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Corporate Finance

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Introduction 1

I. Concepts 2a. Venture Capital vs. Private Equityb.Private Equity as Growth Capital and Buyoutsc. Investor vs. Investment Management Companyd.Funds Raised vs. Funds Investede. Managing investments

II. Background 4a. Assessment of Distinct Periodsb.Turkish Initiatives of Private Equity Style Investment Holdingsc. Role and Efforts of Turkish Intermediaries

III. Tips for Turkish Companies and Private Equity Investors in Striking Deals 10a. How to Tap into Private Equity Pool of Fundsb.How to Sense Investment Opportunities and Manage Them Afterwardsc. Major Concerns of Turkish Companies and Investors in Entering Deals

IV. Going Forward 13

V. Deloitte as Your Key Corporate Finance Advisor 14

VI. Appendix 16Table - 1: Private Equity Investments in Turkey (1995- 2007)Table - 2: List of Private Equity Investors and Their Activities (1995-2007)Table - 3: Private Equity Style Investment Holdings

fåíêçÇìÅíáçåPrivate Equity is emerging as a popular capital raising and/or partnership concept in Turkey today. More and more privateequity investors are viewing Turkey as one of the last high growth frontiers and are becoming interested in investing inTurkey. The recent global thesis of investing in “BRIC” (Brazil, Russia, India and China) has now become “T-BRIC” throughthe addition of Turkey. I have been stating this very fact for more than a year, and am happy to see it being highlightedmore and more in investor circles. The flood of money into private equity funds in the world, triggered mainly by thesudden build-up of cash in the oil producing countries due to the surge in oil prices, has paved the way for anaccumulation of funds in this asset class. There is an accumulation of such funds looking aggressively for investmentopportunities in high growth companies and buyouts worldwide. The search now includes Turkey, thanks to the positivemacro economic outlook in recent years and the start of the EU accession negotiations on December 17, 2004.

In parallel, with globalization running at a rapid pace, Turkish companies are becoming more international. Turkishcompanies are trying to expand not only in Turkey but outside Turkey as well, where they are also looking at alternativecapital raising and partnership opportunities to grow their businesses. Today Turkish companies are more open to the ideaof private equity than up until two years ago, especially after seeing the total of approximately US$ 30 billion of FDI whichentered the country in 2005 and 2006.

The objective of putting this paper together is to elaborate on the practical aspects of what private equity is really allabout and its background in Turkey. We also wanted to provide an all inclusive document on the concepts andbackground with tips for both investors and Turkish companies in striking deals. It was not our objective to prepare acomparative analysis of the Turkish private equity scene with the rest of the world. There are plenty of easily accessiblearticles on private equity internationally and therefore while preparing this study, we wanted to focus only on Turkey andits particular situation. According to our research, there has not been a similar paper published focusing on the Turkishmarket.

The statistics and sources related to private equity in Turkey has never been comprehensive in nature and therefore thefigures presented here may not be exact. Few individuals havedelivered presentations and published some articles on thissubject and the most recent ones were in 2003 and early2004. Media coverage on this subject also depended onthose few pieces and some interviews. There are a handful ofprofessionals who have lived through the entire period ofprivate equity evolution in Turkey from the very beginning,including the author of this report. Most of the datapresented in this study is based on the author’s know-howand views as well as market intelligence.

On the other hand we also briefly discuss the basic conceptsof venture capital, private equity, seed money, investmentmanagement companies, investors, funds raised and fundsinvested. Our purpose is to assist Turkish companies who maybe coming newly to these concepts and may have difficulty inrelating to them.

We hope that this study will be useful both for Turkishcompanies and private equity investors and will lead to moretransactions through an improved mutual understanding ofthe dynamics.

Barış Öney

PartnerDeloitte Corporate Finance

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The terms “venture capital” and “private equity” aresometimes used interchangeably but they vary inprinciple in their investment philosophy. Venture capitalinvestors usually invest in a company at an early stagewhereas private equity investors invest as a part ofgrowth capital. Private equity investors usually do notinvest into ideas or at an early stage. They require asignificant and proven history of the company beforethey consider investing i.e. 3-10 years of operations.Venture capital investors on the other hand may invest asa seed capital in an idea or into 1-3 year old companiesfor them to grow. Nevertheless there is no clear cutbetween these definitions.

The end investors who allocate a portion of their fundsfor venture capital or private equity investments placethese funds with reputable and trusted investmentmanagement companies for them to decide whichinvestments to make on their behalf. Investmentmanagement companies have two main tasks: to raisefunds from investors, and to invest the funds raised intoinvestment opportunities to provide the required returnsfor their investors. They need to invest the money theyraise or otherwise need to return it to their investors atthe end of a predefined period.

It is sad to admit that venture capital investments simplydo not exist in Turkey. New ideas or early stageinvestments are usually self funded by the entrepreneurthemself or through bank loans, which are usually short-term borrowings. Funding the majority of capitalinvestments by short term bank loans has causedconsiderable problems both for the companies and forthe banks in the past. This was one of the main reasonsfor the severe crisis (also referred to as the banking crisis)that occurred in 2001. Since the original entrepreneur isusually able to support the company only for a few years- unless it is one of the holding companies or a companylarge enough to support growth – he/she ends up eitherquitting or selling the business to another strategic buyer.We think the majority of ideas and early stageinvestments will continue to be self funded for theforeseeable future and we therefore concentrate moreon the private equity investments.

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Private equity capital is primarily used for growth.Therefore, companies seeking to tap into this huge poolof funds need to have a clear growth strategy. As stated,private equity is considered as a high risk, high returnasset class worldwide. These investors usually stay 2-7years in a company and then exit. The expectations ofprivate equity investors for rate of return range anywherebetween 18 – 35 % per annum, if not more, especially inemerging markets.

Private equity capital is also being used in buyouts.Investors acquire control of a company which is notrealizing its full potential for some reason, restructureand manage it for a few years and sell it on to a strategicbuyer or take it public with high returns. Recently thesebuyouts are being realized by larger amounts of debtthan capital. Investors tend to acquire companies usingloans obtained from financial institutions plus a littlecapital. They usually use the acquired company ascollateral. These are called leveraged buyouts and thetype of financing is called acquisition finance.

Private equity in Turkey was mostly geared towardsgrowth capital rather than buyouts, up until recently.However, we have started seeing buyouts in the last twoyears as well. The difference from the West is that inmost Turkish buyouts the acquisition finance product isscarce and therefore investors achieve buyouts withcapital injections rather than debt. Leveraged buyoutshave therefore yet to be seen on the Turkish scene.

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We would also like to highlight the difference betweenan investor and an investment management company.Although the terms can often be used interchangeably(including in this paper), it is important in many ways forTurkish companies to appreciate clearly the difference inorder to negotiate in the most suitable manner.

The way the private equity world works is as follows: thesource of funds is usually high net worth individuals,pension funds, fund of funds, insurance companies and,to a certain extent, banks. These individuals andinstutions allocate usually a small portion of their fundsto the private equity asset class and give this amount toexperienced investment management companies to beinvested in high return investments. These investmentmanagement companies search for high returninvestment opportunities depending on their mandatefrom their investors. Investors may give their money for aspecific sector or sectors (e.g. telecoms, IT,manufacturing), or to a specific region (e.g. Central &Western Europe), or for any opportunity to bring in thedesired return.

Funds which were raised or committed for Turkey to datefall mainly under the latter two categories, rather thanbeing sector specific. Investment managementcompanies seeking investment opportunities in Turkey,while having some sector preferences, look at prettymuch every opportunity that has the potential to bringthem high returns.

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Another concept not always understood is: what ismeant by funds raised and funds invested. Investorsallocate their savings to investment managementcompanies through what are called “fund raisingactivities”. After setting their objectives, completing therequired financial and legal documentation andidentifying potential targets or types of investmentopportunity, investment management companiesapproach investors and ask for their commitments. Fundraisings are made through organized roadshows orthrough individual meetings. Investors usually preferallocating their funds for this asset class to experiencedinvestment management companies. Therefore the trackrecord of an investment management company is key toraising funds. They need to convince investors that theyare qualified and experienced in managing such fundsand usually the single most important item in convincinginvestors is the returns achieved in managing prior funds.

Funds are usually collected from investors for a certainperiod of time and need to be invested and exited at acertain time interval. For example a US$ 100 millionfund, raised for a period of 7 years, needs to be investedduring that period and disbursed back to investors at theend of 7 years preferably with agreed returns. Investmentmanagement companies earn their income frommanaging the fund, which is usually in the range of 1.5-2% of the fund size per annum, and receive apercentage from the total return of the fund which isusually around 20%. This portion is referred to as“carry”.

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Once an investment management company invests into aTurkish company from its fund, it will require certainrights from existing shareholders. These rights willdepend on whether it is a minority or a majority investor.If the investment is a minority one, investors usually staysilent or passive. However the term silent or passiveusually includes a blocking power. They are usuallyrepresented at the board level with signature authority instrategic operational and managerial decisions andgenerally prefer to assign an agreed-upon CFO to assureproper reporting among other things. If a majority isacquired, then the company will be fully managed by theinvestment management company. Board members, CEOand key top management are usually assigned by theinvestment management company or the existingmanagement start abiding fully by new rules set bythem.

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To better understand and relate to the current privateequity activity in Turkey, it is advisable to know a bitabout the background of how and when this activity hasstarted and how it progressed in the country.

Private equity activity in Turkey has been limited up untiltwo years ago. Despite the fact that alternative sourcesof capital and funding have always been limited forprivate sector investments in Turkey, private equity didnot make substantial headway during the 1990’s and thefirst half of the current decade. Investments were fundedprimarily by a small amount of capital put in by theowner and through short-term bank loans provided byTurkish banks. Capital was accumulated mostly in thehands of big or mid-size family conglomerates andgroups, where most investments were realized by thosewho had capital at hand, rather than by youngentrepreneurs. Banks were providing loans to such familyowned companies simply by looking for not more than aweek to ten days into historic unaudited accounts andwith a handshake in many instances, since the ownerswere regarded as prestigious and wealthy individuals.

Bank loans were easy to tap into for those groups eitherthrough their own banks or through state-owned banks,sometimes using political influence. Feasibility studies forinvestments were never questioned and never studied,with the exception of a few banks that were providingloans from sources such as the World Bank, IFC or EIB.Pay-back periods were usually not closely matched toloan repayments, which caused constant cash flowimbalances.

Foreign capital, on the other hand, has not showninterest in long term investments either. The macropolitical disturbances which directly affected economicstability and growth, coupled by continual rapidfluctuations in the capital markets, made it almostimpossible for any long term investor to take the risk.

The history of private equity needs to be evaluatedbearing in mind such factors and therefore can beanalyzed in four periods with distinct features.

1. Period 1: The first period, before 1999, may becalled the “nomadic investment period”;

2. Period 2: The second period was between 1999and 2000 where we see the “first wave” ofprivate equity efforts happening in numbers;

3. Period 3: The third period between 2001 and2005 may be regarded as the long take-offperiod; and

4. Period 4: The fourth period is 2006 to date andcan be fairly presented as the “period whenpotential is finally being realized”.

This background section by no means attempts to becomplete and the numbers provided below may not befully accurate. However, it is believed that theinformation provided is pretty close to what has actuallytranspired.

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To summarize the history up front, the total amountinvested between 1995 and 1998 was approximatelyUS$ 36 million in 10 companies. Approximately US$ 114million of investments were made in 13 companiesbetween 1999 and 2000. However, the 2001 crisisbrought a slowdown in private equity activity until 2003.The total number of investments between 2001 and2005 was estimated as 13 and the amount invested wasapproximately US$ 167 million. In 2006 and 2007 todate, 15 investments were made and approximately US$2.5 billion was invested. The table below summarizesthese investments and Table-1 and Table-2 in Appendixlist private equity investments in more detail.

However, this history provides lessons and conclusions forinvestors and companies and is therefore provided herefor review. Let’s analyze each period and then try toproject the situation going forward.

Before1999

1999-2000

2001-2005

2006-2007

Total

Estimated number ofinvestments

10 13 13 15 51

EstimatedTotal InvestedAmount US$million

36 114 167 2.527 2.844

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Period 1: Before 1999 – The Nomadic Investment Period

The main reason we may refer to this period as the“nomadic investment period” is that the early entrantswere quite brave investors who invested opportunisticallyin companies at times where volatility in the markets wasat its peak. The country changed governments at timesalmost annually. It was almost impossible to forecastahead in Turkey and therefore the chance of exiting suchilliquid investments (i.e. investment into companies nottrading on the stock exchanges) with positive returns wasat great risk.

A Nomura backed company called Sparx InvestmentManagement Company can be regarded as the pioneerin this sector. In 1995 the company established its Turkishoffice to make private equity investments where thewords “private equity” were being heard for the firsttime in Turkey. Between 1996 and 1998 Sparx invested atotal of approximately US$ 27 million into Unal Tarım(Food), Arat Tekstil (Textiles), GSD Holding (Textiles),Biomar (Chemicals), Rant Leasing (Leasing), EkaElektronik (Electronics) and Aba Ofset (Printing Materials).Sparx made returns out of two of its investments (UnalTarim and Arat Tekstil) through IPO exits, after aninvestment period of two years and is thought to haveachieved positive returns. The investments were betweenUS$1-7.5 million.

A Turkish private equity firm called Vakıf Risk Sermayesiwas established in 1996 as a subsidiary of Vakıfbank, amajor Turkish Bank. The fund made its first investment ina production company called Teknoplazma.Approximately US$ 1 million was invested in thiscompany. However the company performed poorly andwas liquidated in 2005.

Merrill Lynch Global Private Equity from London wasanother early private equity entrant. In 1997 MerrillLynch invested in Termoteknik, a radiator panelmanufacturer, and resold its shares with a considerablereturn through a strategic sale in 1998.

In 1997, another interesting fund called the GlobalEquities Management (GEM) with the support ofTempleton, set up a hedge fund to invest mainly intostock market companies. However, for a long time theyhave not made investments private equity style. Thereason we mention it here is because of the record. Theybecome active as private equity in 2006.

Another early entrant was FMO, the NetherlandsDevelopment Finance Company. In 1998 FMO invested inTUYAP, the leading fair and exhibition organizer. FMOincreased its stake later in 2005 via a capital increasetogether with Is Venture Capital before its exit in 2006 byselling it back to the owners.

Approximately US$ 36 million was invested into theabove 10 companies during Period 1.

Period 2: 1999 - 2000 – The First Wave Period

A larger number of private equity investors startedentering and investing in Turkey, triggered by the macrosituation internationally, the dot-com and telecombubbles in 1999 and 2000 and the IMF backed programin Turkey. It is fair to call this period the “first waveperiod” for two reasons: the number of private equityinvestors exploring and investing in companies hassuddenly increased and we saw, for the first time, fundsbeing raised for Turkey. A number of foreign investmentmanagement companies established their presence byopening up offices in Istanbul and hiring localmanagement during this period as well. It is estimatedthat 13 major investments were made during this period.

Merrill Lynch initiated its second investment in 1999 inBIM, a food retailer. They exited this investment in 2006though an IPO and are thought to have made more thanthe initially expected returns. Citicorp investedapproximately US$ 2.4 million in 1999 in a frozen foodand tomato paste producer Merko Gıda which waspublicly traded on the ISE at that time. Citicorp exitedthis investment in April 2003 via sale of its shares on thestock market.

A London based private equity fund advisor, SafronAdvisors Ltd backed mainly by Middle East investors,invested in Jumbo, a silverware sector leader, and AlfaSecurities, a small Turkish securities firm, in 1999 and inNetOne, an internet service provider, in 2000. Totalinvestment in the three companies was estimated as lessthan US$ 15 million.

Vakıf Risk Sermayesi made investments in InnovaBioteknoloji (Medical) in 1999 and in Ortadoğu Yazılım(Internet, IP) in 2000, of approximately US$ 2 million andUS$ 1 million respectively. In 2000 the fund becamequoted on the ISE as well. However as in the case of theirTeknoplazma investment, these companies alsoperformed poorly and were liquidated in 2005.

AIG Blue Voyage Fund, which was established with a US$100 million commitment for Turkey, opened its offices inIstanbul in 1999. They made their first investment intoGalatasaray's sports equipment and accessories companyGalatasaray Sportif and in a movie theater chain, AFM, in2000. A US$ 21 million investment into GalatasaraySportif was made in January 2001 and recorded as thefirst private equity investment in Turkey over US$ 20million. The AFM investment was thought to be aroundUS$ 7 million.

The partnership between AIG Blue Voyage andGalatasaray went sour after the management change inGalatasaray in 2002, which resulted in lawsuits againstGalatasaray. This incident also was recorded as the firstlawsuit from a private equity investor against a companyin Turkey. The lawsuit was finalized with an agreementbetween the two parties in early 2004 and AIG exitedGalatasaray with good returns. They remain an investorin AFM.

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A Greek private equity investor Commercial Capital hasinvested US$ 10 million in a leading paper sackmanufacturer Işıklar Ambalaj. Işıklar Ambalaj also hadinvestments in Bulgaria and Egypt at that time and was apublicly traded company on the Istanbul Stock Exchange.This investment was recorded as the first major Greekinvestment into Turkey. The investment initially went well.But then primarily as a result of the major crisis in 2001,Commercial Capital had first to write-off the investmentand then to sell its shares in the stock market in 2002,earlier than expected and with much less than thedesired returns.

EMEA, a subsidiary of Egyptian-based EFG HermesGroup, invested US$ 21 million in the leading systemsintegrator Probil and US$ 1 million into a ceramictableware firm Gorbon Isil. EFG has not yet exited Probil.However the investment in Gorbon Işıl, which was closedright before the February 2001 crisis in Turkey, had to bewritten off the same year.

Bank of America was another group that entered theTurkish market in 2000, by establishing Taurus CapitalPartners with a US$ 60 million commitment. Theyinvested in BIM as a co-investor with Merrill Lynch andexited in 2006. Soon after Bank of America’s investmentin BIM, the Caisse de Depot et Placement du Quebec(CDP) and the Abu Dhabi Investment Authority joinedBank of America in the form of an investment club withUS$ 30 million commitment from each, bringing the totalcommitment to US$ 120 million. However, due to theeconomic crisis in 2001, this initiative did not last longand lost interest in Turkey.

In 2000, two important private equity players wereestablished. Turkven Private Equity, an independentinvestment management company, started with 3 younghighly educated entrepreneurs and the assistance of oneof the world’s largest private equity funds, Advent. Theymanaged to raise US$ 44 million from 5 majorinstitutions IFC, DEG, EIB, FMO, NBG and the TechnologyFoundation (part of the World Bank). As Sparx was thepioneer in Turkey for starting private equity investments,Turkven was the pioneer in putting together the firstindependent Turkish private equity house. Theydemonstrated that it was possible for a few Turkishindividuals with persistence to knock on the doors of theworld’s financial institutions and ask for funds to becommitted to Turkey. They had a co-investmentagreement with Advent and their investors. Advent inparticular committed to Turkven that any investmentmade by Turkven would be matched by Advent. Inaddition, the Is Venture Capital Fund, which wasestablished by Turkey’s largest bank Is Bank, committedclose to US$ 30 million for investing in Turkishcompanies.

Approximately US$ 114 million was invested in theabove 13 companies during Period 2.

The Turkish Venture Capital Association was establishedthe same year. However, the activities and effectivenessof this association in promoting private equityinvestments in Turkey have been somewhat limited so far.

This rapid increase in private equity activity slowed downsharply around the end of 2000 primarily with thebursting of the dot com and telecom bubbles in the US,followed by the 9/11 incident and the major economiccrisis in Turkey. Major funds and investment houses thatwere seriously looking into opportunities in Turkey lostmost of their interest and turned their focus back toWestern markets; these included Merrill Lynch, Citicorpand AIG private equity funds as well as major privateequity houses like Apax Partners & Co., Hicks Muse Tate& First Inc., Texas Pacific Group (TPG), Washington DCbased Emerging Markets Partners (EMP), JP MorganPartners, Capital Group, CVC Capital Partners, WarburgPincus, Globalvest, Softbank Emerging Markets andTempleton. Up until 2003 there were hardly anyinvestments made.

Period 3:2001-2005 – The Long Take-off Period

Despite the grueling efforts of leading investmentbankers, intermediaries and advisors to raise capital fromprivate equity investors for their Turkish clients, only ahandful of investments were made between 2001 and2002 primarily due to the crisis situation in Turkey. DEG,an industry-focused German investment fund, invested intwo publicly traded companies: approximately US$ 12million in the frozen food manufacturer Penguen in 2001and approximately US$ 6 million in the public jewelrycompany Goldas in 2002. Is Venture Capital invested in asystems integrator company Probil as a second investor,and ITD, the payment and voice systems provider, in late2002.

Private equity investments started to increase in 2003and 2004 as EU accession negotiations became apossibility and as the economy responded positively tostrict implementation of the IMF measures by thegovernments in power after the February 2001 crisis.These investments accelerated in 2005 after the start ofthe EU accession process on 17 December 2004.Investments between 2003 and 2005 were dominated byIs Venture Capital and Turkven Private Equity. Is VentureCapital continued to make investments: US$ 3 million inNevotek, a software developer, US$ 5 million inCinemars, a movie theater chain in 2003, US$ 3 millionin Step, a carpet retailer in 2004 and US$ 36 million inTuyap, a fair and exhibition company in 2005 (allapproximate values). They also took Is Venture Capitalpublic on the Istanbul Stock Exchange. Turkven acquired50% of UNO, a packaged bread producer, forapproximately US$ 13 million, in 2003, investedapproximately US$ 15 million in Intercity, the leadingfleet rental company in Turkey in 2004, andapproximately US$ 25 million in Trend Tech Group,Turkey’s leading mobile value added services provider in2005.

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Soros established a US$ 200 million fund together withOPIC in 2002, not only for Turkey but for SoutheastEurope, and started looking into investmentopportunities under Soros Investment CapitalManagement LLC. They made a total of 9 investments incountries like Serbia, Croatia, Macedonia, Bulgaria,Georgia and Turkey. These investments were beingmanaged from their Istanbul office. In 2003, Soros madetheir first and only investment in Turkey in Unikom Gıda,Unilever’s edible oils business (the “Yudum” brand). In2006 Soros decided to move out of investmentmanagement activity and changed its manager fromSoros Investment Capital Management to BedminsterCapital Management. Soros exited from 6 of theirinvestments in the region and exited the Yuduminvestment, in May 2007 via a strategic sale to NationalBank of Kuwait’s investment arm NBK Capital. NBKCapital Equity Partners acquired 100% of the shares ofYudum Food, the leading packaged edible oils companyin Turkey, from Bedminster Capital’s Southeast EuropeEquity Fund.

A Belgian investment management company ProbelCapital Partners have started to look for investmentopportunities in Turkey actively from 2004. They weremanaging OPIC based regional funds which werefocusing in Russia, CIS and Turkey. Their main fund islooking into investment opportunities in Turkey in theareas of oil&gas, logistics and maritime sectors. Theyhave not yet invested in Turkey but expected to realize aninvestment in 2007.

Approximately US$ 167 million was invested in theabove 13 companies during this period.

Period 4: 2006 – To date – The potential finally being realized

The year 2006 experienced 2 landmark deals. ProvidenceCapital acquired 45% of Digiturk, the only digital TVplatform of Turkey, for US$150 million and TPG acquired90% of Mey İçki, the leading liqueur manufacturer, forUS$ 810 million. These two deals were the first tripledigit investments in Turkish companies by private equityinvestors and were the final eye-openers for many largeprivate equity investors who have started focusing onTurkey quite seriously. Bancroft invested US$ 90 million inStandart Profil, a supplier to the automotive industry andAIG Global Emerging Markets Fund invested in For You, acosmetics retailer owned by the owners of BIM the foodretail chain (used to private equity from the old MerrillLynch days). The other major transaction was Partners inLife Science UK Ltd (PiLS-UK) and Citigroup VentureCapital International (CVCI) investing US$ 240 million inBiofarma, a leading generics pharmaceuticalmanufacturing company in the form of a leveraged buy-out. The acquisition finance for this deal was arranged byGaranti Bank.

Deva İlaç, a publicly listed pharmaceutical companyexperienced investor battles in 2006. Advent Pharma, thepharmaceutical arm of Advent private equity, althoughsigned an MOU with the company to buy shares, GEMGlobal Equities Management S.A., who already hadcollected 24% of the company from the stock market atthat time, made a move and out bid Advent Pharma’soffer. Nevertheless, as Advent decided to withdraw dueto the financial turmoil in summer of 2006, GEM had theopportunity to call shares at a much lower price to reachmajority. As a result Eastpharma (52,8% majority ownedby GEM) took control of Deva. GEM Global EquitiesManagement S.A., earlier in 2006, has bought EmekSigorta from the SDIF’s portfolio of companies for overUS$ 1 million, with the assumed objective ofrestructuring and then exiting with good returns.

Meanwhile Is Venture Capital continued to invest in 2006and acquired shares in the fleet rental and managementcompany Beyaz Filo Oto Kiralama for approximately US$10 million, while Turkven invested approximately US$ 10million in Pronet, a security provider. In 2006, Is VentureCapital has exited from 2 of its investments Cinemarsand Tuyap by selling the shares back to the shareholderswhereas Turkven exited its Uno investment in 2006 with3 times its original cost in 2003 back to the originalshareholders. These were the first exits in Period 3.Average deal size in Is Capital Ventures and Turkven werearound US$ 10 million. Their objective has always beento exit investments in 3-5 years, in line with worldstandards.

Two major fund-raising initiatives occurred in 2006 aswell. Antika Partners raised a fund, the Actera Fund, ofapproximately US$ 400 million mainly from twoCanadian pension funds (The Canada Pension PlanInvestment Board and Ontario Teachers' Pension Plan)and EIB. Actera made their first investment in Mey Icki asa co-investor with TPG recently.

Dundas Unlu has arranged a US$ 150 million specialsituations fund called Dupem to invest in long-termabove average returns. They are actively seekinginvestment opportunities.

Most recently in May 2007, CVCI has invested in Boynerand Beymen with US$ 46 million and US$ 146 millionrespectively. This investment was made a day after Turkeywent into political shake-up due to the presidentialelections. Again in May 2007, İş Venture Capital investedUS$ 5 million in Ode Yalitim, a company active in theinsulation sector.

A London-based real estate fund called the Ottomanfund made its first major investment in Turkey. The fundinvested US$ 110 million in land of 1 million sqm in Riva,Istanbul for development. The Ottoman Fund Limited hasbeen set up to provide early-stage wholesale financing todevelopers of new-build residential developments in themajor cities and coastal destinations in Turkey. The Fund'sinvestment scope includes land purchase and jointventure projects with local and other partners.

More than US$ 2.5 billion investment into 15companies has been made in the 18 month periodfrom the beginning of 2006 to date.

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Another subject worth mentioning here is the initiativesof certain Turkish holdings and companies during eachperiod mentioned above, who have allocated some oftheir funds to make investments with a private equityphilosophy. The first initiative was Fiba Holding, anaffiliate of Finansbank, establishing Girişim Holding in1996. Girişim acquired a majority of Gima and Endi foodretail stores and immediately started an expansionproject. They exited by selling both companies toCarrefour in May 2005 for a total of US$ 132.5 million.

Esas Holding was established in 2000 by Şevket Sabancıand his children Ali Sabancı and Emine Kamışlı butbecame more active after 2004. It has made 9investments in 4 main sectors. Medline HealthcareServices, Pegasus Airlines, Çoban Yogurt, İzAir Airlines,Bonservis Food Sales and Distribution, Promed ElectronicsClaims Processing, Medair Air Transportation andElectroWorld Electronics Retail (jointly with Dixons). It isnot yet clear whether the Group has a philosophy ofexiting from these investments within a certain timeframe, but their initial investment philosophy can beregarded as private equity style.

iLAB Holdings, established in 2000, was also such aninitiative. The company focused on investing incompanies which have based their operations on internetbased technologies. Their first investment was intoKariyer.Net, a human resources portal. They have alsoinitiated projects themselves and started growing themsuch as Kariyerakademi.net, Sigortam.net, Chemorbis,Steelorbis, Treda and BESOnline.net. In March 2006 theyhave invested in a company called www.gittigidiyor.com,which later became a member of the ebay company.

Access Turkey Capital Group, established in 2005 by thesame owners of iLAB Holdings with the objective ofinvesting in mid to large size growing industrialcompanies, made their first investment in Olgun Çelik, anautomotive spare parts company.

Turkcell, the leading telecoms mobile operator in Turkeyhas initiated an incubation project in 2000 after its IPOand started investing into new technology and contenttype companies. However, this approach was halted soonafter the economic crisis in 2001.

Brightwell Holdings was established in early 2006 by anex-owner of the Technology Holding, with the objectiveof investing private equity style investments in varioustechnology-related sectors in and outside Turkey. TheGroup is currently looking into investment opportunities.

Such initiatives are being discussed by manyentrepreneurs nowadays. We expect to see aconsiderable increase in the establishment of suchinvestment holding companies primarily due to the fundsaccumulated in the hands of many Turkish shareholdersas a result of numerous share sales. Recent FDI inflowreaching a total of US$ 30 billion in 2005 and 2006 inthe form of M&A in Turkey has led to an accumulation ofsuch funds. Owners who have sold their companiesand/or assets are looking for new investmentopportunities and the private equity philosophy seems aninteresting way of realizing new investments. Althoughthe tendency of Turkish owners is to invest in companieswhich they actually manage, rather than setting up afund and having investment managers manage, webelieve this will also change over time.

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Most private equity transactions over the last 12 yearswere realized with the considerable efforts of a fewTurkish intermediary institutions and key individuals.Among those TSKB, Ata Yatırım, Yapı Kredi Yatırım,Garanti Yatırım, Dundas Ünlü and PDF have madepositive contributions to the take-off of this asset class inTurkey. Big-4 accounting firms have also contributed tothese investments in various capacities by providingfinancial advisory, tax structuring, due diligence andvaluation services.

Since many of these transactions were in the range ofUS$ 5-20 million, London based investment banks havenot shown interest since the fee income would be muchless than their expectations. Only a few boutique Londonbased investment advisors have assisted in thecompletion of some transactions. After the two landmarkdeals in 2006, big investment banks also started focusingon such transactions.

8

9

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To be able to tap into this source of funds, the Turkishprivate sector needs to approach the investmentmanagement companies, since the investors are generallynot disclosed and known to anyone other than theinvestment management company itself. The investmentanalysts and decision makers in these investmentmanagement companies are generally young butsophisticated and experienced in financial analysis as wellas in sensing growth opportunities. They can practicallyunderstand whether there is an investment opportunityfor them in less than an hour after the case is explainedto them. One of two things usually happens when aTurkish company interacts with an investmentmanagement company:

1. If the company is dealing with such an investmentmanagement company for the first time and doesnot have a good corporate finance advisor whounderstands the private equity world well, thesituation is more or less an unpleasant experienceand the dialogue may not last long. Even if thecompany has a case, since the expectations of theprivate equity investor are not known, a negativeoutcome may result even where there was aviable transaction.

2. If the company is prepared to tap into privateequity capital with a good corporate financeadvisor or is experienced enough in their dealingswith the private equity world, then the dialogueprogresses well up until the closing phase. Thetransaction usually occurs unless any unexpectedlegal or accounting matter arises during the duediligence phase , or any macro issues such aspolitical or economic concerns surface andbecome a deciding factor not to invest in thecountry at all.

It should be noted that since private equity investmentmanagement companies are not strategic investors, inother words they cannot know the business as themanagement does, they invest their money intocompany management to run it according to the agreedbusiness plan. Therefore it is key to have a good andcommitted management team with integrity on boardwhen companies start their discussions.

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Although they have developed numerous techniques forsearching for and sensing good investment opportunities,it seems that investment management companies oftenmay not have sufficient resources to spend the time andeffort with the company on their radar screen to try todevelop the investment case. They tend to leave it to thecompany to do their homework and get themselvesprepared to approach them properly. This is very normaland an expected practice in the Western economies.However the Turkish company usually fails to preparecomprehensive material for the investment officer andfor this very reason, many deals which could be doneusually fail to proceed. Not only the company but theinvestor loses the opportunity.

It is also difficult for the investment managementcompanies to seek and manage investments from outsideTurkey. Most investment management companies haverealized this difficulty and are therefore opening upoffices in Turkey. It is also highly advisable to appointqualified Turkish individuals to run these funds in Turkey.It is quite complicated for a non-Turkish investmentmanager to conduct the pre-investment negotiations andafterwards to manage the investment as a boardmember of the investee company.

10

The chances of attracting private equity capitalincreases quite substantially if the company:

• can demonstrate that it possesses goodand able management,

• has at least 3 years audited financialsaudited by one of the big-4 firms and

• has a clear and detailed business planfor at least 5 years.

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Turkish companies usually have two main concerns intheir dealings with the investment managementcompanies: company valuations and exits.

Company Valuations: Valuation of the company is ofcourse one of the areas where most of the deals are cutor broken. In the last few years since Turkey’s riskpremium has decreased and the stock market has risenconsiderably, company valuations have started toapproach EU levels and it became easier to agree on acertain valuation. In earlier periods, due to Turkey’s risksthe companies were valued with discount rates of morethan 20% on DCF valuations – not to mention lowmultiples when comparing with comparables - and theshareholders were reluctant to sell their shares at thosevaluations.

Exits: Investment management companies stay with theinvestment for a short period of time and then would liketo exit from the company. Exit plans, apart from valuationof shares, are another major deal breaker issue whichmost businessmen usually overlook initially. Turkishbusinessmen in nature are great entrepreneurs inentering new businesses. However, exiting from thesebusinesses in 2 to 7 years is generally not part of theirplan. Since this is the case, they can’t really understandor want to relate to the exit mechanisms. Private equityinvestors exit either by taking companies public on thestock market or through what is called a trade sale. Inother words, selling to a strategic buyer. In many

instances, investors prefer the option of selling 100% ofthe company at the time of exit to get the desired return.Turkish company owners not being accustomed to theidea of exiting their businesses fully alongside theinvestor in a 2-7 year period, do not welcome the idea inmany cases. Further, many concepts such as drag along,tag along, put options, call back options and alike arenot well understood and because of that many dealsagain do not happen.

It should also be noted that since investmentmanagement companies in many instances need to closethe fund that they have raised and start the nextfundraising activity, they can become aggressive inclosing funds in order to show investors their goodreturns as a reference for new fund raisings. This in turnhas the potential to put stress on investee companieswhere investment management companies may becomepushy for exits.

Private equity investors, on the other hand, need to havecomfort first in the macro situation of the country andthe sector, before they look into the company. Once theyfeel comfortable with this outlook, then they concentrateon three major areas: (i) company management, (ii)transparency of accounts and corporate governance, and(iii) clear growth strategy and business plan. Unlesscompanies provide comfort to investors in these threeareas, there is little to no chance that a deal can getdone.

11

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Although Turkey has an up-and-down history of private equityinvestments, the scene still remains unclear as far as the success andadoption of the private equity investment philosophy and suchpartnerships is concerned. Once the presidential and parliamentaryelections are out of the way in 2007, we expect to see over US$ 2billion private equity funds committed for investing in Turkishcompanies beyond 2007.

Turkven and Is Venture Capital claim to have looked into over 600 and850 investment opportunities respectively since their inception in2000. The number of investments made as a result of this screening,however, was 6 and 7 respectively. Taurus, Soros, AIG and Citicorphave also looked into numerous deals - and have invested into 1 or 2at the end.

We expect to see an enourmous amount of screening activity by thecurrent investors going forward as well. Apart from the alreadyinvested ones, investors like KKR, Carlyle, 3i, Blackstone, BedminsterCapital, Euroasia Capital Partners, Apax, CVC, Probel CapitalManagement, The Blackstone Group, Hellman & Freidman Europe Ltd,Ashmore Capital as well as investors from the Gulf Region such asNational Bank of Kuwait Capital, Kuwait Investment Authority,Istithmar and Abraj Capital are looking into investment opportunities.Among others Probel, NBK Capital and Carlyle have already set uptheir offices in Istanbul getting ready for investments, expected to befollowed by others. These groups hired mostly ex-corporate financepartners from the big-4 audit companies and/or consultancy firms.This was also the case for most other Turkish based investmentmanagement companies in the past.

Turkish entrepreneurs, who have accumulated funds from selling theirshares in their companies in the last two years and are planning toinvest private equity style, are expected to increase. Also we’ll see anincrease in the initiatives from Turkish intellectuals and qualified youngprofessionals to raise funds and make considerable investments in thecoming years.

It will be quite a competitive environment for this asset class toidentify the right investment opportunities with desired entryvaluations. From now on we expect to see a higher hit ratio for themsince the severe competition will not allow that much of a luxury inthe selection of deals. With the appetite of foreign strategics inentering the Turkish market through acquisitions, it will be even morechallenging for private equity investors to get into deals due to thegenerally higher valuations accepted by strategic investors ascompared with the private equity investors and their exit requirements.It is highly advisable for both investors and companies to utilize theskills of high quality intermediaries, which help make deals close.

Unless we experience severe macro disturbances domestically orthrough international crises, we expect to see investment battleshappening in Turkey for the first time in Turkish history.

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As the effects of globalization increase, coupled withstrict banking rules and regulations and increasedtransparency in the capital markets transactions, Turkishcompanies may tend to seek more and more privateequity type capital as an alternative to their own capitalor long term bank borrowings to expand their reach. Andas Turkey progresses towards the EU and the economygrows, private equity investors will expand the level oftheir interest to invest in Turkish companies. We believethe number of transactions executed will increasesignificantly over the next decade.

Today Deloitte is one of the leading corporate financeadvisors in this respect for both sides. As DeloitteCorporate Finance, we understand the dynamics andmechanisms that are needed to help companies andinvestors strike a deal and create value for both parties.We know that a company needs to clarify its position firstand therefore we prepare the company to solidify itsgrowth objectives, strategies and business models beforesearching for capital raising alternatives. We preparecompanies on the valuation, exits and alike and briefthem prior to their interaction with the investmentmanagement community. Therefore they are wellprepared even before the first meeting.

A tip for Turkish Companies

We highly recommend Turkish companies to consult withDeloitte Corporate Finance prior to their decision to tapinto private equity markets for any reason. In most cases,we open new avenues for them in their minds whichresult in better business prospects. Clients talking withDeloitte will gain a global perspective in doing businessrather than focusing just on Turkey and their currentbusiness practices. This way they approach private equityinvestors in a more clear way and increase the chance ofclosing a deal.

A tip for Private Equity Investors...

And for private equity investors, we recommend a similarapproach that it is best to work with a good corporatefinance advisor to identify high return opportunities.Most private equity groups try to meet Turkish companiesthemselves in which the majority of the meetings provedead-ends. We believe a significant portion of thesedead-ends can be turned into investment opportunitiesfor an investor. As Deloitte Corporate Finance, we canadd value from identifying the right opportunity for theinvestors and assist them all the way to the closing. Werecommend private equity investors to direct suchpotential companies to intermediaries / advisors likeDeloitte Corporate Finance to increase the chances of aworkable deal.

14

Deloitte Corporate Finance let both sidesunderstand each other by assisting them totalk the same language.

15

1995 - 1998: The Nomadic Investment Period – Estimated Total Investment USD mil. 36

Number Year Buyer Target Company Sector Ownership

EstimatedInvestedAmount(USD mil.)

Exits

1 1995 Nomura (Sparx Group) Unal Tarım Food Minority 2 Yes

2 1995 Nomura (Sparx Group) Arat Tekstil Textile Minority 2 Yes

3 1996 Vakıf Risk Sermayesi Teknoplasma Production Minority 1 Yes

4 1996 Nomura (Sparx Group) Eka Elektronik Electronics Minority 2 Yes

5 1996 Nomura (Sparx Group) Aba Ambalaj Packaging Minority 6 Yes

6 1997 Nomura (Sparx Group) Rant Leasing Leasing Minority 2 Yes

7 1997 Nomura (Sparx Group) GSD Holding Textile Minority 8 Yes

8 1997 Nomura (Sparx Group) Biomar Biotech Minority 1 Yes

9 1997 Merrill Lynch Investment Termoteknik Radiator Panel Producer Minority 5 Yes

10 1998 FMO Tüyap Arts & Ent. & Recreation Minority 7 Yes

1999 - 2000: The First Wave Period – Estimated Total Investment USD mil. 114

Number Year Buyer Target Company Sector Ownership

EstimatedInvestedAmount(USD mil.)

Exits

1 1999 Vakıf Risk SermayesiInnovaBiotechnology

Medical Minority 2 Yes

2 1999 Merrill Lynch Investment BIM Retail Minority 15 Yes

3 1999 Citicorp Inv. Services Merko Food Minority 2 Yes

4 1999 Safron Advisors Ltd. Alfa Menkul Brokerage House Minority 5 Yes

5 1999 Safron Advisors Ltd. Jumbo Kitchenware Minority 6 Yes

6 2000 Commercial Capital Işıklar Ambalaj Paper & Packaging Minority 10 Yes

7 2000 Safron Advisors Ltd. Net One ISP n/a 4 No

8 2000 AIG Blue Voyage Fund Galatasaray Sportif Soccer Marketing Minority 21 Yes

9 2000 AIG Blue Voyage Fund AFM Arts & Ent. & Recreation Minority 7 no

10 2000 Vakıf Risk SermayesiOrtadoğu YazılımHizmetleri

Internet, ISP Minority 1 Yes

11 2000 EFG Hermes Group Probil System Integrator Minority 21 No

12 2000 EFG Hermes Group Gorbon Işıl Tablewear Minority 1 Yes

13 2000 Taurus/ Bank of America BIM Retail Minority 19 Yes

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16

2001- 2005: The Long Take-off Period – Estimated Total Investment USD mil. 167

Number Year Buyer Target Company Sector Ownership

EstimatedInvestedAmount(USD mil.)

Exits

1 2002 İş Venture Capital Probil System Integrator Minority 6 No

2 2003 İş Venture Capital Nevotek Information and IT Majority 3 No

3 2003 Soros Investment CapitalUnikom GıdaSanayi

Food Majority 13 No

4 2003 İş Venture Capital Mars Sinema Arts & Ent. & Recreation Majority 5 No

5 2003Turkven Private Equity /Advent

UNO Food Majority 13 Yes

6 2003 İş Venture Capital ITD Information and IT Minority 4 No

7 2004 İş Venture Capital Step Halicilik Furniture & Carpets Minority 3 No

8 2004 MT Invest Karyateks Textile Majority 1 No

9 2005 İş Venture Capital & FMO Tüyap Holding Arts & Ent. & Recreation Minority 36 Yes

10 2005Turkven Private Equity &Pound Capital Inv.

Trendtech andRetomedia

Information and IT Minority 25 No

11 2005 İş Venture Capital Tepe Cinemax Motion Picture Majority 14 No

12 2005The International InvestorK.C.S.C. (Kuwait)

Docar OperasyonelFilo Kiralama A.Ş.

Real Estate & Leasing Majority 29 No

13 2005 Turkven Private Equity Intercity Real Estate & Leasing & Minority 15 No

2006 - Todate: The Potential Finally Being Realized Period – Estimated Total Investment USD mil. 2,527

Number Year Buyer Target Company Sector Ownership

EstimatedInvestedAmount(USD mil.)

Exits

1 2006Providence Equity PartnersLtd.

DigiturkBroadcasting (exceptInternet)

Minority 150 No

2 2006 Texas Pacific GroupMey Icki Sanayi veTicaret A.S.

Beverage and TobaccoProduct Manufacturing

Majority 810 No

3 2006

Partners in Life Sciences(PiLS) & Citigroup VentureCapital International(CVCI)

Biofarma İlaçSanayi ve TicaretA.Ş

Pharmaceuticals Majority 240 No

4 2006Turkven&AdventInternational

Roma Plastik Plastics Majority 76 No

5 2006 AIG Capital Partners Inc. For You Retail Trade Minority 25 No

6 2006Global Finance House,IDB, Goldman Sachs,Babcock Brown

TAV Airport Operations Minority 650 No

7 2006Turkven Private Equity andFMO

Pronet GuvenlikHizmetleri

Administrative and Supportand Waste Managementand Remediation Services

50-50 10 No

8 2006 Bancroft Private Equity Standart Profil Automotive Majority 90 No

9 2006 Is Venture CapitalBeyaz Filo OtoKiralama

Fleet Rental n/a 10 No

10 2006 Ottoman Fund Riva (GS) Real Estate n/a 110 No

11 2006GEM Global EquitiesManagement S.A. (GEM)

Deva Holding Pharmaceuticals Majority 162 No

12 2007 Citigroup Venture Capital Boyner Retail Minority 46 No

13 2007 Citigroup Venture Capital Beymen Retail 50-50 143 No

14 2007 İs Venture Capital Ode Yalıtım Mineral Products Minority 5 No

15 2007 National Bank of Kuwait Yudum Edible Oil Production Majority n/a No

17

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Fund / Inv. Management Co.Estimated Investment To date

for Turkey (million USD)Estimated Commited Amount

for Turkey (million USD)New Fund Raising for Turkey

(million USD)

Currently Active

Actera none 100 400

Advent 44 44 n/a

AIG Blue Voyage Fund 28 100 none

AIG Capital Partners Inc. n/a n/a none

Bancroft Private Equity 90 n/a none

Bedminster Capital (Soros) 20 20 none

Carlyle none 100 none

Citicorp Inv. Services 2 3 none

Citigroup Venture Capital 189 190 none

Dundas & Unlu none 150 none

EFG Hermes Group 21 22 none

Euroasia Capital Partners none none 150

FMO 25 25 none

GEM 162 250 none

Global Finance House / IDB /Goldman Sachs / Babcock Brown

650 650 none

Great Circle Fund none 50 none

İş Venture Capital 68 120 none

Merrill Lynch Inv. 20 30 none

National Bank of Kuwait Capital none 100 none

Otoman Fund 110 150 none

PİLS / CVCI 240 240 none

Pound Capital Inv. 13 13 none

Probel Capital Management none 50 none

Providence Equity Partners 150 150 none

Texas Pacific Group 810 810 none

The Int. Investor KCSC 29 29 none

Turkven Private Equity 75 75 300

Total: 2.746 3.471 850

Inactive

Commercial Capital 10 10 none

Nomura (Sparx) 27 30 none

Taurus/ Bank of America 19 60 none

Safron Advisorts Ltd. 16 20 none

Vakıf Risk Sermayesi 6 10 none

Total: 78 130

Grand Total: 2.824 3.601 850

18

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Investor Companies Invested Sector

Girişim Holding (Fiba Holding) Gima Food Retail

Girişim Holding (Fiba Holding) Endi Food Food Retail

Esas Holding Medline Healthcare Health

Esas Holding Pegasus Airlines Airline

Esas Holding Çoban Yoğurt Food Production

Esas Holding İzAir Airlines Airline

Esas Holding Bonservis Food Sales Food Retail

Esas Holding Promed Electronics Electronic

Esas Holding Medair Airline

Esas Holding Electro World Electronics Electronic

İLAB Holding Kariyer.net Consulting

İLAB Holding Sigortam.net Insurance

İLAB Holding Besonline.net Insurance

İLAB Holding Chemorbis E-marketing (chemicals)

İLAB Holding Steelorbis E-marketing (steel)

İLAB Holding Treda IT

İLAB Holding Gittigidiyor.com Online Auction

Access Turkey Group Olgun Çelik Steel

19

This publication contains general information only and is not intended to be comprehensive nor to provide specific accounting, business, financial, investment, legal, taxor other professional advice or services. This publication is not a substitute for such professional advice or services, and it should not be acted on or relied upon or used asa basis for any decision or action that may affect you or your business. Before making any decision or taking any action that may affect you or your business, you shouldconsult a qualified professional advisor. Whilst every effort has been made to ensure the accuracy of the information contained in this publication, this cannot beguaranteed, and neither Deloitte Touche Tohmatsu nor any related entity shall have any liability to any person or entity that relies on the information contained in thispublication. Any such reliance is solely at the user’s risk.

20

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