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4 | ifr special report | May 2010 EQUITY CAPITAL MARKETS


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Boosting the local market


Turkey is unlikely to become a major player in the interna- tional capital markets until it manages to develop its domestic capital markets. In the local equity markets, serious efforts are underway to improve liquidity and so- phistication. However, entrenched obstacles need to be overcome before meaningful progress can take place.


One statistic perhaps best sums up the dichotomy at the heart of Turkey’s domestic capital markets: foreign investors own 70% of the domestic equity market. This shows that foreign, institution- al investors approve the Turkish investment thesis and the country’s macro prospects. But it also confirms that the investable opportunity is small: there is just not enough investment product to go around. It also shows how underde-


veloped the local investor base is compared to what is needed. No market that is so dominated by foreign investors can claim developed status. And so what is needed, perhaps more than anything in Turkey’s drive to modernise its financial system, is the development of a statistically significant onshore institu- tional investor base. “Turkey’s capital markets


are dominated by commercial banks and not by institutional investors as happens in other European countries,” said Ercan Uysal, chief economist at Unicredit in Istanbul. “The amount that is invested by these institutions in equities is miniscule. Over the next 5-10 years we really have to see


public ownership increasing dramatically.”


Looking at the makeup of the domestic equity investor base, it is largely high net worth individuals with some participation by insurance companies and a fast growing public pension system. But the overall numbers are small. For instance, in 2008 the total amount of assets in the insurance sector was TL24.7bn, with new premiums being written for a value of TL11.8bn, according to the Association of Insurance and Reinsurance Companies of Turkey. However these figures, while small, stem from a base of only TL4bn of total assets and TL2.5bn of new premiums in 2001.


In the pension system, the


growth has been equally rapid, but as a whole the numbers are still small. According to the Pension Monitoring Centre of the Under-secretariat of the Treasury, on April 30 2010 there were 2.1m people in Turkey who had private pensions. These pensions contained total assets of TL9.6b, up from virtually zero in 2001. This rapid growth is a cause


for hope among many in the market. It is seen as evidence that a major structural shift is taking place. “ I believe that in ten years time the private pension providers will be the biggest institutional investors in the market,” said Uysal. “The private pension market really is growing exponentially at the moment.” Nevertheless, compared to the massively overcapitalised banking system, these institu- tional investors make up a tiny


proportion of the domestic capital markets. Moreover these investors tend to only invest in either government securities or very rarely into other fixed income products. With inflation and interest rates running around the 8% mark, there has been very little incentive to take the added risk of exposure to equities. “These pension providers will be very cautious about going into the equity market,” said Uysal. Others agree that not only does the investor base need to expand, but also the mentality of those investors needs to shift from fixed income to equity. “We need to create an equity culture here,” said Ugur Bayar, CEO of Credit Suisse Turkey in Turkey. It is important to help Turkish institutional investors gain access to the equity markets.” The lack of institutional


investing in the equities market is best seen by the activities in the mutual fund market. The market is divided into A and B fund structures, where A type funds carry a minimum of 25% in Turkish equities and B type funds have no obligation to invest in equities at all. It is estimated that 97% of the TL 26bn mutual fund market are B type funds – essentially money market funds, issued by banks. In other words, these are retail bank deposits masquerading as capital markets instruments.


Getting these investors into equities will be the route to a long term sustainable domestic investor base that will support the development of an onshore equity market.


“In 2009 there was very little equity capital market activity in Turkey. But in 2010 there has already been an unprecedented level of activity.”


These companies are structured in the classic emerging market conglomerate waterfall: ultimate control is retained by the family, who through a holding company structure then control a range of subsidiaries in a variety of sectors. There are some minority listings of sub- sidiaries or even the holding company, but these listings are not meaningful, either in terms of the size of the public share, nor the control that they give public investors.


Over the past five years other large companies have come onto the exchange, but these have largely been secondary privatisations of government owned entities such as Turk Telecom or Turkish Airlines. In 2008 and 2009, during the crisis, new issue activity ground to a halt. But 2010 has seen a remarkable comeback, with eleven companies applying for a listing since the beginning of the year and two starting to trade. Economy Minister Ali Babacan said at the conference that he expects up to 40 new companies to seek a listing by the end of the year, which would be the highest number since 1988.


“In 2009 there was very little equity capital market activity in Turkey,” said Ugur Bayar, CEO of Credit Suisse in Turkey. “But in 2010 there has already been an unprecedented level of activity.”


Deals scrape through


The first deal to successfully list this year was Koza Gold which raised TL576m (US$378.5m) in April from the sale of


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