Entrepreneurship in Turkey

Finance Perspective

September 2009

2

Table of Contents

1. Companies established in Turkey (# and paid-in capital)

2. Sources of finance

3. Private Equity in Turkey

4. Brief info on Is Private Equity

5. Projects evaluated by Sector

6. Investment criteria

7. Challenges faced at Pre-investment stage

1. Companies established in Turkey (# and paid-in capital)

2. Sources of finance

3. Private Equity in Turkey

4. Brief info on Is Private Equity

5. Projects evaluated by Sector

6. Investment criteria

7. Challenges faced at Pre-investment stage

3

Companies established in Turkey

Source: Turkish Statistical Institute

A total of 664.592 companies established since 1995, with US$59,6 billion paid-in capital

Paid-in capital per company increased to US$194K in 2008 (US$154K in 01-08/2009)

56

.04

6

55

.30

3

67

.89

8

27

.08

3

33

.16

1

29

.66

5

32

.25

9 40

.92

5

47

.40

1

52

.69

9

29

.58

0

49

.00

3

55

.35

1

57

.37

6

30

.84

2

1,6 2,1

2,0 2,

8

2,1

2,0

1,4 1,

9

3,4

5,7 6,

6

4,1 4,

6

9,59,7

0

10.000

20.000

30.000

40.000

50.000

60.000

70.000

80.000

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 01-08/2009

0

2

4

6

8

10

12

14

No. of Companies Established Paid In Capital (US$ billion)

Internal and external sources are inadequate to finance the desired growth for

private companies in Turkey

Private Equity becoming an increasingly viable financing alternative

4

Financing Private Sector – Sources of Finance

Internal Sources External Sources

Shareholders’ Equity Poor

Internal Cash Generation Fair Generally, limited internal cash generation ability due to:

-Lack of operationally sound business models and strategies to sustain profitable growth

-Poor working capital management ability; unfavorable trade credit conditions

Companies usually established with limited equity

short term working capital loans are available; however Turkish banks are reluctant to provide long-term loans with favorable conditions to finance investments for growth Hard collateral requirement

ISE is not equipped for SMEs; SME stock exchange underway outcome is unknown

Government Bonds with high interest rates cannibalize the market

Relatively new concept

Loan Fair

Capital Markets Poor

Corporate Bonds Poor

Mezzanine Poor

5

Private Equity in Turkey

Private Equity:

Equity investment in companies with high growth and return potential

Private Equity Funds in Turkey:

• Domestically established funds governed by the Capital Market Board

•Exempt from corporate and income tax

•Minimum 50% of portfolio to be invested in investee companies

•Exit within 10 years

• International funds

•Investment from abroad

PE Industry Evolution in Turkey:

• 5 Funds in 2002

• More than 30 funds currently in Turkey

Private Equity:

Equity investment in companies with high growth and return potential

Private Equity Funds in Turkey:

• Domestically established funds governed by the Capital Market Board

•Exempt from corporate and income tax

•Minimum 50% of portfolio to be invested in investee companies

•Exit within 10 years

• International funds

•Investment from abroad

PE Industry Evolution in Turkey:

• 5 Funds in 2002

• More than 30 funds currently in Turkey

6

Is Private EquityFund Structure

US$87m capital under managementShareholding Structure

Investments

www.isinvestment.com/ www.tskb.com

www.ttgv.org.tr/en

www.anadolusigorta.com.tr/en

www.millire.com/english

www.isfactoring.com.tr

Is Bank Group57.67

TTGV 11.11

www.ise.org/

Public 31.22

Technology Services Healthcare Construction Materials

Retail

Total equity investment amount: US$61 m

Total equity and debt placement: US$300 m

29.00 6.6716.67

4.44 0.89

MCap@IPO: US$57.8mio

MCap@15/04/2009: US$27.0mio

7

Projects evaluated by Sector

Is Private Equity evaluated 1.390 projects since its establishment in 2002

invested in 11 projects

Sector No. Of Projects Share

Technology 199 14,3 %

Food 145 10,4 %

Healthcare 124 8,9 %

Retail 92 6,6 %

Logistics 60 4,3 %

Construction & Material 79 5,7 %

Energy 58 4,2 %

Automotive 55 3,9 %

Textile 55 3,9 %

Tourism 52 3,8 %

Chemistry 33 2,4 %

Entertainment 32 2,3 %

Telecom 26 1,9 %

Electronics 22 1,6 %

Security 16 1,2 %

Other 342 24,6 %

TOTAL 1.390 100,0 %

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Investment Decision Criteria

Attractive returns

An aggressive but realistic business plan for high growth – organic & inorganic, domestic & international

Operational profitability

•In current situation

•Room for development by identifying opportunities to add value through operational improvements

Strong, experienced, innovative and dedicated management team with a sense of urgency, driven by high energy and high integrity

Sustainable competitive edge, differentiation

•A leading and defensible market share

•Well recognized brand name

•Scalable and hard to replicate business model with defensible margins

•Strong, dominant and defensible distribution channel

•Propriety concept / products with competitive advantages

•Patents

Clear exit opportunities

•Exit to financial / strategic buyer

•IPO prospects

•Exit to founding shareholders

9

Challenges: Pre-Investment

Challenges / Risks Explanation

Determining Past Performance of Companies – Due Diligence

•Macroeconomic history of high inflation, fluctuating FX rates and volatility•Lack of accounting and IT infrastructure

•Accessing accurate company data

Business Culture

•SME’s usually over diversified, lacking focus•Weak feasibility studies

•Willingness to diversify industry risk•Lack of long term vision and sound growth plans

Industry Information

•Immature market research and intelligence industry•Accessing reliable industry information

•Scarcity of result-oriented management talent that can deliver expectations•Management backgrounds relatively difficult to reference

Management Recruiting and Retaining

Corporate Governance and Transparency

•Complicated shareholding structures•Hard to identify “related parties”•Creative accounting practices•Shareholders are usually also in the management team

•Endangering arm’s length transactions•Deteriorated internal control mechanisms

•SME’s that lack vision have not come to the need of result-oriented and top-quality management talent.•SME’s usually do not rely on recruiting firms

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Summary

• Both internal and external funding sources are limited for Turkish entrepreneurs

• Private Equity is becoming a viable alternative

• There are good projects available at a variety of sectors

• Sound and comprehensive business plans are necessary to evaluate these projects

• Lack of reliable company and sector data, lack of business plans create challenges in analyzing the projects

• Both internal and external funding sources are limited for Turkish entrepreneurs

• Private Equity is becoming a viable alternative

• There are good projects available at a variety of sectors

• Sound and comprehensive business plans are necessary to evaluate these projects

• Lack of reliable company and sector data, lack of business plans create challenges in analyzing the projects