkey
Favorable investment environment with reservations
Turkish economy has demonstrated growth between 2002-2010 and forecasted GDP growth is one of the highest among OECD countries Increasing current account deficit and lack of transparency are some investor reservations
Turkish economy has demonstrated solid growth since 2002 and the growth is expected to continue at 6.7% p.a. throughout 2017
Turkey's past and forecasted GDP growth rate
Turkey GDP Growth Rate, 2002-2010 (%)
9.4 6.2 5.3 8.4 6.9 4.7 Average: 4.88% 0.7 7.0
Comments
Turkey had the 16th largest economy in the world and 6th largest economy compared with EU countries in 2009 Since the banking crisis in 2001, Turkey's GDP has grown at an average 4.88%. This is due to implementation of sound economic policies, a tight fiscal policy, political stability combined with high growth throughout the world Turkey has recovered rapidly from the 2009 economic crisis due to a good export performance. Compared to other OECD countries, Turkey is expected to be among the highest growing economies mainly due to increasing exports, foreign investment and factor productivity
-4.7 2002 2003 2004 2005 2006 2007 2008 2009 2010f
Annual Average Real GDP Growth Forecast in OECD Countries, 2011-2017 (%)
6.7 4.9 4.7 4.5 4.1
3.4
2.8
2.6
2.6 1.2
UK
Poland
US
OECD Japan
Turkey has performed better than most developed economies in 2009, the performance is above average among emerging economies
Turkey's economic performance in 2009
Change p.a. in debt-to-GDP ratio for select countries, 2006-2009 (%)
16.1
0.9
5.2
6.0
11.7
5.9
6.1
7.3
12.4
9.1
2.1
-2.4 -4.2 -8.8 UK US Czech- China JapanGermanyBrazil Turkey Russia Rep. China Brazil US CzechRep Turkey Germany UK Japan -4.7 -4.7
-4.9
2009
2010
Increase in debt-to-GDP ratio for Turkey is below most of the developed economies as well as emerging economies. Turkey has strengthened its banking system following the 2001 crisis that held Turkey's economy relatively strong during the crisis. As derivate products were not widely used in Turkey, banks continued their profitability trend during the crisis Turkish economy bounced back from the negative GDP growth in 2009 fairly strongly. While the bounce-back is stronger than US, UK, Germany and Japan, compared to China and Russia, the growth has been weaker
Source: IMF, Worldbank, Morgan Stanley, Santa analysis
FDI has increased considerably from 2002 to the credit crisis, and the increasing trend is expected to continue in 2010
Foreign direct investment in Turkey
Turkey FDI Volume (bn USD) and FDI to GDP ratio (%)
25 20 15 10 5
Comments
4.0 3.5 3.0 2.5 2.0
FDI-to-GDP FDI
10.0
7.9 1.8 2003 2.9
9.0
FDI in Turkey has shown a steady increase since 2002 due to improving key macroeconomic indicators in addition to achieving political stability. The value has decreased starting in 2008 due to credit crisis and has started the increasing trend in 2010 With the surge of FDI in 2007, FDI to GDP ratio has stayed above those of developing countries, however the decrease thereafter has put Turkey below Share of energy sector FDI is expected to increase in the near future. Insurance has been one of the active segments within financial services as it is underpenetrated while manufacturing is attractive due to cheap labor opportunities for European companies
1.1
0
2002
2004
2005
2006
2007
2008
2009 2010H1...*
22%
* Includes 2010H1 and value for BBVA-Garanti Bank transaction Source: Turkish Central Bank, Desktop Research, Santa analysis
In spite of a favorable investment environment, some factors still create discomfort for foreign investors
Common reservations of foreign investors
1
Legal environment, enforcability of contracts, protection of shareholder rights and legal concepts familiar to private equity are not fully covered by the Turkish legal system. Slow moving legal environment is another disadvantage
Increasing current account deficit, is widening with increase in energy prices and appreciating TL as the country's competitiveness is decreased
Lack of transparency, cash transactions that stay out of the book are widespread in Turkey, this creates discomfort for foreign investors
Political stability concerns, results of elections expected to be held in 2011 may bring a coalition government bringing political instability
Potential government intervention, intervention of government in commercial matters, such as recent tax fine to a large media company, and changes in regulations and working environment pose risks
Private equity investments have soared in Turkey starting in 2006 primarily due to stable economic growth
Private Equity Investments in Turkey, 2000-2010
Private Equity Investment Value, 2000-2010 (bn USD)*
# of deals with known values / total
16/16** 5/5 10/10 18/21 13/27 6/10 11/18
Comments
Since 2000, domestic private equity funds have shown an increase in activity which has in turn attracted international buy-out houses International buy-out houses have entered the market to compete for a number of the countrys largest assets as evidenced by Texas Pacific Groups acquisition of Mey Icki Increasing confidence in the countrys stability was further displayed in 2007 by KKRs acquisition of UN Ro-Ro for $1.2bn Number of deals kept increasing until the credit crisis. The increasing trend has started again in 2010 as number of deals started to increase globally as well
2.54
0.81
0.65
0.89
0.45
0.45
2007
2008
2009
2010YTD
Other deals
* Annual investment value only includes deals where value is known ** Includes the total number of private equity transactions within the timeperiod *** Transactions above USD 800m have been categorized as "very large deals"
Source: Ernst&Young M&A Reports, Industry Interviews, Desktop research, Santa analysis
Turkey's ratio of private equity investment to GDP is higher than CEE/CIS and Latin America regions whereas lower than certain countries
Private Equity Investment as a percentage of GDP (%)
2008 Value bn USD
28.3 7 6.3 2 7.5 3 9 2.5 0.4 2.7
1.20
0.90
0.67 0.61 0.53 0.40 0.22 0.16 0.15 0.14 0.37 0.29 0.18 0.21 0.29 0.32
Emerging Asia
Latin America
CEE/CIS
South Africa
India
Brazil
China
Turkey
Poland 2007
Comments
Turkey's private equity investment to GDP ratio was above the CEE/CIS average in 2007 and 2008 Among major emerging economies, South Africa, India and Brazil have demonstrated higher ratios in 2007 than Turkey has If Turkey's ratio was to reach the Emerging Asia average, a further USD 653m would have been invested in 2008
Source: EMPEA, IMF, Desktop Research, Santa analysis
Key drivers of growth for the private equity market have been increased availability of companies and their challenges to accessing finance
Key drivers of growth for private equity investment
Economic Freedom of the World Index for select countries
9 8 7 6 5 4 3 2 1 0 2002 2003 2004 2005 2006 2007 2008
Major obstacle levels for firms in Turkey (% of companies perceiving the topic as an obstacle)
29 26 18 18 18 17
15 14 9 8
Access to Tax Rates Political Informal Unskilled Finance Instability Competition Workforce
All Firms SMEs
...
Turkey
United Kingdom
United States
Comments
Measure of conditions for private business have improved in Turkey (based on EFW Index) and it is getting closer to those of developed economies, leading to an increase in the number of companies of interest to private equity Turkey is experiencing growing domestic credit to private enterprises and a transition from a state-owned financial system to more private sector involvement, resulting in easier access to finance. Even though there are improvements, Turkish firms will require further financing and this gap can be bridged with private equity
* Based on survey with Turkish firms Source: Fraser Institute, Economic Freedom of the World (EFW) Index, Turkey ES 2008 (World Bank Report), Santa analysis
Other key drivers for growth have been availability of local financing and increasing exit prospects
Other key drivers of growth for private equity
These two drivers are making all stages of private equity investments easier Increasing number of private equity funds operating in Turkey Increasing volume of private equity transactions
Global private equity funds have assets in Turkey while as expected, local players are ahead in terms of number of transactions
Private equity landscape in Turkey*
# of transactions***
13 12 11 10 9 8 7 6 5 4 3 2 1 0
Is Private Equity
Turkven
RHEA
Actera
CVCI
Abraaj Capital
Bedminster Capital Carlyle Group Providence TPG HSBC PE 100 150 GEM 200 250 300 1,300 Average Deal Size (USD m)**
KKR
* The chart does not include all private equity funds operating in Turkey ** Average deal size is calculated using deals with known values within 2000-2010 timeperiod *** # of transactions includes both deals with disclosed and undisclosed values within 2000-2010 timeperiod Source: Ernst&Young M&A Report, Deloitte Private Equity report, Santa analysis
Average deal size in Turkey is higher than emerging markets although it is expected to decrease as the availability of medium-size deals increase
Private equity deal size and deal sources
Private equity deal size comparison of Turkey to other regions (m USD), 2007-2008
435
2007 2008
Comments
Deal size in Turkey is higher than emerging markets average and Asia primarily due to a number of very large deals - Un-Ro-Ro, Migros to name two as well as cultural issues related to selling equity at mediumsized enterprises Deal sizes globally were high due to abundance of credit and a high number of LBO transactions in 2007 Majority of deals in Turkey are sourced through investment banks/brokers although less so than in developed economies. Investment banks are perceived to be less successful in sourcing good deals, requiring funds to use other methods of identification Although "Approached by companies" category is low, it is expected to increase as the awareness for the asset class increases
196 61 69
Emerging Markets
58 66
Asia
38
74
Global
Europe
Turkey
20%
41% 28%
8%
Self-researched&identified
Approached by companies
Investment bank/brokers Others
* Un-Ro-Ro and Migros transactions have been discarded Source: Dealogic, EMPEA, GIA Asia Report, Desktop Research, Industry Interviews, Santa analysis
While there are challenges for private equity funds in Turkey, the landscape is improving in terms of legal, finance and HR
Challenges to sustainable growth for private equity
Commercial Law is in the process of being updated helping in creating a better private equity investment environment As private equity investment increases, highly skillled individuals work towards understanding fund expectations
Since 1998, the services sector has grown rapidly, with an average 30 percent annual growth
Analysis of Services sector in Turkey
GDP by sector in Turkey, 1998-2009 (TL bn) Value added as share of GDP by sector, 2008
100 100 9 100 2 100 7 100 4 100 5 100 6 100 7 100 1 100 1
140 120
16
24 29 38 31 31 29 27 25
22
100 80 60 40 20 0 1998
2000 2002 2004
Industry
33
51
62
60
62
65
66
67
68
75
77
2006
2008
Turkey Turkey Czech Bulgaria Poland Hungary Brazil Romania (1998) Rep
UK
US
Agriculture
Services
Agriculture
Industry
Services
The services sector has not only been the fastest growing in the past decade, but is also hit by the economic crisis to a lesser extent than the manufacturing sector Sector's relative contribution to GDP increased from 51% in 1998 to 62% in 2008 When compared to developing economies and the CEE, services sector contribution is generally lower in Turkey there is room for additional growth
Source: Turkey ES 2008 (World Bank Report), Desktop Research, Santa analysis
Retail has been the dominant sector in Turkey whereas TMT is one of the more common sectors for CEE and Asia
Private Equity Investment by Industry, comparison of Turkey to other regions
Turkey Private Equity Investment Value By Industry, 2006-2009* CEE Private Equity Investment Value By Industry, 2008 Asia Private Equity Investment Value By Industry, 2008
9%
7%
4% 0% 15%
52%
12%
Retail
Transportation
Healthcare
Manufacturing
TMT
Other**
* Deals within 2006-2009 timeperiod has been added to make a representative sample due to a low number of deals with known values only in 2008 ** Other includes FSI, Agriculture, Construction, Energy and Food&Beverages. Food&Beverages industry makes up for 14,8% of total investment value in Turkey within the timeperiod Source: EVCA, GIA Asia Report, Desktop Research, Santa analysis
Healthcare has been another attractive sector for private equity funds within 2006-2009 timeperiod
Private Equity investment in healthcare sector
Industry
Retail
Healthcare Food and Beverages Manufacturing TMT Transportation Business Services Others
# of deals* Value (USD m)** Health expenditure per capita, 2008 (USD)
12
9 9 9 7 6 5 5
2075
1138 973 224 215 1481 220 126
7,538
3,737
3,696
3,129 3,060 1,781 1,213
852
767
US
Germany France
UK
Mexico
Turkey
Healthcare has been the second most invested sector in terms of number of deals. Carlyle Group's investment in Medical Park and Abraaj Capital's investment in Acbadem Salk Hizmetleri are the largest investments in the sector Turkey's health expenditure per capita is among the lowest in OECD countries. As health spending is correlated to income, Turkey's lower than average figure is expected Growth in GDP and GDP per capita is expected to increase health expenditure which in turn will affect market growth rates
* Includes disclosed and undisclosed deals within 2006-2009 timeperiod ** Includes deals where value is known within 2006-2009 timeperiod Source: OECD Health data 2010, Deloitte Private Equity report, Ernst&Young M&A Report, Santa analysis
Abundance of family-owned businesses present both challenges and opportunities for private equity funds
Challenges and opportunities
Due to Turkey's capitalist heritage, there are a large number of family business; level of institutionalization is not high and succession planning is usually weak. This environment creates a sustainable pipeline for private equity investors, yet comes with its own challenges
OPPORTUNITIES
As Turkish company owners are entrepreneurial in nature and are generally not strategic-thinkers, tackling critical strategy and marketing issues with a different perspective is beneficial Implementing corporate governance and a performance management culture becomes a key value creation element Good monitoring practices and strict focus on agreed business plan elements have potential to bring results Owners tend to have a revenue focus rather than EBITDA focus, private equity firms can restructure the cost base and put proper policies in place to increase profit margins
CHALLENGES
Owners tend to have an emotional attachment with their companies View private equity funds as sources of equity rather than the potential best practice it could bring and optimization it could perform Unrealistic price expectations Reluctance regarding selling majority stake Low level of corporate governance results in a low-level of transparency making it harder for outsiders to understand past actions Lack of data availability is hindering data mining and proper analytics in firms As the owners are generally the CEOs, private equity funds are usually not able to change the CEO, limiting possibilities for strategy change
Market growth has been the dominant value creation lever so far, the share is expected to stay about the same in the upcoming years
Value creation lever analysis
Private Equity Value Creation Levers in Turkey (%)*
4% 3%
Comments
Substantial amount of private equity investment has been in retail, healthcare sectors which have been high growth sectors in Turkey confirming survey results Importance of leverage is expected to decrease slightly in line with global expectations due to debt becoming more expensive and financing terms more onerous
14%
19%
21%
21%
26%
21%
35%
36%
Operational improvements through best practice implementation and optimization will drive profitability and this lever is expected to increase in the coming years, in line with global expectations. Operational improvements will require experience, expertise and process
* Findings are the result of a survey with private equity funds and are based on estimates rather than statistical analysis Source: Industry Interviews, Desktop Research, Santa analysis
There are key challenges for private equity funds operating in the Turkish market
Main challenges throughout the life of a successful investment
Pre-Acquisition
Even though third parties conducting financial and legal due diligence is widely available, parties conducting insightful commercial due diligence, especially for mid-market are scarce Sector data including market size, market share is hard to find making the due diligence effort more cumbersome Increasing multiple expectations by target companies due to a variety of reasons including emotional attachment is an obstacle
Monitoring
High level of entrepreneurship in the country is resulting in poor strategic focus and unawareness of global trends Company owners generally have topline focus rather than EBITDA focus Implementing change requires higher level of effort due to resistance from owners and company employees As some business has been conducted off the record preacquisition, transparency in finance and accounting are key issues
Exit
Emerging market appetite worldwide needs to be maintained in order for favorable private equity exits to increase In order to demostrate company's true value, it is important to increase transparency, implement management dashboard and perform KPI benchmarking
IMPLICATIONS
Private equity funds need to understand the legal, tax and business environment within the country fully preacquisition and hire skilled people for operational excellence during monitoring
Source: Industry Interviews, Santa analysis
Agenda
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There are three main services offered to private equity funds; due diligence, cost reduction and 100-day plan
Mapping of private equity fund challenges to services offered
Pre-Acquisition
Even though third parties conducting financial and legal due diligence is widely available, parties conducting insightful commercial due diligence, especially for mid-market are scarce Sector data including market size, market share is hard to find making the due diligence effort more cumbersome Increasing multiple expectations by target companies due to a variety of reasons including emotional attachment is an obstacle
Monitoring
High level of entrepreneurship in the country is resulting in poor strategic focus and unawareness of global trends Company owners generally have topline focus rather than EBITDA focus Implementing change requires higher level of effort due to resistance from owners and company employees As some business has been conducted off the record preacquisition, transparency in finance and accounting are key issues
Exit
Emerging market appetite worldwide needs to be maintained in order for favorable private equity exits to increase In order to demostrate company's true value, it is important to increase transparency, implement management dashboard and perform KPI benchmarking
Due Diligence
Cost Reduction
100-day plan
Due Diligence involves providing an objective third party opinion to companies/investors looking to acquire or partner with target companies. It is important for companies/investors looking to acquire or partner with a company to better understand the market, competitors, risks and whether competitive advantages are sustainable within the planned investment period.
Identifying domestic and global market size and determining the growth forecast for the market Analyzing the various customer segments within the market in terms of size, purchasing behaviour and other criteria Analyzing current state of domestic and global competitiors and identifying strenghts/weaknesses Identifying risks and critical success factors within the market
Analyzing product profitability, customer and supplier concentration figures and change in these figures over time Identification of the firms competitive advantages following management, sector interviews, various other research methods and analyzing the sustainability of these advantages
Performing reality check regarding the managements business plan taking into account the market, competitors and companys competitive advantages Identifying the potential risks to be faced by the investor post-acquisition and developing appropriate risk mitigation strategies
Customers Need
The private equity fund requested a third party opinion before acquiring minority stake in a Turkish agri-trading and processing company. Opinion was requested regarding: The attractiveness and growth potential of agriculture sector both domestically and globally Growth potential of the target firm and the risks associated with reaching this target The managements business plan
Goal
Providing opinion regarding the feasibility of the managements business plan after gaining an understanding about the market, critical success factors and risks
Results
It was determined that the agriculture sector is expected to grow both domestically and globally As a result of customer and supplier interviews, target firms competitive advantages were determined by product and sustainability potential was analyzed Following an analysis of managements business plan, it was reported to the private equity fund that plans regarding certain products were realistic while some were overly aggressive
Cost reduction projects involve a thorough analysis of company's cost buckets, top-down bottom-up analysis to identify cost reduction potential and development of project progress measurement tools to make the cost cuts sustainable
Trend Analysis
Benchmarking
Based on the analysis of company's overall OPEX structure, performance matrix tool developed and used as data source for top-down and bottom-up analysis Each cost bucket is compared at different timeperiods to understand increase/decrease trends and cost drivers
Company's KPI values are calculated and compared to benchmark figures to identify top-down cost reduction potential Meetings/workshops conducted with relevant departments to perform bottom-up analysis Cost reduction projects are identified and prioritized based on impact and ease of implementation
In order to make cost cuts sustainable, KPIs are determined for each project and measure sheets are developed Project KPIs are tracked to calculate revized and realized cost reduction figures Cumulative figures are presented to top management
Customers Need
Turkish incumbent telecom operator's EBITDA margin was expected to decrease as the competition in the fixed line business is increasing and number of subscribers is falling. Client has asked to: Understand cost drivers and benchmark various cost buckets to peer operators Propose cost reduction initiatives where inefficiencies are identified using both topdown and bottom-up analysis methodology Measure effectiveness of cost reduction projects as part of the Cost Reduction Initiative PMO
Goal
Operational costs of the operator at Sales&Marketing, General&Admin, Network Operations and Technical Field Services areas are expected to decrease as a result of a list of cost reduction initiatives
Results
A significant amount of cost reduction potential was identified and discussed with top management for support Projects were scoped to decrease OPEX at the telco operator
A 100-day plan is a detailed agreement on the steps necessary to achieve strategic and operational goals postsigning. A 100-day plan with well targeted actions can have a significant impact on the success of a deal. As the new plan will bring change to the organization, a continuous change management effort is necessary
Gain full transparency into finance, operations, assets and IT infrastructure Perform risk assessment and develop a risk mitigation plan Develop employee, customer retention and supplier communication plans Develop PMO office structure and processes to bridge gap between strategy and execution
Review strategy with management and private equity firm to gain alignment Analyze key elements of the strategy (investigate upside opportunities, risks, new developments post-signing) Prioritize major strategic initiatives based on impact and ease of implementation, ensure they are linked to 100-day plan
Perform screening analysis to identify possible areas of opportunity Prioritized list of initiatives broken down into three categories: quick-wins, Wave I prioritized initiatives, all other initiatives Develop initiative template for each potential opportunity Develop dashboard wth KPIs and target values plus tracking process for value capture implementation
Deal Structuring
Postsigning, preclosing
Medium / long-term
Exit
In scope
Governance and organizational change Risk management and maintenance of business Refinement of strategy and investment thesis Creation of value capture plan, with robust analysis, clear KPI targets and budgets Alignment and mobilization of the company
Agenda
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Our understanding of Private Equity in Turkey How Santa Consultants can help
Appendix
Who are we
Santa Consultants helps companies improve their business through formulizing innovative solutions to their issues We provide value to our clients by making recommendations for their business issues, and also by helping implement these recommendations We have a collaborative working style and use an analytical and structured approach to solving business issues
Performed commercial due diligence for a global private equity company planning to invest in an agri-commodities trading and processing company in Turkey
TURKEY Leading Telecom Operator* Managing the initiatives, within the Program Management Office, to reduce cost at Sales&Marketing and General&Admin departments and analyzing opportunities for low cost energy sourcing at a leading telecommunications operator in Turkey Supported the equipment manufacturer during its partner/vendor selection process to increase its presence in the Turkish market
Services Company
Advised a supply chain consultancy firm regarding product portfolio management and sales best practices
Managed the development of the growth strategy for an internet business within the photosharing and printing sector and supported the implementation this strategy
COUNTRY
CUSTOMER
ENGAGEMENT TOPIC
Developed and executed a change management plan to ease the migration to the new CRM software (Siebel) for the employees and to increase user adoption within all business units of a leading telecommunications operator in Saudi Arabia
Performed feasibility analysis for a company looking to invest in the energy sector in Northern Cyprus
Bykdere Caddesi, Tevfik Erdnmez Sokak Blok:13 Daire:2 Esentepe Istanbul TURKEY Phone: +90-212-347-1377 Fax: +90-212-210-8069 Email: info@santaconsultants.com
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