Investment strategy, process and resources
ISGSY’s strategy is to invest in Turkish lower-mid market companies mainly through taking equity stakes in companies. Among the factors it looks for when making an acquisition are companies in an expansion or later phase, with excellent growth prospects, a strong management team and a sustainable competitive edge. It seeks to add value to these companies by sourcing acquisitions for them, enhancing operational efficiencies, facilitating expansion into new markets and formulating an optimal capital structure. It is sector agnostic and currently prefers transactions in the US$5-20m range where it believes it has a comparative advantage given the recognition of its name in Turkey and the international firms’ preference for larger transactions. ISGSY is looking to invest in niche businesses like data centre management and online travel agency where it believes there are favourable long-term trends.
ISGSY has 11 investment professionals with experience in project finance, consulting, strategic planning, research, corporate finance and the Turkish industry. Most have been at ISGSY for several years and the CEO, Murat Ozgen, has been with ISGSY for 14 years.
ISGSY screens approximately 150-200 opportunities per year and aims to achieve an IRR of
15-20% in US dollar terms with an exit goal between three and seven years. After an initial screening, ISGSY undertakes a detailed assessment, which includes sector research; competitor analysis and benchmarking; management quality reference calls; and financial analysis.
ISGSY investment team members firstly prepare deal entry forms and investment proposal forms regarding the candidate target company and after the approval within the investment team ISGSY employees prepare a report and present it to the investment committee. This makes a recommendation to the board of directors responsible for making the final decision. After a deal has closed, ISGSY monitors its investee company, and places representatives on the investee company’s board until finally a decision is made to exit.
Exhibit 2 shows ISGSY’s investments and exits since its formation. Altogether it has made17 investments totalling US$134m; it has exited 11 and achieved an average IRR on its exits of 26.5% on a US$ basis according to management calculations. It invested US$72.5m on the investments it has exited and earned US$166.9m as exit proceeds, a 2.3x money multiple. According to publically available data (Calpers), ISGSY is the only fund in Turkey with more exit proceeds than total investment amount.
Exhibit 2: ISGSY investments and exits
|
|
Sector |
Investment ($m) |
Exit date |
Years owned |
Exit ($m) |
IRR |
ROI |
2002 |
ITD |
Telecoms & IT |
1.9 |
2010 |
8 |
4.2 |
11.8% |
128.0% |
|
Probil |
Telecoms & IT |
3.2 |
2011 |
9 |
4.2 |
3.1% |
31.0% |
2003 |
Cinemars |
|
11.5 |
2006 |
3 |
19.4 |
30.3% |
69.0% |
|
Nevotek |
Telecoms & IT |
3.0 |
|
|
|
|
|
2004 |
Step |
Consumer |
3.5 |
2008 |
4 |
6.8 |
19.0% |
93.0% |
2005 |
Tuyap |
Consumer |
7.0 |
2007 |
2 |
10.8 |
45.8% |
54.0% |
2006 |
Beyaz |
Services |
4.0 |
2008 |
2 |
8.8 |
58.7% |
119.0% |
2007 |
ODE |
Services |
5.0 |
2012 |
5 |
10.5 |
17.0% |
110.0% |
|
Ortopro |
Healthcare |
14.6 |
|
|
|
|
|
|
Turkmed |
Healthcare |
2.5 |
2013 |
6 |
0.2 |
N/A |
-90% |
2008 |
Dr Frik |
Healthcare |
13.4 |
2011 |
3 |
30.5 |
34.6% |
128.0% |
2009 |
|
|
|
|
|
|
|
|
2010 |
Havas |
Services |
10.8 |
2012 |
2 |
19.7 |
26.7% |
82% |
2011 |
Aras Kargo |
Services |
9.8 |
2013 |
2 |
51.9 |
165.0% |
428% |
2012 |
Toksoz Spor |
Consumer |
15.9 |
|
|
|
|
|
|
Numnum |
Consumer |
15.0 |
|
|
|
|
|
2013 |
|
|
|
|
|
|
|
|
2014 |
Radore |
Services |
7.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2015 |
Mika Tur |
Consumer |
4.6 |
|
|
|
|
|
Total |
|
|
133.6 |
|
4 |
166.9 |
26.46% |
130% |
Source: ISGSY, Edison Investment Research
ISGSY currently has six private equity investments, which we show in Exhibit 3 below. The average value of its investments is around US$9m (calculated independently according to IFRS principles), so is within the current preferred investment range of US$5-20m. In one of the six investments ISGSY has a minority shareholding and in one of the investments it has a majority shareholding with a co-investor. It is prepared to consider taking minority positions if it does majority-like deals by getting strong reserved matters and exit provisions. In addition, with minority deals exit alternatives such as IPO and selling back to the majority shareholder are more probable. This gives it an advantage in sourcing deals compared with other firms that are not so flexible.
In 2015 ISGSY increased its holding in Ortopro to 83.64% from 32.5% at a cost of TRY25m. It has become the majority owner now and will change the company’s business model to focus more on direct sales to hospitals, as well as increase exports through expanding its dealer network around the world. Ortopro has appointed a new CEO since ISGSY took majority control.
Exhibit 3: ISGSY private equity investments at 31 December 2015
|
Acquisition date |
Fair value (TRYm) |
Ownership |
Description |
Nevotek Telecoms & IT |
30 September 2003 |
13.1 |
81.24% |
Nevotek, headquartered in Turkey, is a global player in IP convergence, covering IP telephony (IPT), IP TV and connected real estate technology for use in hospitality, healthcare, multi-tenanted real estate and public space management. Its platform allows the rapid development of unified applications across voice, data, video and building management. Nevotek has the largest client base in convergent IP with over 150 channel partners and clients in 50 countries, including Holiday Inn, Crowne Plaza, Sheraton, US Air Force, W Hotels, Royal Caribbean, Le Meridien and SABIC. In addition to its core enterprise software business, Nevotek has accelerated developing cloud-based products, which aim to build a recurring revenue model for the company. Nevotek’s cloud products aim to solve customer engagement problems in the hospitality sector. Hotels’ lack of engagement with guests from reservation to check-out results in missing opportunities for additional revenues. Nevotek’s cloud products will help hotels to increase ancillary revenue generation as well as increase customer engagement and satisfaction. |
Ortopro Healthcare |
10 December 2007 |
33.5 |
83.64% |
Ortopro is a Turkish orthopaedic implant company. It runs a modern production facility with 2,750m2 of closed space in Izmir. In addition to sales of its own brands in Turkey and international markets, Ortopro serves as a contract manufacturer to global orthopaedic companies. In 2015 Ortopro generated 45% of its revenues from exports, mainly with its own brand, Covision. It now offers a complete product portfolio to local hospitals through its 66 retailers and direct sales to more than 50 hospitals. Ortopro creates barriers to entry in its manufacturing product groups from its cost advantages and R&D. The Turkish government also provides some price advantages to local producers, which favours Ortopro. The production provides significant cost benefits compared to US and European players due to lower employee costs. Production in Turkey also has the advantage of a skilled labour force and rapid delivery time compared to Far Eastern players. ISGSY has become the major shareholder of the company with 83.64% share in December 2015. |
Toksoz Spor Consumer |
13 November 2012 |
35.5 |
55.00% |
Toksoz Spor is a leading sporting goods retailer and wholesaler in Turkey. It is the Turkey region distributor of global sports brands like Arena, Head, Umbro and O’Neill. Wholesale customers include hundreds of dealers over all of Turkey’s cities, department stores, other sports retailer chains, sports clubs, universities and sports federations. Toksoz Spor sells more than 100 brands in its 37 retail stores in 21 cities. It has become the multi-brand sports retailer with highest floor area (c 27,500sqm) in Turkey after the investment of Is Private Equity. The company’s store number and store area rose by 79% and 69% respectively after ISGSY’s investment. Retail outlets accounted for 64% of total revenue in 2015, from 50% before ISGSY’s investment. The company also sells products under its own brand, Sportive. Sportive sales accounted for 11% of the company’s revenues in 2015. |
Numnum (Istanbul Food and Beverage Group IFBG) Consumer |
5 December 2012 |
23.4 |
61.66% |
Istanbul Food and Beverage Group (IFBG) is a leading Turkish restaurant service and gastronomy company operating under five major brands: Mikla, Numnum, Trattoria Enzo, Terra Kitchen and Kronotrop. Mikla is an upscale fine dining restaurant, at the forefront of Istanbul’s contemporary dining scene, serving new Anatolian cuisine in the historic Pera region. Mikla’s wine menu won an Award of Excellence from the wine magazine Wine Spectator for four consecutive years between 2011 and 2014. Mikla was also awarded the World’s 96th best restaurant in June 2015. Numnum is a full-service casual restaurant chain, serving American/Italian cuisine. It operates 10 successful stores, five in Istanbul (Levent Kanyon, Umraniye Meydan, Bagdat Caddesi, Brandium Atasehir and Akasya Acıbadem), four franchise restaurants in Ankara (Panora, Gordion, Armada and Tepe Prime) and one franchise restaurant in Bursa Podyum Park Mall. Trattoria Enzo opened its doors in 2014 in an upscale shopping mall of Istanbul Akasya AVM, and serves ‘homemade’ Italian food. Terra Kitchen, a casual self-service concept, has the motto ‘eat well, feel good’. Kronotrop is an upscale speciality coffee roastery and bar in three different locations in Istanbul (Cihangir, Maslak Orjin and Allianz Tower) and also operates a roasting facility, R&D and training centre in Maslak, Istanbul. Kronotrop is listed among the top 25 coffee shops by Buzzfeed. |
Radore Services |
1 December 2014 |
16.0 |
25.50% |
Radore provides data centre services in Turkey, including co-location, dedicated cloud, web-hosting and domain sales. Established in 2004, it offers data centre solutions to over 2,000 clients, including both individuals and corporations, to meet the emerging requirements of the growing data processing and internet economy in Turkey. Radore made its first data centre investment in 2005. According to Deloitte Technology Fast 50 rankings, Radore was the fastest-growing data centre in Turkey in 2012, 2013 and 2014, and was among the top 10 fastest-growing technology companies in Turkey in 2012 and 2013. It currently hosts more than 2,100 servers and the investment supports a capacity of up to 10,000 servers. Radore will be one of the largest independent data centre companies in Turkey, in terms of revenues. M Selcuk Sarac, former owner of another data centre company in Turkey, became 16% shareholder in Radore by purchasing shares from Is PE (3%), DGSK PE (3%) and founder Z Kubilay Akyol (10%). Is PE’s IRR in this partial exit was 21.6% in US$ terms. ISGSY expects the data centre market to expand with international demand, in addition to the growing potential in Turkey. The growth in the sector is expected to be driven mainly through corporate companies’ shift from internal to external data centres. ISGSY aims to take Radore a step further in this rapidly growing sector by acquiring new customers and increasing its sales as a result of operational improvements, upgrading services/infrastructure, completing ongoing investments and evaluating new investment opportunities. With the new investments, Radore will be one of the largest independent data centres in Turkey, and consequently in a position to shape the growth in the sector. |
Mika Tur |
6 November 2015 |
10.4 |
20.00% |
Mika Tur markets and sells its services under six general categories: domestic hotels, corporate travel organisations, outbound tourism, flight tickets, cultural tours and transport services. Its main operation is domestic hotel accommodation booking services; it has access to more than 1,305 hotels as of 2015, of which it has exclusivity, guaranteed rooms or price contingencies. It provided services to 730k customers in 2015. Mika Tur’s revenues rose by 26% in 2015. |
Total |
|
131.9 |
|
|
Source: ISGSY, Edison Investment Research
Two of the company’s investments, Nevotek (IP converge) and Ortopro (orthopaedic implants) have international exposure through their international sales, which amount to 98% and 45% of revenue respectively. They could in theory benefit from current economic conditions, in which the value of the Turkish lira has declined sharply, as it could boost their competitiveness in international markets but, if those markets are also slowing down, the increased competitiveness may not boost sales. It should be noted that the current estimated fair value of the private equity investments is higher than the initial investment cost in Turkish lira terms.
The other four investments – Toksoz Spor (sports good retailing), Numnum (domestic restaurants) Radore (Turkish data centres) and Mika Tur – are more focused on the domestic market, but Radore generates 40% of its revenues in US dollars. Toksoz Spor and Numnum are more exposed to consumer spending, so would suffer from any slowdown in GDP growth. Radore is more exposed to technology changes and, even though it is focused on the domestic market, is less sensitive to a slowdown in the economy.