EQUITY CAPITAL MARKETS AND FINANCIAL INSTITUTIONS İNGİLİZCE İŞLETME DOKTORA PROGRAMI ALAATTIN YOLAÇTI PresentatIon layout PRIVATE EQUITY OVERVIEW 1 PRIVATE EQUITY FUNDS ID: 332677
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Slide1
PrIVATE
EQUITY
CAPITAL MARKETS AND FINANCIAL
INSTITUTIONS
İNGİLİZCE İŞLETME DOKTORA PROGRAMI
ALAATTIN YOLAÇTISlide2
PresentatIon
layout
PRIVATE EQUITY – OVERVIEW
1 PRIVATE EQUITY FUNDS2
KEY ISSUES IN PRIVATE EQUITY APPLICATIONS
3
PRIVATE EQUITY MARKET
4Slide3
PRIVATE EQUITY - OVERVIEW
1Slide4
WHAT IS PRIVATE
EQUITY (PE)?
Financing
is a
critical key succes of a business Private Equity (hence on PE) is alternative method to that
may
meet
the
needs
of
entrepreneurs
PE is the provision
of
equity
capital
by
financial
investors
over
the
medium
or
long
term
on
companies
with
high
growth
potential
Equity
owner
can
join
in
management
of
the
business
or
can
join
by
information
sharing
due
to
reasons
;
The
entreprise
may
have
less
experience
than
the
investor
The
investor
may
want
to
have
a
control
over
the
company
to
lower
riskSlide5
WHAT IS PRIVATE
EQUITY (PE)? -2
The
system
briefly works as follows ;Equity owner supplies capital to entrepreneur in return
for
stocks
of
project
by
participating
risks
of projects in opposition to
other
financial
associations
After
5-10
years
when
the
stocks
come into value at the market , equity owner sells them and gains revenue from this investment.The expected profit rate for the investor is annually %18-%35 or more in developing markets Slide6
WHAT IS PRIVATE
EQUITY (PE)? -3
PE is
largely
applied to the companies whose investments arenot quoted to the capital market
It
is
classified
under
the
title
of “
alternative
investments”
PE is
high
-risk
high
profit
class
as
well
as an
alternative
finance
type for the small and medium sized enterprisesPE can also used for buyouts where investor take the controlof the company , reconstruct it and finally sell it to a strategic buyer
or
offer
it
to
public
BUYOUT :
The purchase of the entire holdings or interests of an owner or investor.Slide7
PRIVATE
eQUITY
VS.
lISTED EQUITYPRIVATE EQUITY LOW LIQUIDITY LONG INVESTMENT HORIZON HIGH ACTIVE INVOLMENT
LOW MARKET EFFECIENCY
NO PUBLISHED INFORMATION
LOW REGULATORY OVERSIGHT
LISTED EQUITY
STRONG LIQUIDITY
SHORT OR LONG TERM
LITTLE ACTIVE INVOLVEMENT
HIGHER MARKET EFFECIENCY
PUBLISHED INFORMATION
HIGHLY REGULATEDSlide8
Why
do
companIES
SEEK PE?
Private
Equity is an alternative option for a company on similiar cases listed as follows
;
Create
a
business
Improve
and
develop
the
export
performance
Recruit
highly
qualified
personnel
Sell
part
or
all of the companyChange the size of the business and take one over competitionLaunch a new productImprove the management capacityLiquidise some of the assets Slide9
What
IS A PE FIRM LOOKING FOR?
High
growth
, competitive products or services In the case of disposal or transfer, a loan
capacity
and
recurring
profits
A
quality
and
stable management
team
,
capable
of
turning
the
negotiated
goals
into
reality
A solid management procedures either already in place or able to to be put in placeA transparent legal structure where personal and professionnal assets are not entangledAn agreement on the investor’s exit with
or
with
out the head
of
companySlide10
Cons
&
pros
CONS High Revenues Increases portfolio variety Able to reach the information
of
the
enterprise
legally
. (
Insider
trading
is not legal in the stock Exchange market)more secure
to external economic fluctations than that
stock
exchange
market
PROS
Excessive
levels
of
debt
to
acquire
corporatipns Long term investment (minimum 3 years) Investors rights to exit is restricted within the period High liqudity risk CONS High Revenues Increases portfolio variety Able to reach the information of the enterprise legally. (Insider trading is not legal in the Stock Exchange Market)More secure to external
economic
fluctations
than that Stock Exchange Market
PROS
Excessive
levels
of
debt
to
acquire
corporatipns
Long
term
investment
(minimum 3
years
)
Investors
rights
to
exit
is
restricted
within
the
period
High
liqudity
riskSlide11
PRIVATE EQUITY VS.
VENTURE CAPITAL-2
THE PHILOSPHY IS SIMILIAR IN NATURE
VENTURE CAPITAL IS THE SUB-BRANCH OF PRIVATE EQUITY BESIDES INVESTING IN EARLY STAGES
Definition of PE by NVCA (Natioanal Private Equity Assosication ) : Venture Capital is the capital provided by investing
professionals
who
have
the
potential
to be a significant participant
Definition by SPK (Turkish Capital
Markets
Board):
Venture
Capital
is a form of
investment
which
enables
dynamic
and creative entrepreneurs who don’t have adequate financial power to fullfil their investment ideas.Slide12
PRIVATE EQUITY VS.
VENTURE CAPITAL
VENTURE CAPITAL
Venture
capital investors invest companies
at
earlier
stages
Provide
an
initial
capital
to an idea or 1-3 years
old
companies
. (
Deloitte
,2007)
Includes
the
financial
support
in early stagesIt has a particular emphasis on on entrepreneural undertakings rather than nature of the business. PRIVATE EQUITY Investors of private equity generally donot invest on idea or premature companyrequire a background of 3-10 years including operations
.
Private
equity
not
only includes the financial
support
in
early
stages
but
also
in
the
expansion
stages
More
emphasis
on
business
itself
Venture
capital
and
private
equity
terms
are
largely
used
as a
substitute
for
one
another
but has
slight
differencesSlide13
Stages
of a
company
development
SEED :
Seed financing is designed to research, asses, an develop an idea before a company has reached start up
phase
.
Investors
are
mainly
business
angels
.
START UP : Start
up
financing
is
used
for
product
development
and
initial marketing phase . Capital is mainly required for R&D of the product and train personnel. (Especially for electronics, life sciences sectors.)POST CREATION : Business has already developed its product and needs capital to
begin
manufacturing
and
sell it. Yet no profit has
been
created
EXPANSION DEVELOPMENT :
Business
has
approached
or
near
break
even
point
.
High
growth
period
,
capital
is
used
to
increase
capacity
and
sales
power
TRANSFER/SUCCESSION :
The
total
or
partial
retirement
of
the
head
of a
company
is
often
an
opportunity
to
implement
a
leveraged
operation
. Slide14
EXPECTED
RETURN VS RISK DIAGRAMSlide15
PE INVESTMENTS
& FUNDS
2Slide16
PE INVESTMENT
METHODS-1
DIRECT INVESTMENT :
The
investor himself finds the company to investAnalysis, invests and terminates
it
when
it is time.
High
revenue
but has a risk of
loosing
invested
capitalOnly suitable
for
experts
in PE /
Less
used
way
II. IN HOUSE PE FUND INVESTMENT :
Investors
invest
their extra funds to a PE investment fundProffesionals in this fund are experts in finding enterprises which will be invested in Analysis, investments ,management and time to quit the investment are done by
these
professionals
III. INVESTING IN FUNDS OF FUNDS :
A fund
manager
evaluates
various
private
equity
funds
and
chooses
among
them
and
distributes
the
selected
funds
Investors
have
to
pay
extra
expenses
to
the
manager
as a
consultancy
service
feeSlide17
PE INVESTMENT
METHODS-2
TYPES OF PE INVESTMENTS
Source
:
M.Yardım,Private Equity as an alternative financial method that support Entrepreneurship:
Turkey
mcıoğlu
, N.Demirel, 2008,
“
Case
”
,
KMU İİBF Dergisi Yıl: 10 Sayı14 Haziran/2008Slide18
HOW DO PE FUNDS WORK?
Source
:
Guide
on
Private Equity and Venture Capital for Enterpreneurs, European Venture Capital Assosiation Publications,
November
2007Slide19
LIFECYCLE
OF PE FUND :
underwrITINGS
-1
CREATION OF A FUND AND UNDERWRITING BY PROFFESSIONAL INVESTORS :
PE management companies (General partners) after obtaining the agreement of controlling authorities establish investment funds
that
collect
capital
from
investors
known as Limited partners
This capital is used to buy high
potential
companies
known
as
the
portfolio
or
investee
companies PE fund managers invite the institutional investors to subscribe an investment fund for a period (usually 10 years) The fund raising period lasts for 6 months to one yearSlide20
LIFECYCLE
OF PE FUND :
underwrITINGS
-1
Usually institutional investors cannot leave the funs before their terms completedInvestors get
prenegotiated
stake
in
the
equity
of
the
investment and they become
fully fledged shared holders, sharing the
risks
The
investors
aim
usually
is not
to
take
the
control of the company (there are exceptions) but to help create value to realise a capital gain. Slide21
LIFECYCLE
OF PE FUND : INVESTING
2. INVESTING THE FUND :
Once
the target amount of capital has been raised, the subscription is closed In some cases (in Europe %30) PE funds come together
to
form a “
financial
syndicate
”
to
make
an
investment in case of large size capital
needs and high risk. One of
the
investment
company
represents
the
group
in
the
syndicate
dealing with the enterpreneurThe private equity team usually makes the investments in the first five years of the fundSlide22
LIFECYCLE
OF PE FUND :
managIng
3. MANAGING THE INVESTMENT
The fund manager on behalf of the investors is concerned with creating value in the company,
He
will
follow
the
investment
over
long time period and prepare
exit conditions.Slide23
LIFECYCLE
OF PE FUND :
exIT
4. REDISTRIBUTION :
When the fund manager decides to exit their investment, the capital recovered from the
exit
is
redistributed
to
the
original
investors on a pro-rata basis
depending on their initial investmentEXIT ROUTES :
Trade
Sales
(
Merger
&
Acquisition
trade
sales
,
more
common way)Enterpreneur or management team repurchase Sale of the investment to another financial purchaser (Secondary Market Investor) IPO (Initial public offering) : Flotation on a public stock marketLiquidation Slide24
TYPES OF PE FUNDS
PE FUNDS CAN BE CLASSIFIED ACCORDING TO THE SHAREHOLDER
PERCENTAGES AS FOLLOWS
INDEPENDENT FUNDS :
funds
which the third parties are the main source of capital and in which no one shareholder holds a majority stake. An independent fund is
the
most
common
type
.
CAPTIVE PE FUNDS :
Funds
which one shareholder contributes the most of the
capital
.
SEMI CAPTIVE FUNDS :
Funds
in
which
again
the
large
part
of the company belongs to one share holder, but a significant share of the capital is raised from third parties.Slide25
KEY ISSUES IN PE
APPLICATIONS
3Slide26
Process
chart
Slide27
BUSINESS PLAN
The
process
of attracting a private equity company starts with a Business PlanIt is the main tool used by financial investor to evaluate business
CONTENTS OF BUSINESS PLAN :
Executive
Summary
Company
History
Managemet
Team
Products
&
Services
Analysis
of
the
market &
competitors
Commercialisation
Operational
management
Financial Projections Capital RequiredExit PossibilitiesSlide28
Due
dILLIGENCE
Avabiality
of
the marketManagement qualityGeographical situationProximity to the marketFinancial ForceSWOT analysisEffeciency of
the
Project
owner
Advantage
over
rivals
Sharing
of stocks
Patent rightsLegal infrastructureSlide29
Company
valuatIon
Valuation between PE Firm and the target company should be covered in the agreement
No
pure
quantitative
methods
,
usually
based
on hypothesis that may be subjective
Diffucult to apply especially for
start
up
companies
GENERAL METHODS USED IN VALUATION
Discounted
Cash
Flow
-
If
company
has already has a positive cash flowComparative Methods – Using similiar price/earning ratios for a similiar company, have wide application areasOpportunity Cost - Opportunity Costs of the investors if they invest in different tools Slide30
What
do
the
pe
fund managers do?
Fund
Managers
have
four
principal
roles
:Fund Raising : Funds are
raised
from
international
investments
,
many
of
which
are
pension funds, banks, insurance companies and high networth individuals. The investments are usually as limited partnership. Sourcing investments: A PE found must source and complete succesful transactions to generate profit.Active Management of Investments : PE managers have become hands-on managers of their investments. They don’t involve day to day control, instead actively involved in setting
and
implementation
of
the
strategy.Releasing Capital Gains :
The
academic
evidence
shows
that
there
is a
wide
variation
in
the
length
of time of
the
PE
investment
.
Slide31
How
are
pe
fund managers rewarded
?
SALARY
FEE INCOME
:
Receive
management
fees
that
are
expressed
as a
percentage
of
the
funds
raised
.
Larger the funds greater the income although 3 % in smaller funds, 1-1.5% in larger funds for operating costs (sometimes cause principal agent problems between fund management and
investors
)
CARRIED INTERESTS :
Share
in the
profits
of
the
of
the
fund
known
as
carried
interest
Once
the
investors
have
achieved
the
a
certain
pre
-
agreed
rate of
return
(
hurdle
rate) ,
the
fund
managers
shared
in
the
excess (usually
the
%20 of
the
excess
amount
)
The
hurdle
rate is
around
%8
per
annum
Slide32
How
are
pe
fund managers rewarded
?-2Slide33
HOW IS
pe
company’s
succes MEASURED?Slide34
Success
Slide35
PRIVATE EQUITY MARKET IN THE WORLD AND IN TURKEY
4Slide36
PE APPLICATIONS
IN THE WORLD
PE has
been
a major driving force in technological advance in the USA, Japan, Germany, Canada and England
Historically
Digital
company
was
the
first one
constructed
with
venture
capital
.
Constructed
with
70,000 $
and
in
five years time reached a value of 3,5 billion $ sold to Compaq for 10 billion $ in 1998PE houses announced more than 2,000 deals globally worth a total of over $236 billion in 2010Slide37
PE
funds
raISING
2005-2010Slide38
PE
ACQUISITIONS BY REGIONSSlide39
PE
ACQUISITIONS BY SECTORS IN 2010Slide40
PE APPLICATIONS
IN TURKEY
In
Turkey
, financial system mostly depends on banking sectorEspecially the SME (KOBİ) cannot benefit from traditionally
recognised
banking
system
adequately
due
to Mc Millan Gap
According to a survey made
by
ITO
and
piar
among
4671
small
enterprises
%78 of
their
capital
is provided by themselves, only %7 by short time banking creditsFirst legal regulations are made by CMB (SPK), after that the first found was constructed by Vakıf Risk Capital established in 1996 MC MILLAN GAP : The name for the research which succeded in detecting the fact that traditional banking system is largely divirted to large well known
corporations
therefore
hindering SMEs Slide41
PE INVESTMENTS
IN TURKEY
(
Between
1996-2007) –
cont.YEAR
BUYER
TARGET COMPANY
SECTOR
OWNERSHIP
ESTIMATED INVESTMENT AMOUNT (million USD )
1995
Nomura (Sparx Group)
Ünal Tarım
Food
Minority
2
1995
Nomura (Sparx Group)
Arat Tekstil
Textile
Minority
2
1995
Vakıf Risk
Teknoplasma
Production
Minority
1
1996
Nomura
(
Sparx
Group
)
Eka Elektronik
Elektronics
Minority
2
1996
Nomura
(
Sparx
Group
)
Aba Ambalaj
Packaging
Minority
6
1997
Nomura
(
Sparx
Group
)
Rant Leasing
Leasing
Minority
2
1997
Nomura
(
Sparx
Group
)
GSD Holding
Textile
Minority
8
1997
Nomura
(
Sparx
Group
)
Biomar
Biotech
Minority
1
1998
Merrill Lynch Investment
Termoteknik
Radiator Panel Producer
Minority
5
1998
FMO
Tüyap
Arts&Entertainment
Minority
7
1999
Vakıf Risk
Innova
Biotechnology
Medical
Minority
2
1999
Merrill Lynch Investment
BIM
Retail
Minority
15
1999
Citicorp Inv. Services
Merko
Food
Minority
2
1999
Safron Advisors Ltd.
Alfa Menkul
Brokerage
Houes
Minority
5
2000
Commercial Capital
Işıklar Ambalaj
Packaging
Minority
10
2000
Safron Advisors Ltd.
Net One
ISP
4
2000
AIG Blue Voyage Fund
Galatasaray Sportif
Soccer Marketing
Minority
21
2000
AIG Blue Voyage Fund
AFM
Arts&Entertainment
Minority
7
2000
Vakıf Risk
Ortadoğu Yazılım
Internet, ISP
Minority
1
2000
EFG Hermes Group
Probil
System Integrator
Minority
21
2000
EFG Hermes Group
Gorbon Işıl
Tablewear
Minority
1
2000
Taurus/Bank of America
BIM
Retail
Minority
19Slide42
PE INVESTMENTS
IN TURKEY
(
Between
1996-2007) –
cont.YEAR
BUYER
TARGET COMPANY
SECTOR
OWNERSHIP
ESTIMATED INVESTMENT AMOUNT (million USD )
2002
İş Risk Sermayesi
Probil
System Integrator
Minority
6
2003
İş Risk Sermayesi
Nevotek
IT
Minority
3
2003
Soros
Investment
Unikom Gıda
Food
Minority
13
2003
İş Risk Sermayesi
Mars Sinema
Arts&Entertainment
Minority
5
2003
Turkven
Private
Equity
/
Advent
UNO
Food
Minority
13
2003
İş Risk Sermayesi
ITD
IT
Minority
4
2004
İş Risk Sermayesi
Step Halıcılık
Furniture
Minority
3
2004
MT Invest
Karyateks
Textile
Minority
1
2005
İş Risk Sermayesi & FMO
Tüyap
Arts&Entertainment
Minority
36
2005
Turkven Private Equity/Pound Capital
Trendtech
and
Retomedia
IT
Minority
25
2005
The International Investors KCSC
Docar Filo Kiralama
Real
Estate
& Leasing
Minority
29
2005
Turkven Private Equity
Intercity
Real
Estate
& Leasing
Minority
15
2006
Providence Equity Partners
Digiturk
Broadcasting
Minority
150
2006
Texas Pasific Group
Mey İçki
Tobacco
Product
Man
.
Majority
810
2006
Partners in Life sciences & Citigroup
Biofarma İlaç
Pharmaceyticals
Majority
240
2006
Turkven & Advent International Group
Roma Plastics
Plastics
Majority
76
2006
AIG Capital
For you
Retail
Minority
25
2006
Global Finance, IDB, Goldman Sachs
TAV
Airport Operations
Minority
650
2006
Turkven and FMO
Pronet Güvenlik
50-50
10
2006
Bancroft PE
Standart Profil
Automative
Majority
90Slide43
PE INVESTMENTS
IN TURKEY
(
Between
1996-2007) –
cont.YEAR
BUYER
TARGET COMPANY
SECTOR
OWNERSHIP
ESTIMATED INVESTMENT AMOUNT (million USD )
2006
İş risk Sermayesi
Beyaz Oto Kirlama
Rental
10
2006
Ottoman Fund
riva (GS)
Real Estate & Leasing
110
2006
GEM Global equities
Deva Holding
Pharmaceuticals
Majority
162
2007
Citicorp Inv. Services
Boyner
Retail
Minority
46
2007
Citicorp Inv. Services
Beymen
Retail
50-50
143
2007
İş Risk Sermayesi
Ode Yalıtım
Mineral Products
Minority
5
2007
National Bank ofKuwait
Yudum
Oil
Majority
unknown
Source
:
Resource: Deloitte, “Private Equity in Turkey – A Practical Guide for Turkish Companies and Investors”, 2007, pp.16-17. Slide44
PE INVESTMENTS
IN TURKEY
(
Between
1996-2007) –
Cont.Slide45
ConcludING
REMARKS
Researches
show
that the countries that have high entrepreneurial activities had provided a growth above
avarages
KOBI’s which are supposed to vitalize economy and
Industry life has to work out alternative financial methods
Private Equity
Applications
should
be
improved
to
s
upport
e
ntrepreneurship
in
TurkeySlide46
Thank
you
for
your attentIonSlide47
REFERANCES
M.Yardımcıoğlu
, N.Demirel, 2008,
Private
Equity as an alternative financial method that support Entrepreneurship: Turkey “Case”, KMU İİBF Dergisi Yıl: 10 Sayı14 Haziran/2008Akkaya G.C., İçerli, M.Y., 2001, “Kobilerin Finansman çözümünde risk sermayesi finansman modeli”
, Dokuz Eylül Üniversitesi Sosyal Bilimler Dergisi, Cilt 3, Sayı 3,2001
Guide
on
Private
Equity
and
Venture
Capital for Enterpreneurs
,
European
venture
capital
Assosiation
Publications
,
November
2007
Private
Equity Demistified, An Explanatory Guide, J.Gillian, M. Wright, 2nd edition, Corporate Finance Faculty PublicationsGlobal Private Equity Watch, Ernst Young Yearly Report, 2011