The road between the Marmara seaside town of Yalova and Bursa is one of the busiest and most dangerous in Turkey but this does not prevent Yasar Kucukcalik’s chauffeur from driving at breakneck speed, violating every traffic rule known to man. We are on our way to the Kucukcalik textile works outside Bursa, a large industrial centre south-east of Istanbul. “Relax, nothing will happen,” says Kucukcalik, as the powerful BMW overtakes and passes yet another lorry on the wrong side of the road.
Kucukcalik, who is on this road virtually every day, is a man in a hurry and does not mind the speed. In seven years he and his younger brother have built a $60 million business to become one of the largest home textiles manufacturers in Turkey. He has a busy agenda. Each of the company’s three plants near Bursa is undergoing extensive expansion. Construction will soon start on the fourth, a $25 million polyester yarn plant near Istanbul. His brother Yilmaz is in Canada to sell their net curtains and furnishing fabrics. One of his buyers is in China, where more and more of the company’s raw materials are sourced.
In the factory Kucukcalik has a large office whose walls are bare except for a few framed prayers in Arabic script from the Koran.
It is surprising to encounter such energetic expansion plans at a time when the Turkish government is talking about applying the breaks to the economy. It proposes to reduce inflation by half to 50% in 1998 and forecasts that economic growth will drop to 3% this year. Isn’t Kucukcalik worried about the country’s messy macro-economic situation and about the possibility of an early election, something which always causes havoc to the economy?
“You have to develop a frame of mind in order to cope with all that,” he says. “This is what I tell myself: you are operating in a free zone, not in Turkey. If I were to think of myself as working in Turkey, I might be so terrified I would not leave my house.”
Like a growing number of medium-size companies, the Kucukcaliks focus on exports to minimize the impact of the boom-bust cycles of the Turkish economy. Some 40% of the company’s annual turnover of $60 million is generated from exports to 20 countries ranging from Singapore to the US, and 60% from local sales. “We are aiming to reverse this ratio,” says Kucukcalik.
Kucukcalik’s father went into business in Kayseri in central Turkey in the 1930s and moved to Istanbul where he made a fortune selling cheap print cloth. In 1990 when the family decided to go into manufacturing, Kucukcalik senior, who retired a few years ago after a stroke, took $10 million out of their bank account and built their first plant without borrowing a penny. Growing without borrowing has been one of company’s tenets ever since.
Half of the $25 million required for the planned 60-ton-a-day polyester yarn plant near Istanbul will come out of company-generated funds. Yasar Kucukcalik hopes to finance the remainder through medium-term credits from suppliers.
“In Turkey if you are counting on loans you are a lost man,” he says. “They want to lend me dollars at Libor plus 5%. This is terrifying. It means no loans. In Turkish lira there is nothing under 150% per annum. If they know you are in trouble there is nothing under 200%.”
The Kucukcalik experience is the rule not the exception and underlines a fundamental reality: the rise of Turkish companies is built on internally generated funds, not on loans. A shortage of financing has been the biggest constraint on growth for all private companies except for large conglomerates, most of which own banks which have until recently financed their expansion.
Turkish companies have an extremely limited ability to borrow from overseas markets. Of Turkey’s total foreign debt of $78 billion, the private sector accounts for only $9 billion, most of it owed by private banks. Non-bank overseas borrowing in Turkey is notably rare. The majority of Turkish companies don’t have the size or the track record to go out and get foreign loans and despite the large potential, the world banking community has largely ignored them.
The domestic borrowing scene is hardly dynamic either. Because of endemic high inflation and the uncertain economic outlook, banks in Turkey (including foreign banks) provide virtually no funds other than short-term loans. According to the OECD, the average maturity of loans available in the banking system is four months. Banks play a minor role in investment finance simply because they allocate virtually no funds for medium- or long-term loans. Total bank loans in Turkey are equivalent to about 33% of GDP compared with 101% in Malaysia, 150% in Japan and 170% in Germany.
Many companies are obliged to finance their capital investments with short-term foreign-currency-denominated bank loans carrying high interest. Some companies are forced to allocate between 80% and 96% of their operating profits for interest payments.
“Maturities are very short because we cannot get into anything long,” says Kemal Kaya, an executive vice-president at Yapi Kredi Bank, one of the top three private-sector banks. Yapi Kredi’s Turkish lira loans have an average maturity of between three and six months and its foreign-currency loans average nine months.
The banking sector is dominated by state banks. According to Ozen Goksel, general manager of Akbank, in 1996 some 65% of total Turkish lira deposits and 41% of foreign-currency deposits were in state banks, which use most of their resources to bankroll the government.
Interest rates are very high as a result of sky-rocketing public borrowing and inflation which approached 100% last year.
The Turkish treasury has to do most of its borrowing at home because its below-investment-grade paper has a limited market overseas. The treasury is sucking the local market dry and driving real interest rates to between 20% and 25% a year, which sets the benchmark for other borrowers.
The Turkish financial system has two other important characteristics: bonds and equity markets are also underdeveloped. In fact, the Turkish bond market is virtually non-existent. Domestic commercial-paper issuance has been extinct since 1994 when the treasury crowded the private sector out of the borrowing market completely. International commercial-paper issuance is so rare as to be practically non-existent.
The number of companies offering stocks on the Istanbul Stock Exchange is on the rise, but family ownership remains the norm. The ratio of market capitalization to GDP is less than 0.3%. In January 1998 the number of actively traded companies was 244; in other words less than half of Turkey’s 500 largest companies,
as listed by the Istanbul Chamber of Commerce, are publicly quoted.
Proceeds from stock offerings more than quadrupled in 1997 yet the total yield from about 30 new offerings was only just over $600 million. More than 80% of the new issues were bought by international institutional investors because domestic demand is only able to absorb issues of $8 million or less. More than a third of the offering was accounted for by Sabanci Holdings’ $207 million IPO, the largest equity offering last year.
There is not a single company on the stock exchange which has the majority of its shares traded. Most companies are still in the hands of their founders or their heirs. The majority of companies that float their shares do so for tax advantages rather than to generate funds for investment and the proceeds are often pocketed by the shareholders rather than reinvested. The average float size is 22% of a company’s total equity.
But this is beginning to change as bigger companies become more sophisticated, their financing requirements grow and management becomes more adept at handling offerings.
It took even the mighty Sabanci family more than six years to master the art of going public and to appreciate its benefits fully, according to Faruk Bilen, Sabanci Holdings’ executive vice-president for finance. The Sabancis, owners of one of Turkey’s two largest private conglomerates with consolidated sales of $3.8 billion in 1996, went through agonies of indecision before they could bring themselves to part with equity. As a result, the Sabanci group trailed well behind the Koc group, Sabanci’s arch-rival, in floating its companies.
Akbank, the jewel in the conglomerate crown with a market capitalization of $4.5 billion in January 1998, was the first company to be floated in 1994. Since then 10 other companies within the group have been floated but there are still 30 other companies which remain in private ownership. The market capitalization of the quoted companies is $10.2 billion but only $1.5 billion of this is traded and two-thirds of this figure is accounted for by two companies: Akbank and Sabanci Holdings.
“In 1996 there was a fundamental change in policy,” says Bilen. “The family decided companies in the group should be floated as they became ready and that IPO revenue should henceforth become a main source of financing for new investments.”
In 1997, for the first time in the group’s history, nearly half of investments of $600 million came from revenues raised from IPOs. The target for revenue from equity offerings this year is $300 million, most of which will come from Akbank’s secondary offering. “We have learnt three important lessons,” says Bilen. “You should not employ the investment bank which offers to charge the smallest commission. You should not dictate the price. And you should not dictate the timing.” Morgan Stanley valued Sabanci Holdings at $2 billion, plus or minus 10%, which was right on target, says Bilen. The market priced it at $1.8 billion: by the beginning of January its market capitalization had risen to $3.1 billion.
But although foreign funds have played an important role in recent equity offerings, Turkey is not heavily dependent on foreign capital. In fact, the inflow of direct foreign investment is declining because of political and economic instability. Investment actually realized was $1.1 billion in 1995 and $965 million in 1996. The figures for last year are not available but probably will be lower.
The slow-down started with the currency crisis of 1994 when Turkey was downgraded by the Wall Street rating agencies. The crisis was caused by a decline in the macro-economic situation which caused international borrowing to dry up and turned Turkey into a net repayer of foreign debt. A succession of feeble governments have been unable to address the situation effectively. The political situation remains highly volatile and uncertain particularly after the closing down last month of Refah (Welfare), the Islamic fundamentalist party which is the country’s biggest political force. Prime minister Mesut Yilmaz’s three-party secular minority coalition has been in talks with the IMF almost since it took office but it is unlikely that a deal will be reached. Yilmaz is in too weak a position to comply with the IMF plan for a severe, front-loaded austerity programme which would bring inflation down to under 20% in one year.
But the private sector seems to have grown immune to political and economic instability and there are not many who believe that a solution to either is imminent.
Back on the road to Bursa, Yasar Kucukcalik says: “We need surgery. I don’t mean delicate surgery but an operation where we use axes. And we don’t need anaesthetics either.”
Meanwhile Nurettin Sarac of packaging-materials manufacturer Debant believes that it is impossible to develop total immunity to instability. “If it rains you will get wet even if you carry an umbrella,” he says.
“Experience has taught us that political instability multiplies the risks, increases costs and wastes time,” he says. “But it does not stop business. Political instability has never been so bad as to force me to stop doing what I had planned to do. Perhaps this is because we have something which has died out in Europe: excitement and hunger to achieve. We get a thrill out of achievement. Europe is tired and does not feel this thrill anymore. I suppose, what makes us tolerate political instability is this thrill.”
Perhaps this sense of excitement explains how the Turkish economy has grown by an average of 7% a year for the past three years. Growth is certainly being fuelled by the private sector. Turkish companies are flourishing and their profits continue to climb. Overall capacity usage is over 80% and exports are on the rise. Business failures are surprisingly rare. Bad debts (other than to public-sector banks) are a small portion of the banking system’s assets partly because banks spend a relatively small proportion of their assets on bankrolling companies. Most of the loans advanced are in the form of self-liquidating export financing.
High economic growth is aggravating the financing shortage felt in the private sector. The number of companies with a turnover of between $30 million and $75 million and whose growth is constrained by the prohibitively high interest rates and the shortage of both working and expansion capital, is estimated at around 6,000.
Industry has started to spread out of its traditional belt along the eastern stretch of the Marmara Sea between Istanbul, Izmit and Bursa to Anatolian mainland provinces such as Denizli, Gaziantep, Maras, Urfa and Corum. Sleepy rural areas as recently as 15 years ago, these provinces have built significant industrial bases with a big slant towards textiles. This growth is the result of capital and entrepreneurial ability built up over time. The transition from the first to the second generation has brought in a clan of younger, better educated, more internationally-minded businessmen who still share much of the entrepreneurial vigour and ambition of the first generation.
Headline: Re-learning corporate banking
Source: Euromoney
Date: February 1998
Bankrolling the government has been good business for Turkey’s banks, but now they need to start lending money to companies again
Yapi Kredi Bank is the most active of Turkey’s top three private banks in corporate and commercial banking, especially in the provincial cities. In 1988 it took a decision to focus on small and medium-sized businesses with turnover ranging between $1 million and $10 million. “Today we are the largest in this field,” says Kemal Kaya, the bank’s executive vice-president. “We were the first bank to discover these companies and no one can beat us here.”
After the 1994 economic crisis, bankrolling the government through high-yielding government paper became very attractive for private-sector banks, says Kaya. But Yapi Kredi, believing the phenomenon to be transient, has kept this exposure to a minimum so as not to lose its corporate customers. The bank thus has the lowest exposure of any bank to government paper, its portfolio corresponding to 8% of equity as opposed to the sector average of 15%. Loans, on the other hand, are relatively high at 53% of assets compared to the sector average of 43.5%.
Kaya concedes that the bank’s maturities are low. Of total loans, 72% are export credits with an average maturity of nine months; 16% are loans to small and medium-size businesses where the average maturity is much smaller, around three months. He says Turkish banks have little ability to make longer-term lending as a result of their limited access to international capital caused by Turkey’s below-investment-grade rating.
Ozen Goksel, general manager of Akbank, probably the most solid and certainly the most conservative of the big three Turkish banks, concedes that Yapi Kredi is ahead in company lending. “We are cautious,” he says. “One has to take into account that because there is a big element of short-term loans in investments, lending involves a lot of risks.” The bank’s lending figures underline its cautious policy. At 30%, its loans-to-assets ratio is nearly half that of Yapi Kredi.
Leyla Etker, executive vice-president of Garanti Bank, says that developing corporate business is a top priority for his bank. Garanti has seven branches, four of them in Istanbul, serving only corporate clients; each of these branches deals with some 50 to 60 clients. Loans make up approximately 50% of Garanti’s assets. Etker also claims that Garanti is the only bank which gives medium-term loans but does not give details of typical maturities.
But while banks are beginning to pay more attention to their corporate clients, Turkish companies remain desperately short of capital. As medium-term debt is still hard to come by, the gap is being filled increasingly by equity investment, both public in the case of Turkey’s largest companies and private.
Already the plethora of companies capable of doubling their earnings in two or three years is starting to attract the attention of investors. “There are strong companies that won’t or can’t borrow from the local market and which don’t have the size or experience to go out and get foreign loans,” says David Edgerly, general manager of Alliance Capital Management, Istanbul. “They need money to expand but there are precious few sources. They have gone as far as they can with their own resources. So what do they do for money? We are trying to raise money for private-equity investment because we see a great opportunity in it. We are trying to convince others of that so that they will commit money.”
Edgerly, who first came to Turkey as a US Peace Corps volunteer in the 1970s, speaks Turkish and knows the Turkish financial scene well. He is one of the firmest believers in the profitability of the Turkish market. The Turkish Growth Fund, one of three funds he manages from his office overlooking the Bosphorus, has generated a 50% return since its inception in 1994.
But Edgerly says that the lack of instruments is slowing things down in Turkey. “There is only one,” he says. “That’s equity. There is no readily available convertible bond, preferred share, none of the instruments you typically use in investments in the US. So some investors are reluctant to make that kind of direct equity investment without any kind of bond-like protection.”
He says: “I can’t tell you how many phone calls I get from people asking can you find us a private company we can invest in. I have to say: listen, it’s not that simple.”
But others have already taken the plunge into private-equity financing. Banks such as Yapi Kredi which concentrate on lending to smaller companies may still be the exception but with a vigorous stock market and a small but growing private-equity sector, the financing options for Turkey’s companies are becoming ever broader.
Headline: Buying into the family business
Source: Euromoney
Date: February 1998
If a company can’t afford to borrow from a bank, is too small to float on the stock market and isn’t allowed to issue commercial paper, how does it finance growth? Private equity, say many, is the answer
Private-equity investment in Turkey was pioneered by Sparx Management and Advisory, a subsidiary of the Tokyo-based Sparx Asset Management Co which also has offices in Switzerland and the US.
In December 1995 Sparx raised a two-year closed-end fund of about $5.88 million which it invested in three unlisted companies. Two years later the funds were recouped through IPOs, the first time such an exit route was used for a foreign private-equity investment. The value of the funds on exit was $8.46 million, a 44% return over two years or a 21% compounded return on an annual basis, according to Murat Soycengiz, a shareholder and managing director in Sparx’s Istanbul subsidiary.
Sparx decided to move to Turkey when it struck gold on the Istanbul Stock Exchange in its first investment there. The investment, made on behalf of a US fund in 1994 when Turkey was going through an economic crisis with some similarities to the one now rocking south-east Asia, proved the adage that the best time to invest is when blood is flowing in the streets. “There was a huge devaluation, the stock market hit rock bottom, everyone was running away,” says Soycengiz. “Everyone was selling and everything was being sold. We started off with a $5 million investment which went up to $20 million. We earned 190% on a dollar basis. It was a once-in-a-lifetime chance. And after that the urge to set up a company here was unbearable.”
Sparx Turkey was incorporated in 1995 as an independent advisory firm with a charter to invest in listed as well as unlisted companies.
Initially the company raised a combination of liquid and closed-end funds on a ratio of 70% to 30%. The liquid funds were invested in the stock market and the closed-end funds in private equity in unlisted companies. Over time, as the business matured, the ratio became 50:50. Now the two funds are raised separately and, as Soycengiz puts it, “most of the money is generated from the funds invested in the capital market and most of the sweat is generated from equity investment”.
Over two years Sparx invested $40 million in unlisted companies. Sums of between $1 million and $7.5 million were placed in seven companies and their affiliates.
The funds were provided by Nomura, a firm with which Sparx has a special relationship. (Shuhei Abe, the founder of Sparx, worked as a Nomura securities analyst in Tokyo and New York before founding Sparx in 1989. The company now has over $1 billion under management, the bulk of it in Japan, the US and Europe.)
Soycengiz asserts that private equity is the investment of the future in Turkey where a huge gap exists between the availability of investment capital and company growth. “In this respect,” he says, “Turkey is the complete opposite of Japan. In Japan there is a glut of investment capital and investment saturation. In Turkey there is a glut of investment opportunities but there is very little investment capital.”
He goes on to say: “Turks are the most entrepreneurial people in this part of the world. They are very versatile. An American could not operate a mine in Siberia: he would be kidnapped. A Japanese could not run a cafe in Geneva: it would not even occur to him. A Swiss could not sell oranges to the Ukraine: he would have no incentive. But Turks are doing all of these things. And this promises great things for the future.”
Soycengiz says that the average Turkish company tries to finance its investments with three-to-six-month credit lines when in fact it needs three-to-five-year loans. If it can find a dollar loan a Turkish company will probably have to pay something like 15% interest. “Who else in the world pays such rates?” he asks. Yet making private-equity investments in Turkey is a risky business. “It is like skiing on very thin snow through which stones no, rocks are showing,” he says.
For Sparx it has not been stone-free skiing. One company in which Sparx placed money defrauded it. Soycengiz refuses to name the company but says that his firm was lulled by figures which proved to be false.
“We grew fast but we learned a lot,” he says. “We have to review the lessons we have learnt and formulate new strategies. We will learn from our mistakes. We are here for the long term.”
What are the most important things that Sparx has learnt?
Soycengiz is silent for a few moments. “We have learnt that figures don’t have much meaning,” he says. “Even if they are audited. We have learnt about the deficiency of the legal system. And we have learnt the great power which the unregistered economy holds over companies.”
Many Turkish companies operate in the twilight of the unregistered economy where the norm is to have two sets of books one for the tax man and another for the shareholders neither of which reflect their true financial state. Separate books help tax evasion which is practised on a very wide scale.
It is often said that the Turkish economy owes its dynamism to the size of the parallel sector which is unofficially estimated by Turkey’s State Planning Organization to be as big as the registered economy. The parallel economy is more efficient than the registered sector because it lacks the most inefficient element in the registered economy the state.
“For most businessmen taxation as a concept has no meaning,” says a Turkish banker who does not want to be named. “The concept they recognize is zakat rept zakat [alms worth one-fortieth of income which according to Islam must be distributed to the needy every year]. For them the government falls under the category of the needy. It is up to them what portion of their profits are declared and how much will be paid as taxes, not the government.”
He guesses that at least 80% of non-quoted companies behave along these lines.
Because supervision is lax and corruption widespread the risk of getting caught is negligible. Metin Ar, executive vice-president of the Industrial Development Bank of Turkey, calls tax evasion the no-tax umbrella and says it is probably the most important explanation for the capital accumulation which has created the explosion of industry in some rural provinces.
“The emerging companies in Anatolia which you now see are those which successfully ploughed back these resources into business,” he says. “The wealth was spent on growth, not on reckless extravagance and luxury. Perhaps these people did not pay their taxes but they did not take their money out of the country. They created employment and wealth. Who can say that this was not the best thing for Turkey?” But Soycengiz believes that this is only half of the story.
“What many Turkish businessmen don’t realize is that accounting was not invented by the finance ministry to control taxation,” he says. “It was invented by shareholders to control their businesses. Up to a size of $8 million to $10 million turnover you might just be able to control your business even with shabby accounting. Beyond that, by destroying proper accounting you lose control of your own company. What you don’t give the taxman can be stolen during transportation, at the depot, by your supplier by your accountant even.”
But even this is not the whole story. The unregistered economy also feeds the corrupt officials who stamp false accounts. It fattens the debt-collection mob, which is widely used to collect cheques which bounce. The businessman who does not pay taxes can often end up paying just as much to corrupt officials and gangsters. But the difference is that the Turkish economy gains a reputation for being corrupt and mob-ridden.
Ironically it is the country’s archaic and unfair taxation laws which cause this state of affairs to prevail. Inflation accounting is not practised although high inflation is endemic. In calculating taxable revenue, the tax laws take no account of inflation. Companies which pay risk losing their investment capital in two or three years and going bankrupt.
At present, few Turkish investors appear willing to commit money to the private-equity sector in spite of the generous returns available. Last year, for example, a group of American investors, including Citicorp, is reported to have tried to put together a $100 million Turkish private-equity fund. But for a variety of reasons the project was put on the back burner. Citicorp’s view was that the US component of this money could be raised only if Turkish institutions pledged a substantial amount some $30 million to $50 million. The project’s co-sponsors, which included Fairchild Corporation, a leading manufacturer of aerospace parts for commercial and military aircraft, could not find Turkish institutions to pledge money for the venture.
This is despite the fact that the sponsors were talking about opportunities that could generate a 30% annual return on investment. “For the US investor this is almost science fiction,” says an American banker involved in the deal. “For years the Turkish investor has been picking up 25% on government paper on a daily or monthly basis. They probably did not see why they should take a medium-term risk for an extra 5%.”
Soycengiz says that 1998 will be a year for stabilization and consolidation when Sparx will evaluate the lessons it has learnt and fine-tune its placement policies. One new element in any future structure will be to combine equity injection with debt relief. Often Turkish companies are saddled with crippling short-term debt, a problem that capital injection leaves unresolved. Private-equity injection would be more effective combined with debt relief which would involve converting short-term debt into medium-term funding, he says.
This is exactly what has happened in the latest private-equity deal involving Merrill Lynch and Termo Teknik, a leading company in the heating sector. Merrill Lynch acquired a significant but unspecified minority interest in the company for $7 million. The funds will go towards Termo Teknik’s expansion. Ata Invest, which served as financial adviser to Termo Teknik and helped structure and execute the investment, also secured $6 million from two unspecified foreign sources to restructure the company’s senior debt.
When it came to Ata Invest in December 1996, Termo Teknik was working at close to full capacity and exporting 50% of its output. But it was crippled by short-term, foreign-currency-denominated debts. The family-owned company, run by Gazi Gazioglu, one of Turkey’s most innovative and dynamic entrepreneurs, had a turnover of about $40 million a year and had excellent operating profits. But it owed $10 million to Turkish banks in treacherously short maturities, and this left it with little or no net profit, according to Mehmet Sami, the senior vice-president at Ata Invest who worked on the deal.
“The picture was very clear; the turnaround story was very simple,” he says. “If you took away the debt you would be left with a huge operating profit. As it was, the company was at the mercy of its creditors. Any day one of the creditor banks could pull the rug from under its feet.”
Searching for options, Sami ruled out an IPO because of the debt burden. Likewise, raising a new loan was not feasible because the company was already highly leveraged. With a business plan under his arm he visited 25 European and American investors. The response he got from most was the same: we are not interested in putting money into Turkey. One company told him: “Turkey is not a country which appears on our radar screen.”
Nonetheless, by August 1997 he had two letters of intent. One of them was from Merrill Lynch. The other was from a large European company in the heating industry which Sami refuses to identify because it may yet become a part of the deal at the exit phase.
The deal was closed in December 1997. Under its terms, exit will be in a maximum of seven years through an IPO, buy-back or sale to a strategic investor. Sami is confident, however, that it will turn around in three years. He expects the return on investment to be 20% on an compounded annual basis, about the same as the figure realized by Sparx.
Sami thinks there are dozens of companies like Termo Teknik in Turkey. They can’t get access to finance other than private equity. Funds available in the banking loan market are limited, savagely short-term and costly. It is impossible to issue fixed-income paper because the treasury has sucked the market dry to satisfy the budget deficit. It is virtually impossible to issue commercial paper because Turkey’s Capital Markets Board will not allow interest rates which will compete with government paper. IPOs are limited to the largest companies.
He is in the final stages of putting together a private-equity fund which will be dedicated to medium-size Turkish companies. He hopes to raise a minimum of $50 million from two or three investors (who he refuses to identify) to be placed in tranches of $5 million to $10 million, which he considers to be the ideal size.
“We have been in private-equity investments as agents since 1995,” says Sami. “We have learnt the business and we have the infrastructure.”
There are others nosing around Yapi Kredi Invest, Demirbank, Citibank, SBC Warburg and Capital Alliance among them and this may be the year when private-equity placement takes off.
Headline: TSKB turns to private equity
Source: Euromoney
Date: February 1998
There are very few bankers who know the Turkish corporate scene better than Metin Ar, head of the investment-banking division at the venerable Industrial Development Bank of Turkey (TSKB).
Three years after the board took the decision to focus on investment-banking activities, Ar and his team have made TSKB the biggest name in the Turkish equity offering market. By the end of 1997 it had captured more than half of the market. It was lead manager in five of the biggest 1997 offerings, which between them accounted for nearly 55% of total sale proceeds, and its market share was three times bigger than that of Global, its nearest competitor.
In 1997, there was a big jump in offerings as more and more loan-starved Turkish companies decided to tap the stock market. Total domestic and international equity offering proceeds reached $612 million in 1997 from $185 million in the previous year.
The new year also started well for Ar. Salomon Brothers chose TSKB as joint global co-ordinator for the offering of the treasury’s shares in Is, a partially state-owned bank which ranks as Turkey’s second largest bank. The sale most of which will be to international institutional investors will dispose of 12.3% of the bank’s shares. It is expected to yield around $600 million which will make it both Turkey’s biggest ever privatization and its largest share offering by far.
TSKB also has 12 other IPO mandates on its books for the first seven months of the year. “This is what happens when you are number one,” says Ar. “We are getting IPO applications as if we were distributing free money. My main concern now is to schedule them in such a way as not to upset anyone.”
It wasn’t always like this.
Three years ago Ar had to toil for two months to get the mandate for the $5 million IPO of processed-food manufacturer Konfrut despite being an old school friend of one the owners. Now business is pouring in despite the fact that TSKB’s commission is double the average market rate and although it is the only firm which demands a retainer.
TSKB, Turkey’s first investment bank, was set up in 1950 to provide medium-term funds to private companies. It was a partnership between a group of private and state-owned banks. This often explosive combination seems to have worked to perfection for TSKB. In a sector where frequent job changes are the norm, it stands out as a bastion of loyalty. Top managers have been with the bank for an average of 24 years. At the age of 45, Ar is the youngest of these top managers.
In 1998 Ar wants to branch out into new fields: international capital-markets trading, international debt-raising for large Turkish companies and acquisitions. But his pet project is private equity.
TSKB has historically been Turkey’s biggest provider of medium-term loans, some re-routed from the World Bank. It disburses about $100 million annually, which by international standards is small. But according to Ar, total medium-term credit available in the Turkish banking sector does not exceed $500 million a year.
He is therefore acutely aware of the shortage of funds in Turkey, probably the single biggest obstacle to corporate growth. He calculates that between 4,000 and 5,000 companies, each employing around 150 people and with annual turnover of $40 million to $50 million, are in a bind.
“They have two alternatives,” says Ar. “They may choose growth through borrowing short-term funds at the risk of undermining their debt/equity ratio. Although they operate
in an environment of growing demand, this is a risky course. If they don’t hit a domestic or international rock they
achieve growth and are able to conduct their IPO. Those which choose the second course don’t take the risk. They constrain their borrowing and therefore limit their growth. They cannot exploit the full potential of operating in an expanding market.”
With its long experience of offering medium-term lending to private companies, TSKB is well positioned to offer private-equity placement. “We have absolutely no problems with the deal flow,” says Ar, referring to perhaps the thorniest issue facing operators of private-equity funds, that of choosing candidates for investment. “There are many customers and it is easy for us to choose the best. The problem is money.”
Ar believes that sooner or later private-equity investment will take off because the opportunity is so large. “This is one of our major projects for this year,” he says.
Headline: King Cotton
Source: Euromoney
Date: February 1998
Quirky, family-run and wary of the stock market, Sanko is a Turkish company of the old school. But it’s also one of the world’s biggest cotton producers
Abdulkadir Konukoglu, whose company epitomizes the closed world of Turkish family-owned business, is not your typical textile king. His office is in Merter, the inelegant rag-trade centre near Istanbul’s airport. At the entrance there is a metal detector which does not work. The lift creaks and the corridor is dark. The space leading to his office contains dusty displays of textile products.
But appearances are deceptive. Konukoglu is king. His company is one of the world’s biggest manufacturers of cotton yarn. Konukoglu virtually sets the price of cotton yarn in Turkey: when he buys, cotton prices move up; when he stops, they move down.
The Konukoglu family has been in textiles in Gaziantep for generations but it was Abdulkadir Konukoglu’s father Sani who developed the family company into the billion-dollar business it is now. He supplied most of the cotton going into the products which made Turkey one of the biggest textile manufacturers in the world. He also had a reputation for being a charitable man and a devout Moslem, traits which he passed on to his children.
“My father’s motto was to invest during times of economic crisis and stop investing during boom times,” he recalls. “During a boom everyone invests. But at times of bust, machinery is at rock-bottom prices. You can squeeze out the lowest prices from contractors. You have no trouble getting qualified workers.”
Despite it huge size the Konukoglu company remains an entirely family-owned business run according to family traditions.
“They have professionals running their factories,” says a banker who does not want to be identified. “But where money goes in or goes out is all down to Konukoglu. There are no outsiders.”
The company is believed to have an annual consolidated turnover of some $1 billion. Its new investment portfolio is in the order of $300 million. But it has no immediate plans to go public: “Maybe in 2000 when things in Turkey settle down a bit,” says Konukoglu.
A banker who knows the group well has another explanation: “They don’t want to go public because they don’t want the stricter accounting rules which they must adopt as a public company.”
“In our family we use family traditions,” says Konukoglu. “In our companies we use the latest products of technology. In our family, ties are very strong. When my father started having heart trouble in 1991 we paused. For two or three years we did not make any investments. After losing our father we rested for another year. Then we started advancing again.”
One family business tradition is to avoid debt. “Our principle is to grow without borrowing,” says Konukoglu. A banker who does not want to be named says that analysis done on the Konukoglu group of which Sanko Cotton Yarn is the flagship company in 1995 revealed a surprisingly low level of borrowing in relation to assets and turnover: “We found that the company was cash rich. Its short-term debts were negligible. Its medium-term debts were equivalent to cash and liquid assets held by the family.
