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In today’s world, both globally and in Turkey, an increasing number of companies are constantly looking for funding and investment, either to develop a promising newly created company or to increase the profitability and efficiency of an already established business by moving it to the next level. In order to meet this need, there are also individuals or companies, i.e. investors, with the capital to provide the injection of liquid in exchange for equity participation or other certain advantages. in the invested company.
From this background have emerged a number of concepts that describe various modes of investor-company relationships, such as angel investing, private equity, and venture capital. In this article, we will explain these last two concepts, as they are the most frequently encountered business investment methods and are frequently confused due to their interconnected nature in both regulation and application.
How are private equity and venture capital similar?
Private equity and venture capital are modes of capital investment that both involve third-party investors or companies investing in a company that needs a capital injection. In both of these forms of investing, investors invest capital in a private company in exchange for equity and generally aim to exit that investment once it has generated a profit for them.
Another similarity between the two approaches is that they are both practical investments, as investors generally want to be involved in the business, and may even want to take a majority stake in the company in order to manage it directly, or to be otherwise represented on the Board of Directors. While this means a change in control of the business from previous shareholders, it also means new and valuable expertise that accompanies the capital injection, potentially increasing long-term profitability.
What are the differences between private equity and venture capital?
While the private equity and venture capital models largely overlap, and are sometimes even used interchangeably, there are in fact key differences between the models in their target investments, ownership strategies, and equity strategies. exit.
First, the models target very different types of businesses. Private equity investors generally look for established companies that are struggling and need a capital injection for one reason or another. Private equity investors buy into the company, make significant changes and improvements that help it generate a healthy profit, and then exit. This approach also means that private equity investors take on less risk, because they enter an established business not in the hope of multiplying their investment, but of bringing it back to a profitable situation, realizing a relatively weak in the process. .
In contrast, venture capitalists are looking for start-ups that offer unique and new market insights, which are usually companies that have not yet made a profit and still need to establish further their operations in order to become a real player in the market. This approach carries a much greater risk because the venture capitalist is essentially investing in an idea. However, since investment targets are small operations that are just getting started, the potential return is much higher and the venture capitalist can potentially earn many times their original investment upon exit.
Another point of dissimilarity between private equity and venture capital is the shareholder strategy favored by the investor. While investors ensure that they retain some control of the business in both forms of investment, private equity investors are much more likely to require a majority stake in the business, essentially giving them the full control of the business in most cases. This allows private equity investors to operate freely within the corporate structure and also to make any decision regarding corporate governance. In contrast, venture capitalists usually ask for a minority stake in the business. Although this tends to cede some level of control and insight to the venture capitalist, the original shareholder, who is usually the originator of the idea, retains ultimate decision-making power.
Finally, the exit strategies of venture capitalists and private equity investors are also very different. As a private equity investor looking for a quick, minor return, he aims to make the business profitable as soon as possible and seeks a quick exit thereafter. A venture capitalist, on the other hand, is looking for a substantial payout and is willing to stay with the company for longer periods. Either way, once satisfied, the investor can exit the company through several methods such as an IPO, trade sale, or secondary buyout.
Turkish Legal Framework on Private Equity and Venture Capital
As with any form of investing, corporate investors and the companies they invest in also need some form of regulation to streamline the investment process while providing protection against some of the risks. Therefore, venture capital and private equity investments are regulated areas in many jurisdictions.
In Turkish law, there is no legal distinction between private equity and venture capital and no legislation regulates general aspects of capital investments. Instead, the 2013 Venture Capital Firms Communiqué [“CVCIC”] and the 2014 Venture Capital Funds Communiqué
[“CVCIF”]both issued by the Capital Markets Board of Turkey regulate the formation and operation of venture capital investment companies
[“VCIC(s)”] and venture capital funds [“VCIF(s)”], which are particular forms of companies and funds dedicated to capital investments. Although the releases do not specify the form of investment that should be undertaken by VCICs or VCIFs, they are more suited to investors seeking venture capital investments.
Companies formed or operating under CVCIC must be incorporated as joint-stock companies with a registered capital of at least 20,000,000 Turkish Liras, must have the phrase “Venture Capital Investment Company” in their title and must be listed on the stock market now or in the future. future, with a floating rate of at least 25%. There are also several other requirements that must be met by these companies and their founders, which are explained in detail in the CVCIC.
On the other hand, the funds set up under the CVCIF are not legal persons and are only funds set up by several approved entities such as portfolio management companies or venture capital investment companies.
VCICs and VCIFs operate under the regulation of the Capital Markets Board of Turkey, but are also subject to numerous financial incentives as a result. The main advantage of VCICs and VCIFs are tax incentives. Income from VCICs and VCIFs is exempt from income tax, while dividends from VCIC and VCIF shares are also exempt from corporation tax. Companies that invest in VCICs or VCIFs also benefit from a variety of other tax incentives aimed at increasing participation in venture capital investments.
As a developing economy, Turkey has an emerging market for start-ups, as well as a functioning capital market, which creates a favorable environment for investment by foreign or domestic companies of any form. CVCIC and CVCIF also help create an incentive process for potential investors looking to invest in Turkish companies.
Meanwhile, start-ups and other companies seeking investment should approach potential investors with a clear plan and proposal regarding shareholding structure and growth strategy to secure a reliable investment that will help serve businesses while providing adequate legal and financial protection.
The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.