Pei Turkey Forum Cakmakci

A Local LP Perspective on TURKEY VC/PE Market

‘A Qualitative Interim Epilogue’

A. Mete ÇAKMAKCI

Technology Development Foundation of Turkey

The PEI Turkey Forum – Partnering for Growth24 November 2009, İstanbul

The PEI Turkey Forum : TTGV 2009

2

Life in İstanbul is a strong attraction for national and international talent

Still affordable to live in İstanbul

Istanbul has become an Eurasian hub (proved by recent growth of THY)

Government plans to develop İstanbul as the financial center as well as many other

including creative industries and software.

The Story

Demographics : A blessing or a curse? Quality of

education,

growth performance still remain as challenges

So far strong labor elasticity for the expanding services

With recent increase in personal wealth, Turkey is

becoming a hard to ignore emerging market

Public funded many mega infra-structure projects, recently BOT models and

privatization is picking-up to maintain a modern infrastructure

Investor and private enterprise friendly political climate

Economic reforms continuing, particularly in healthcare and social security


3

TTGV : Who are we?

A public private partnership established in 1991 with a mixed

government-private sector representation and 41 full time staff

Legal status is “foundation established under law” which

qualifies TTGV for government funding under Turkish law

Program agency operating the public soft loan scheme

towards private manufacturing sector innovation projects

Investor in TURKVEN TPEF-1, İş Girişim A.Ş., iVCi (İstanbul

Venture Capital Initiative) and Teknoloji Yatırım A.Ş.

Recently introducing pilot scale programs towards promoting

clean/renewable technologies in the industry. (soft loans)

Often cited as a best practice


4

Experience in VC/PE

Partnered in around 850 projects from around 580 companies

(almost 85% SMEs) with TTGV cash contribution total

exceeding 290 M USD

Only Turkish investor in TURKVEN TPEF-1 and İş Girişim

(first local funds)

In contact with CMB, the regulatory authority

Partnered with EIF to setup iVCi, actively involved with the

fund raising activities both from public and private investors

Founded Teknoloji Yatırım, the only dedicated early stage

generalist technology investment vehicle in Turkey


5

Structuring the Issue

MANAGEMENT

INVESTORS

REGULATORYFRAMEWORK

INVESTEES

The common platform is the alignment of interests...


6

Regulatory Framework

Turkey is fairly advanced in its economic openness. (No

limitations on foreign ownership, transfers and double-taxation

treaties with most well regarded host countries) = = local

framework is irrelevant for sophisticated investors

BUT, for many local investors, a workable local regulatory

framework is critical. CMB is the unwilling regulator

A competent regulator MUST appreciate, the business exists

as long as there are willing and able investors

Like most other cases, improperly designed tax incentives are

blocking proper regulation for VC/PE in Turkey

Interests of independent minority investors are lost in the mix

Transparent governance is a major issue


7

An Illustrative Example

TTGV is an investor at İş Girişim A.Ş. with a share of 11,11%.

According to Turkish regulation İş Girişim is established as an

open ended, publicly traded corporation.

TTGV’s upfront capital contribution was 3,7 M USD

As of end of October 2009, TTGV’s share of all İş Girişim exits

totaled to 5 M USD

As of end of October 2009, cash returned to TTGV is 0,89 M

USD (%24 of what it should have been.)

İş Girişim’s closing price last Friday at IMKB was 2,38 TL per

share, while its per share active net totals is 5,86 TL.

İş Girişim benefits from all tax incentives and has ~%50 cash

position


8

Investors

Turkey has an expanding war chest of international investors

So far the largest private investor in PE/VC is the İş Group in

İş Girişim

Garanti is an investor in İstanbul Venture Capital Initiative

Many Turkish Blue Chips (including big manufacturing and

services conglomorates) expressed interest in setting up their

own funds. (some are already recruiting management)

“Minority psyche” is big barrier for most to commit to a fund

Unrealistic expectations on representation in investment

decisions

Concerns on branding

Too early to speak about “retirement funds” in Turkey


9

Overlooked Potential

Turkey has another emerging community of investors with a

strong –almost religous- taste for risk

We can speculate that the original ideology of the Turkish

VC/PE was to mobilize/benefit those funds

A vehicle similar to the UK VCIT might be in order. Of all

investors active in the IMKB the recent data is

Portfolio Range (TL) Number Total Invested (TL) % of the Total

50 K – 100 K 23,937 1,124 M 4.50

100 K – 250 K 15,004 1,549 M 6.19

250 K – 500 K 4,894 1,146 M 4.58

500 K – 1 M 2,270 1,053 M 4.21

50 K – 1 M 46,105 4,874 M 19.49


10

Investees

There are still many big hits and hidden gems to pursue for

investment

Usually hard to come up with second and third best with a

generic investment logic (“herd effect”)

SME dominated economy, notoriously shallow capitalized and

very opaque in operations (shadow book keeping)

For most family owned businesses “cashing out” or “letting in”

is a big taboo

Suprisingly Turkish companies have sophisticated business

skills, technology vision (from investment perspective) and

capacity (often cited in international comperative studies)

VC/PE is widely percieved as “no risk” loan for the next “big”


11

A Geography of Innovation

Most economic activity is centered around Marmara region

New industrial corridors are emerging in various regions


12

A Trivial Radar Excercise

Majority

Minority

Ow

ners

hip

Investment Size

Mega5 M EUR

INTE

RESTING


13

Istanbul Venture Capital Initiative

TTGV partnered with EIF, KOSGEB and TKB to set up

Turkey’s first fund of funds as a Luxembourg SIF vehicle

under EIF management (www.ivci.com.tr)

Garanti Bank and NBG Group joined later as investors with a

final closing size of 160 M EUR

EIF contacted many other potential investors, however they

demonstrated a strong lack of strategic vision though most

indicated interest and intend to develop operations in VC/PE

iVCi has an independent Investment Committee, first

investment is now closed and several are in the pipeline

iVCi also incorporates a “Strategic Network” to promote sector

dialogue under the chairmanship of Mr. Akın Öngör


14

Management

Most investor induced funds have problems with management

No question that there is ample supply of local talent with

some international experience/exposure

Most team profiles have strong representation on I-Bank and

consultancy careers

Job is more than deal making – it’s about growth and exit

Recently deal terms are shifting to more conservative (I-Bank)

Profession is more art than science – should look for diverse

skill implants and spin-out teams – local connections are

important (“talk the talk, walk the walk AND drink the tea”)

Another reason for urgency to develop local Turkish investor

base


15

Management

Current opportunity profile requires more “hands on” investments

People with people skills and a vision for the business are required


16

Teknoloji Yatırım A.Ş.

Investing in technology innovation is a niche business,

particularly in early stage

The market was not moving the way TTGV intended under its

presence

In 2005, TTGV set up Teknoloji Yatırım A.Ş.

Genesis of a good Turkish team is emerging slowly, learning

the hard lessons but keeping the spirits up

It is not really the money, but the networks and delivering to

the enterpreneurs

Vision is to spin off Teknoloji Yatırım as an independent

operation after establishing a sound track record


17

Other Remarks

Sector needs a professional association

TurkVCA is MIA since 2004

Concerns over high visibility

Reliable data and strong representation is

needed to develop a good conduct sector and

market

Turkey has extensive experience on localization

of special purpose administrative structures

It might be time to consider setting up a proper

“free financial zone” with its own regulator in line

with other government priorities inside Istanbul

Photos : kind courtesy of METUTECH

Arı Teknokent

Arı 2 Binası A Blok Kat:7

İTÜ Ayazağa Yerleşkesi Koru Yolu

Maslak 34469 İstanbul, TURKEY

www.teknolojiyatirim.com.tr

Cyberpark, Cyberplaza

B Blok Kat:6

Bilkent 06800 Ankara, TURKEY

www.ttgv.org.tr

Documents

Pei Turkey Forum Cakmakci