Turkey's largest private sector pension fund and third largest industrial conglomerate is planning to make strategic investments across Europe, as Oliver Scott explains
OYAK's unusual approach involves taking strategic stakes in companies, in a similar fashion to a private equity fund. The fund typically takes a majority holding that allows it to gain management control and use the dividends to boost its investment portfolio.
Until now, OYAK's focus has been domestic.
"We will always be a Turkish pension fund looking for Turkish assets, yet growing foreign investor interest in Turkey has meant that the pricing environment for strategic assets has become more challenging," said Caner Oner, chief investment officer at OYAK Group. "Meanwhile, recent sales have meant that we have a considerable amount of cash available for investment. And we believe a geographical diversification is timely, and would consider investing if a good opportunity arises.
"We do not have any set investment limit or any geographical preference," added Oner. "We're very flexible and will judge each case on its merits."
However, OYAK is not considering the real estate market or green-field operations. Rather, the company is seeking equity investments that are likely to distribute regular dividends or achieve returns in the short term. And with domestic demand for electricity growing strongly, power generation is sparking keen interest. OYAK already has a strong knowledge of the sector from its 49% stake in a Turkish joint venture with Evonik, the German power company.
Other initiatives will focus around existing core business lines such as cement, iron and steel and the automotive sector. And they may also feature occasional partnerships with strategic foreign investors - OYAK has previously formed joint ventures with key corporations able to add significant expertise.
A strong example of this is the initiative with Renault - the co-owned (49% OYAK, 51% Renault) car plant opened in 1971 is now Renault's largest outside of France and a major foreign currency earner for Turkey.
When considering non-Turkish investments, OYAK's strategy will remain identical to its investment strategy in Turkey.
"OYAK's main mission, as a pension fund and as a private equity-style investor, is to earn the maximum return for its members," said Oner. "It is as simple as that. We have 235,000 members - made up of approximately 200,000 serving armed forces officers and civilian workers, as well as 35,000 pensioners - looking for growth in the fund, or to maximise their lump sum payout on maturity. So it is important that the fund creates both long term and short term value."
Established in 1961 with the aim of providing its members with supplementary retirement benefits, the initial source of OYAK's funds was a compulsory 10% levy on the base salary of its members.
Yet OYAK was given another strategic aim at its inception, one that remains used in its vision and mission statements - to assist in accelerating the country's economic development. Indeed, much of this mentality survives. For instance, Erdemir, the formerly state-owned Turkish steel producer, was acquired with this purpose very much in mind.
Meanwhile, OYAK has been strategically expanding its other industrial holdings while divesting its interests in financial services. In December 2007, ING Group, the Dutch financial institution, acquired 100% of the shares of OYAK Bank for $2.673bn. This sale was followed with OYAK's February 2008 divestment of its 50% stake in AXA-OYAK for $525m.
"We are simply playing to our strengths," said Oner. "Buying where we think we can add value and negotiate a good price, selling where we think the time is right to achieve a good profit. This has allowed us to achieve a strong return on investments in sectors seen as less strategic while consolidating our place as a leading industrial conglomerate in Turkey."
OYAK completed the acquisition of Erdemir - the group's largest acquisition to date - from the state's Privatisation Administration in February 2006. It was purchased in a single cash transaction for $2.96bn.
For the first time, the decision was made to undertake large scale borrowing and to partially finance the deal through the international credit markets. Thanks to its strong track record and favourable credit ratings, OYAK secured a total of US$2.6bn in medium and long term funding in two international bank loan syndications.
Immediately after the acquisition, OYAK launched a comprehensive restructuring project aimed at strategically realigning Erdemir and boosting its productivity.
A new management team and a new set of policies were introduced, with beneficial results almost immediately. In 2006, Erdemir posted the best financial and operational results in its history, booking a net profit of YTL685m (US$555m), 3.5 times greater than that of 2005.
And in 2007, Erdemir announced a net profit of YTL679m (US$551m).
This slight dip in net profits (-0.8%) came as the result of an increase in its cost base as well as a sharp rise in corporate tax. Meanwhile, an upward surge in Erdemir's domestic sales has fuelled an 11.2% increase in revenues.
"Erdemir represents a long term commitment for OYAK," said Oner. "Yet we operate a private equity model, so if a bidder made a high enough offer for any of our current investments, we would, of course, have to consider it seriously."
Meanwhile, OYAK also holds some leading positions in other growing sectors - it has a dominant position in the domestic cement market for instance. The industry currently enjoys very favourable pricing and margins on the back of significant exports as well as booming residential construction.
OYAK also has a solid position in logistics, as well as in automotive manufacturing and distribution, thanks to the joint venture with Renault SA. And as well as being a pension fund, OYAK provides its members with services such as loans, mortgages and disability and death benefits.
The private equity approach comes about largely because when OYAK was established, Turkey's capital markets were particularly immature. There were very few well-rated securities offering opportunities for investment, thus making the strategic ownership and nurturing of companies the option most likely to produce strong returns.
It is not unknown for pension funds to take strategic holdings in businesses - funds such as the California State Teachers' Retirement System (CalSTRS) and The Ontario Teachers' Pension Plan (OTPP) follow a similar model. Yet OYAK ventures further by making controlling investments and being heavily involved in the management of the assets within its portfolio.
"Maximising profit is our guiding objective," said Oner. "And our particular investment strategy allows us to generate returns that are unthinkable for other pension funds."
OYAK has delivered an annual return on assets that is consistently higher than consumer price inflation - over 2.5 times higher in 2006. The 2006 result corresponds to a 25.1% rate of return, with OYAK members' reserves reaching YTL5.1bn (US$3.6bn), up YTL1bn (US$500m) from the previous year.
The 2000 change of management, which brought in a team of former bankers led by CEO Coskun Ulusoy, brought with it a change of strategy. The aim was to diversify into fixed income and other non-private equity investments. Yet the new management had to immediately cope with the 2000-01 Turkish financial crises.
Timely investments in domestic financial instruments allowed OYAK to cope with the ensuing economic difficulties, and saw it well positioned for the stellar growth in the Turkish economy since 2002.
And with sustainable growth very much the Turkish story in more recent years, the asset mix has since shifted back to around 65% private equity holdings.
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