TBY talks to Fawaz Al-Issa, Chairman of the Board of Turkapital, on the opportunities his firm is seeing in both Turkey and Azerbaijan.
TBY To start with, can you tell me about the genesis of Turkapital?
FAWAZ AL-ISSA Kuwait Finance House (KFH) came to Turkey in 1989. During the 1980s and early 1990s there were hardly any foreign investors coming to Turkey. Kuwait Finance House (KFH) is therefore considered as one of the first comers to Turkey. KFH invested in Turkey by establishing Kuwait Turkish Participation Bank (KTPB) as a wholesale bank, and then shifted more to retail. Since then, KTPB has faced several financial crises, including the 2001 financial crisis in Turkey, which resulted in the birth of the Banking Regulation and Supervision Agency (BRSA). As a result of the new banking regulations, banks were more and more restricted in terms of their investments. That was the ground for us to start thinking more strategically. We decided to establish an investment arm, while letting the bank continue with its commercial banking activities and to expand even further in retail. This is where the idea of Turkapital (TK) came from. TK was established in late 2007, and registered in the Kingdom of Bahrain with a capital of $150 million. The main focus for operations and investments is Turkey and the Turkic republics including Eastern Europe, while the management is in Kuwait.
In terms of Azerbaijan, how would you gauge appetite for private equity?
In general, private equity (PE) is now entering into a new era globally while it is relatively new in this part of the world, and therefore it becomes a challenge. The laws and regulatory landscape in Azerbaijan do not necessarily match investors’ requirements and standards yet. International investors come with a set of basic and general expectations, for example; to see international financial accounting standards applied, or issues pertaining to the tax regime, which may not be available in this part of the world. As a result, this could potentially double the amount of work to be done by investors when it comes to PE, especially in areas like valuations and entering into any investment idea. To put it simply, although it is a tough market environment, it is true for most emerging markets. In Azerbaijan, we have looked at some private equity opportunities in the past but we haven’t realized any yet.
Do you foresee the environment changing?
Yes, it has to and it has been when looking back 3-4 years ago when conditions and the environment for PE were discouraging. I think that given Azerbaijan’s potential in terms of geographic location and economic growth prospects, there are many attractive opportunities for global investors. It’s also a two-way street; while some of the more aggressive investors would accept some of the local standards and regulations, Azerbaijan is also changing to meet some of the international investor standards and expectations.
It makes me curious to hear you mention aggressive investors. How would you describe Turkapital’s style of investment?
TK is a relatively small, conservative investment house. I wouldn’t characterize Turkapital as an aggressive investor. PE investors continue to seek opportunities at an increased rate and this is to efficiently utilize capital. TK is able to do this in Turkey as Turkey is a different story for us, because we’ve been in the country for 22 years as a group, and have what it takes in terms of the local know-how and network, therefore it is easier to enter into and to conclude PE projects. However, in Azerbaijan we are relatively new and it will take some time for us to realize a private equity deal.
Where do you specifically see potential in Azerbaijan?
There’s a lot, especially in public sector and infrastructure projects. This can be in transportation, in health care, and even in education. On the other hand, the private sector offers a lot of opportunities as well. The region as whole is characterized as an emerging market region, and this provides a lot of good opportunities for us to consider. As a sector, real estate also offers a lot of opportunities like development and regeneration projects or fixed income. I remember after establishing our office in Azerbaijan three years ago, we came to rent office space and we were limited to about four or five sites in Baku. Back then, this gave me an idea about what the market offers in terms of vacancies for office space and the potential as well. I also had a chance to go outside Baku and saw the need for much infrastructure development.
What are the chances of Azerbaijan developing a competitive Islamic finance sector?
Azerbaijan is a member country of the Islamic Development Bank (IDB) and I believe IDB may lead to promote or introduce Islamic banking laws in Azerbaijan in order to attract investors. Turkey’s banking law, which includes participation bank laws, can be a good example for Azerbaijan to take into consideration. Participation banks have been operating for 25 years in Turkey and are successful. I believe Azerbaijan can benefit from Turkey’s experience in developing legislation for participation banks.
How would you rate participation banking in Turkey compared to other countries?
Outstanding, from both regulatory and performance perspectives. There are four participation banks in Turkey. Given the great potential for growth, evidenced by the track record performance over the last 10 years, I am optimistic for further growth. Turkey’s participation banks were brought under the umbrella of the BRSA and the banking law. I brought a copy of Turkish banking law to the Central Bank of Azerbaijan (CBAR) a few years back for them to get an idea of the Turkish regulatory model. As a group, KFH has experience in helping draft such laws. We did this in Kuwait, in Bahrain, and in Turkey. That’s why we gave a copy of the banking law to CBAR for them to take it into consideration.
When the financial crisis struck the world, there was a lot of talk about how well sharia-compliant banking performed. How do you think the industry has fared during the crisis?
Given a sharia-compliant bank is asset-based in its modes-operandi, one would assume that a sharia-compliant bank would outperform a non-sharia compliant one, especially in a financial crisis similar to that which struck the world recently. However, given the magnitude of the crisis, there were many asset-based financial institutions hit and negatively impacted. I am more comfortable now with the term “ethical banking” instead of sharia-compliant, especially after the crisis. Greed, which many attribute as one of the
main causes that lead to the crisis, is assumed to be absent in a true ethical banking institution.
Coming back to private equity, can you tell us about some of your flagship investments?
We closed the year 2010 with losses, but this is natural for a holding in its first years of operation. During those years we’ve entered into the automotive sector by acquiring Autoland in mid-2008. It’s an auto fleet leasing company for corporate clients. The model under which we operate has been tested and is almost risk free. When we bought the company, it had 100-150 cars. We closed the year 2010 with a fleet size slightly above 2,000 cars. Our aim is to continue growing the fleet size. We’ve also increased Autoland’s capital to about $20 million. Another investment completed was a greenfield; an alternative insurance company, established in Turkey under the name Neova. The sector is regulated in Turkey under the Turkish Treasury. It took us more than a year to finalize all establishment procedures, to comply with all requirements, and for Neova to finally start operations in December 2009. We closed the year 2010 with good results in terms of performance and volume. We use KTPB, which has over 150 branches nationwide, as one of our insurance sales points, and we have contracted with other banks as well, bringing our number of distribution channels to about 500. This is the strength of Neova insurance. We have had 15 months of performance and we have issued over 300,000 policies. A third investment realized is in real estate, through another subsidiary of Turkapital called Iskan Real Estate with a capital of about $50 million. Iskan started with about 120 residential units for sale and to date has sold around 50. Another investment was realized in 2010, when we invested in acquiring warehouses in Istanbul. It was an industrial real estate investment of $20 million. Also, in Azerbaijan, in 2011, we closed our first deal and this was the acquisition of a part of a shopping mall. The deal size was $5.5 million and we own part of a shopping mall, which has tenants. Finally, in the Republic of Tatarstan we have established an investment company with the government of the republic and we are looking to close some deals before the end of 2011.
Macro-economically, what do you think are Azerbaijan’s strengths and challenges?
Azerbaijan is an emerging market with high potential for growth. In 2008 it had the highest growth rate in the world; I think it was around 26 or 28%. This may have been driven by rising oil prices. However, Azerbaijan as an emerging market has to re-position to have a diverse economy that is less dependent on oil as a main source of income and to attract foreign investment. Azerbaijan needs to take more concrete steps to diversify the economy. Upgrading regulations to match international standards and norms, transparency, and bureaucracy are all part of the challenge and are very important when it comes to attracting foreign investment. I think there is great potential in Azerbaijan and I think that the region as whole must re-position itself to provide improved legislation and a solid investment environment.
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