Year: 2011

Turkish fund extends asset base

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OYAK established by law (number 205) in 1961 as a private corporate entity, is subject to private law and is financially and administratively autonomous. It can be seen as a second tier private pension fund, primarily for the officers (commissioned and non-commissioned) of the Turkish Armed Forces, all of whom are permanent members (Reserve Officers are defined as ‘temporary members’). It provides pension, death and disability benefits, as well as housing and personal loans for its members. All of OYAK’s members are also members of the Turkish state pension scheme – OYAK can be seen as a system to provide benefits to its members to supplement their state benefits.

The company operates a revenue sharing system and, as such, it is not a ‘defined benefit’ scheme, for which the precise level of benefits can be calculated in advance. Instead, returns generated by OYAK are shared among all eligible members – nearly 260,000 at end of 2010.

In addition, OYAK acts as an investment holding company, generating returns for its members through investments in financial instruments and its equity participations in more than 60 companies – including subsidiaries, joint ventures and affiliates in the iron and steel, cement, automotive, energy, logistics and other sectors.

As a pension fund, OYAK’s primary objective is to preserve its members’ assets and to maintain its actuarial balance, together with the maximisation of member returns. Its investment strategies are designed accordingly.

Focus on profitability and cash generation
OYAK’s investment strategy is to enhance the profitability and cash generation of the group and to strengthen its position in key sectors, whilst maximising opportunities to further diversify holdings through measured participation in privatisation initiatives or purchases of majority interests in companies operating in the industries and sectors on which it has decided to focus. It does not invest in equities that are not likely to distribute dividends regularly or that are not likely to distribute dividends in the relatively short term. Investments generating insufficient profit or which no longer fit the investment criteria of the group are sold if there is an opportunity to recognise a profit.

OYAK’s investment strategy is risk averse and centres on preserving its members’ reserves. OYAK invests its assets in fixed income instruments and in equity participations in order to generate income and capital gains and to provide real returns above the rate of inflation. In order to safeguard its assets, OYAK has sought to diversify its financial investments and has pursued an investment allocation strategy that takes into account market risk and seeks to hedge its exposure to market volatility.

Equity investment strategies
OYAK controls and actively manages all of its subsidiaries, and exercises shareholder rights to the greatest extent possible in those partnerships and affiliates when it does not own a controlling interest.

OYAK seeks to maintain a majority of the share capital of its subsidiaries, and to ensure they follow its investment strategies and management principles. To that end, either OYAK’s CEO or an executive vice president act as chairman of any subsidiary in which OYAK owns the majority of outstanding shares.

Following various acquisitions and disposals during the last 50 years, OYAK’s strategy is to invest its members’ funds primarily in industrial sectors such as automative, logistics, iron and steel, cement and concrete, and energy, together with any businesses that may complement these core sectors – but not necessarily within Turkey. Currently most of the group’s investments are located in Turkey, but it is seeking opportunities to further diversify its holdings geographically.

Clear corporate governance framework
OYAK has a well defined corporate management structure, which encourages a high level of corporate responsibility, accountability and governance. Because OYAK is primarily a pension fund, its statutory objective is the preservation of members’ assets and the maintenance of its actuarial balance. OYAK selects its investments according to prudent financial management principles. It has four levels of corporate management structure: a representative assembly, a general assembly, a board of directors and a general directorate.

OYAK’s corporate governance framework is designed to provide clear lines of accountability between the management of OYAK and its members. OYAK’s representative assembly, with around 75 members, meets every three years and is responsible for the election of 20 of the 40 members of the general assembly. The general assembly holds regular annual sessions, which are akin to shareholder meetings but last two weeks. For strategic investment decisions, the board of directors may also convene extraordinary meetings of the general assembly.

The board of directors consists of seven members plus the CEO. Three members are elected by the general assembly from a list of candidates, and four other members – who must be graduates specialised and experienced in the fields of finance, law, banking or insurance – are selected by an election committee established specifically for this purpose. As a result, the members of OYAK represented at all levels of management are able to exert a significant amount of influence over the investment decisions of OYAK and the group.

Skilled management team
The OYAK Group has, throughout its history, benefited from the knowledge and experience of its senior management teams. These industry professionals have significant experience in the group’s areas of investment, including iron and steel, cement and concrete, and automotive. Senior executives of OYAK sit on the boards of directors of its subsidiaries, joint ventures and affiliates, ensuring consistency and compliance with the group’s overall strategy.

Brand, reputation, transparency
OYAK imposes on itself, and throughout its subsidiaries, high standards of transparency and accountability. The protection of its members’ rights is paramount in its operations. OYAK’s financial management principles emphasise its corporate accountability towards the concerns and interests of not only its members but also of the wider Turkish community.

OYAK’s annual report is voluntarily made public in order to demonstrate its commitment to corporate transparency. The group’s accounts are audited by international accounting firms and are reviewed by its internal auditors who also sit in on board meetings. For further transparency and accountability, and to elicit their comments, the minutes of OYAK’s annual general assembly meetings are mailed to all of OYAK’s members.

Ratings by Moody’s and S&P
OYAK was the first corporate group to be rated by both Moody’s and S&P in Turkey. Until recently both of OYAK’s ratings were above the sovereign, until Turkey’s rating was increased. Currently OYAK is rated Ba2 by Moody’s (equal to sovereign) and BB+ by Standard & Poor’s (one notch above sovereign). The recognition by the international ratings agencies of OYAK’s stability has enabled the OYAK Group to obtain stable medium and long term financing. OYAK is very active in international loan syndications as well as in private deals.

Proven record of successful investments
OYAK’s return on members’ assets was 2.2 times the CPI for the year ended 31 December 2009, with a rate of return (based on profit for the year) of 14.2 percent. In 2008 the rate was 26.3 percent, 2.6 times CPI, while for 2010 the it is expected to be around double CPI. OYAK has a consistently strong record of achieving annual returns for its members above inflation, despite a sometimes harsh and hyper inflationary economic environment.

Partnerships with major foreign and domestic corporate groups
The OYAK Group has partnerships in different forms with several major international corporations, including two ongoing partnership agreements with Renault Group of France for the manufacture and export of sale of automobiles in Turkey and a partnership with German company Evonik STEAG GmbH in one of Turkey’s largest power generation projects Iskenderun Enerji (Isken). In addition, the group is working on increasing its equity holdings outside of Turkey to diversify its geographical spread.

From pension fund to strategic investor
In its 50 years of history OYAK has come a long way from being solely a pension fund providing services and returns to its members, to become one of the largest and most profitable conglomerates in the country. It is recognised not only as a pension fund but also as a strategic investor, and its proven track record of consistent profitability, steady growth in assets, strong liquidity and strict adherence to corporate governance principles gives OYAK the domestic and international reputation and recognition it deserves.

Greece works to regain investor trust

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Then again, Greece was not the only member of the eurozone (a union which, unlike any successful financial organisation, seems to have based its existence exclusively on positive assumptions) to face financial difficulties.

Difficult decisions had to be made by the financially stronger eurozone members to provide assistance to weaker ones. Early in 2010 the decision was made that financial assistance be granted to Greece – not only from European sources, but also from the IMF.

But financial assistance is never free. Severe conditions were imposed, and the country was obliged to start a long and painful restructuring of its public management and finances by imposing strict public policies. However the public reaction against these policies sent Greece back to the top of the news, with images of protests against the austerity measures shown around the world.

Public reaction, however, is just one side of the coin. The other side is that austerity measures, when properly implemented with the support and guidance of the ECB and the IMF experts, may lead to an impressive reform of the legal framework, securing a cost efficient and revenue generating environment for investments. And undoubtedly Greece, especially today, is in great need of anyone willing to make new investments in its troubled but recovering economy. So, Greece has to prove itself – once again – as an investor friendly country.

Greece, even before the financial crisis and austerity measures, held a very strong record in attracting foreign investments. During the last two decades Greece completed a long list of large concession projects, one of the most favoured categories of foreign investments in Greece. Some of these, such as Athens International Airport and the Athens ring road, were undoubtedly the inheritance of the 2004 Olympic Games. Others that followed simply took a free ride on the project finance model, which was developed and tailor-made for Greece. Impressive projects, such as the Rion-Antirion bridge, the longest multi-span cable-stayed bridge in the world, and the new generation of large finance projects, such as the MK or E65 toll road concessions, which reached financial close less than three years ago, were organised and completed based on such a model.

Also, Greece had made it in the list of approved jurisdictions of some of the most rigorous and difficult-to-persuade investors. Equity funds, such as BC Partners, Rhone Capital, TPG or APAX, and strategic enterprises, such as Deutsche Telekom, have already completed a first round of sizeable – and in most cases successful – transactions targeting Greek companies.

This success in attracting foreign investment resulted from Greece’s years of experience in organising projects that require foreign resources. And Greece knows very well that the recipe for attracting foreign investment requires that an investor friendly jurisdiction can tackle one of the most significant risks: the legal one.

Both older and more recent pieces of Greek legislation provide for the creation of a safe legal framework and for the right tools for financing and completing large projects in Greece. An excellent example is law 3894/2010, a very ambitious piece of legislation that Greece enacted in late 2010 to attract foreign investors to Greece by introducing a fast track process for strategic investments. Also, older pieces of legislation deal with the legal risk. Legislative Decree 2687/1953, the oldest piece of Greek project finance legislation, allows for the creation of a secure legal environment for the foreign investments brought under its scope. Originally used in the shipping business, this decree was then applied to a whole range of projects, from casino investments to the international airport.

In addition, acting as a prudent full EU and EMU member state, Greece saw that all the EU directives dealing with various financial markets and taxation issues were adopted in good time. Moreover, the long list of new directives that preceded the Union’s enlargement have now become Greek law. Greece has also kept pace with all significant EU legal developments and directives in the fields of financial collateral, prospectuses, market abuse and transparency, take-over directives, markets in financial instruments and banking, harmonising all of the respective Greek law fields.

Further steps had been taken at a national level before the outbreak of the crisis to mark Greece out as an investor-friendly jurisdiction. These include the very recent modernisation of the bankruptcy and companies legal regime, as well as the enactment of the very useful bond and securitisation Law 3156/2003, which introduced the notion of private securitisation of receivables and modernised the framework for issuance of bonds by Greek entities. Law 3156, by providing for tax relief and finance-associated cost caps and limitations, and by deviating from traditional legal notions such as the assignment of claims, set a safe legal environment to raise funds for investments into Greece. Law 3156 has been consistently applied for the financing of virtually all the major investments made in Greece since 2003.

The austerity measures and strict public policy that came with the IMF and ECB’s support had only a positive impact on this already existing investor-friendly environment. The liberalisation of the provision of services regime, limitations on unreasonable union rights are some examples of such impact, which further facilitated the investor-friendly legal framework.

The recovering Greek economy is expected to provide for significant opportunities to everyone who is willing to take its risk. Whether these expectations will be fulfilled remains to be seen. One thing, however, is certain. Anyone who will take this risk can rely on Greece’s long standing commitment in sustaining and improving its investor friendly legal framework.

Rethinking sustainability

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It is a pity that the most abundant metal in the earth’s crust, which is also one of the most useful to mankind, is so difficult to render into a useable form. The chemical properties of aluminium make it appear only in combination with other elements, forming compounds such as aluminium sulphate and aluminium oxide.

Although scientists first extracted and identified the metal in 1825, it was not until 1888 that commercially viable processes were developed to obtain aluminium oxide from bauxite ore and extract the pure metal from aluminium oxide. The latter process, based on electrolysis, is still in use today, and its environmental impact in terms of energy use and CO2 emissions are an area of focus for leaders of the industry.

Which makes it all the more notable that the leading producer in the world, New York and Pittsburgh-based Alcoa, has won numerous awards, including the World Finance Best Carbon Markets Heavy Industries Pioneer – 2011, for its ground-breaking work on sustainability.  

“Sustainability is in our DNA,” says Kevin Anton, VP and Chief Sustainability Officer at Alcoa. “Just a few months ago the company created my position reporting to the Chairman and CEO with a mandate to further drive sustainability into everything we do, from working with suppliers, to continued improvements in our production processes, and helping to educate customers, partners and the public understand the environmental benefits of using aluminium solutions from Alcoa.”

First of all, the bad news. There is no question that the production of aluminium disrupts the landscape where bauxite ore is mined, consumes large amounts of electricity and produces waste. But each of these aspects of the production process is the subject of constant research and efforts to reduce or eliminate its impact – efforts which Alcoa is leading. However, based on the full lifecycle of Alcoa aluminium products, the benefits already outweigh the impacts.

At the beginning of the ore to metal transformation is the extraction of bauxite, which is generally done in open cast mines that have the potential to disrupt local ecosystems and the way of life of native people. Alcoa’s most recent mining project was opened in the Juruti region at the heart of the Brazilian Amazon region in 2009. This region is known to have one of the single largest high-quality bauxite deposits in the world, but it is also home to some of the most endangered habitats and the 35,000 strong Juruti Velho people.

The new mine is being cited as an example of how sensitively handled mining developments can benefit the local region as well as the mine owners. Following extensive consultations with the local community, Alcoa identified and implemented 20 environmental and 15 social and economic initiatives to fulfil its licensing requirement. Furthermore, under its own sustainability agenda, the company is investing extensively in additional community initiatives relating to health and education, as well as environmental programmes focused on minimising the removal of vegetation, preserving vital genetic material and seeds, and relocating threatened animals to preserved areas.

Since the century-old electrolytic process is still the only commercially proven method of producing aluminium, the production process remains a heavy user of electric energy. The industry is sensitive to this and has pursued opportunities to reduce its use of electricity. In the last 50 years, the average amount of electricity needed to make a pound of aluminium has been reduced from around 10 kWh to seven. In addition to using renewable hydroelectric power where possible, Alcoa has made a further commitment to achieve an additional 10 percent reduction in the energy intensity of its primary operations from a 2005 baseline by 2020.

A similar commitment has been made with respect to reducing byproducts of the production process. Alcoa has reduced GHG emissions 43 percent from a base year 1990 while more than doubling production – an impressive feat.  New environmental targets set by the company in 2010 take that achievement even further and call for a 20 percent reduction in total (direct and indirect) CO2 equivalent intensity from a 2005 baseline by 2020 and 30 percent by 2030.

These goals are just one part of Alcoa’s sustainability agenda, according to Anton. “We look at three distinct areas,” he says. “The first, of course, is the area of production – how do we produce aluminium in an environmentally friendly way. The second is the use of our product and how it can enhance the environmental performance of the products it goes into – such as making cars and trucks and airplanes more fuel efficient and therefore generating fewer emissions. The third is how we promote environmental awareness and protection… we view that as part of our role to help others in their journey toward a more sustainable world.”

It is the second area where Anton and his team believe even better improvements to the global carbon footprint can be made, and with good reason. Given its attributes of light weight, strength, malleability, superconductivity and non-corrosiveness, aluminium is the metal of choice for uses ranging from cooking and canning to space travel. Demand for the metal is growing fast, as aluminium is used to replace other materials in product design, and developing economies like China and India increase their consumption.

In 1900, annual output of aluminium was 1,000 tonnes; by the turn of the next century, production had reached 32m tonnes. Demand grew by around eight percent per annum from 2002 until the recession hit in 2008, when world aluminium production declined for the first time in fifteen years. Fuelled by growth in China, production has started to grow again, and in its report The Economics of Aluminium, 2009, Roskill Information Services Ltd forecast a total demand of about 58m tonnes by the end 2013.

“What many people fail to realise is how the use of aluminium in the place of alternative materials can enhance the carbon footprint of the product it goes in to,” Anton points out. “Obviously it is more relevant to the sustainability of our planet to look at the environmental impact of any item over its entire life cycle.”
One of the clearest examples of his argument is aluminium in the transport industry.  

In 2006, aluminium overtook iron to become the second most used material in new cars and trucks worldwide. Alcoa works closely with automakers to include aluminium in new car designs in ways that will improve fuel economy, reduce emissions and enhance vehicle performance. According to the International Aluminium Institute, a kilogram of aluminium used as a substitute for heavier metals in the car industry reduces petrol consumption by 8.5 litres and emits 20 kg less CO2. A 10 percent reduction in car weight results in a nine percent increase of fuel consumption efficiency. Essentially, aluminium provides three times the fuel economy benefit of high strength steel.

The same principle is being applied to a wide range of products in general use. Aluminium laptop computers are lighter, and do not need to rely on a fan because of the metal’s thermal properties – making them more energy efficient. At the worlds’ largest light metal research centre, Alcoa scientists are constantly working to exploit the unique properties of aluminium to enhance the energy performance of products in transportation, packaging, construction, lighting, electrics, electronics and surface coatings.

Of course, all of these products will eventually wear out and be discarded, spelling the end of their life cycle – but not of the aluminium content within them. Unlike most other constituent materials, aluminium is 100 percent recyclable without any loss of its natural qualities, and can be recycled an infinite number of times: that’s good news for the planet. And the recycling process uses a mere five percent of the energy used to produce aluminium from ore, so part of the Alcoa sustainability agenda is about encouraging as much recycling as possible to meet the growing demand for aluminium with this more energy efficient material.

“Aluminium is the most commonly recycled post-consumer metal in the world,” explains Anton. “Seventy-five percent of all the aluminium ever produced since 1888 is still in use today.”

With little financial incentive to recycle, consumers needed to be made aware of the environmental benefits of returning their beverage cans for reprocessing. Two years ago, Alcoa launched an initiative that gained the support of the entire industry to lift beverage can recycling rates in the US from 52 to 75 percent by the year 2015. Today that rate is 58 percent and growing. Europeans currently recycle just over 70 percent.

Sustainability is defined by the World Business Council for Sustainable Development as “ensuring a better quality of life for everyone, for now and for generations to come.” As the benefits outweigh the costs of aluminium, it forces us to rethink how we define sustainability in a complex world. For the sustainability team at Alcoa, the concept of lifecycle is an important part of judging aluminium, but they are not content to rest in their focus on constantly improving all aspects of their business process. Their commitment includes embedding sustainability goals in the corporate incentive compensation scheme, to ensure that everyone is focused on best practices and achieving improved levels of performance.

It is this commitment that has given investors confidence in Alcoa’s sustainability agenda – the company has now been listed on the Dow Jones Sustainability Index for nine years.

Banking group optimises on diversification

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When CBZ Holdings Limited became operational in June 2005, a period of intense growth through diversification began. This diversification propelled the establishment of CBZ Holdings (CBZH) as an entity poised to provide all client segments through various subsidiaries whose activities include banking, home loans, asset management, long term insurance, short term insurance, securities and properties.

The various activities provided by the different subsidiaries of the group are meant to ensure that a wide range of clients’ needs are met under one roof.
 
The products offered by CBZ Bank, the flagship of CBZ Holdings Limited include retail banking, electronic banking, corporate and investment banking, treasury, and home loans. The bank provides personal and corporate customers with a wide range of products to facilitate transactional, saving and investment requirements. These services can be accessed via the extensive CBZ Bank branch network in all major centres in Zimbabwe.

CBZ Bank offers development finance and through the bank’s microfinance and SMEs division entrepreneurs have access to solid assistance aimed at helping them realise their full potential.

To complement the basic retail banking products, customers can access card services and electronic banking which remove the restriction of banking hours.

Card-based transactions are available on an account debit and/credit basis while the bank’s innovative electronic banking facilities avail solutions ranging from Visa Gold, ATM, point of sale, and transacting through internet banking.

The CBZ Visa card is convenient for international travellers, offering the security of travelling without cash or travellers cheques. It can be used throughout the world at ATM and point of sale facilities displaying the Visa sign.

The bank’s dedication to electronic based services is also in line with the group’s drive towards environmentally friendly policies, such as moving towards a paperless society.

CBZ Bank’s Home Loans Division offers loans for buying and building houses or commercial properties, property investments, home improvements, property infrastructural development and refinancing.

Loans are extended to individuals directly or through employer assisted schemes, companies and other corporate bodies, land developers and strategic partners.

The Home Loans Division offers these financial solutions under customer focused sections, namely: private home loans, employer assisted schemes, commercial and strategic partnerships.

CBZ Bank is recognised internationally. Apart from the Euromoney Award for Excellence (1998), Best Domestic Bank in Zimbabwe (1999) and Best Domestic Bank in Zimbabwe (2000), the bank is a proud winner of two Business Awards in 2010: the Zimbabwe National Chamber of Commerce Best SME Empowerment Organisation of the Year 2009 and the Best Company Award in Banking by the Zimbabwe Quoted Companies Survey 2009.

With the continued growth of the CBZ Group, clients are now able to have all their financial services needs addressed under one roof as the diversification is designed specifically to make CBZ Holdings an extremely customer-centric financial services group.

IPO for US broker

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Achieving this success has been no small feat. The company’s progress over the last few years is a direct result of FXCM’s dedication to offering the most innovative trading platforms combined with a business model that works in the interests of both the broker and the customer.

An integral part of FXCM’s success, according to Drew Niv, is its ability to embrace each customer’s individual needs. While many of FXCM’s competitors limit their traders’ experience by offering a one size fits all approach to trading, FXCM has learned that all customers are different and have a variety of needs and demands.

An individual service
FXCM offers a suite of different trading platforms which allows them to service traders of all spectrums, from the more traditional customer who wants to trade using live charts, to a computer programmer who wants to write a bespoke trading strategy and have it execute automatically.

Drew Niv explains: “We have found that in offering such a variety, we have managed to cater to the majority of our traders’ needs.

“Also, our No Dealing Desk forex execution policy has been extremely well received. There are some refreshing differences between the FXCM business model and that of the classic forex brokerage firm. While many brokers act as market makers to their clients, resulting in them running a trading book against their clients, FXCM does not. Trading with FXCM means that we only make money from the dealing spread. We want our customers to be successful in their trading efforts so they will trade longer and more often.”

Thriving on competition
FXCM has also been expanding internationally over the last two years, concentrating on the UK market. Their latest acquisition is established London broker ODL Securities Limited.

“We are currently focusing on the UK primarily, which we believe will prove to be an excellent marketplace considering the range of trading platforms and excellent customer service we offer,” says Mr Niv. “We see the UK market as being an excellent place to expand into, despite there already being a host of rival brokers operating there. Although competition is aggressive in the UK, we do not believe there are any brokers who offer the same unique trading offering as we do.

“Overall, the international aspect to our business has had a largely positive influence on our business because it has allowed us to offer a local service to certain areas where forex trading is very popular. FXCM, as a company, not only welcomes competition from other brokers but thrives on it. So we jump at the opportunity of entering into new markets.”

This level of expansion has helped FXCM develop into a company that, despite being based in New York, has established a number of international offices that add value to its global synergy, help diversify its client base, and expose it to new forms of competition.

“Education and research are key”
A reputation of fairness and honesty is something that FXCM has always strived for, aiming to be the most open and transparent broker in the industry, through their commitment to education, research programs and high standards of employee training.

“We certainly agree that our reputation is an extremely valuable corporate asset and we will continue to strive to be the most open and transparent broker in the industry,” Mr Niv says. “Education and research are key when it comes to helping our customers become more successful in their trading and we firmly believe in educating our customers on the way our business model works.

“We have a team of analysts who provide daily market analysis and trading education on Dailyfx.com, training videos and even interactive live webinars to address areas of forex trading that commonly cause confusion for clients,” he says. “DailyFX for Beginners is also available to all potential new forex traders, which provides easy to understand guidance on the basics.”

FXCM is also careful to nurture the investment it makes in its staff, providing them with ongoing professional training courses, regardless of where they are in the company and what stage they are at in their career.

“As with many successful businesses, our company is only as good as its staff,” says Mr Niv. “Good management and training always becomes evident when dealing with someone who works in customer services and it can often be the difference between success and failure. As a retail brokerage, it is essential that we put customers first and do everything we can to make sure that they are both cared for and assisted with any query they may have.”

A market leader
As a company, FXCM stands by core values to ensure that they are as successful as they can be in the field and stay as a market leader.

“FXCM believes that transparency in all areas of our business, particularly trade execution and transparency is necessary,” Mr Niv says.

“We also realised early on that good client retention comes from having a robust offering and enthusiastic customer service representatives who are motivated to help the customer. Everything we do is driven towards making the customer experience as good as possible.

“The global recession of the last two years has put financial strain on the whole financial industry, so we have always ensured that we operate in a stable environment and take a sensible approach to managing risks.”

The next big thing
FXCM’s aim to provide such a transparent service and fair execution has also given them a reputation as an innovator, constantly improving its platforms and technical offerings so that it can continue to be a market leader.

“Anticipating the next big thing in our industry is never easy,” says Mr Niv. “Our approach is to provide a solution to a problem that is in the interests of all parties involved. Long term relationships never work if the scale is significantly tipped in the broker’s favor. We want our customers to understand our business model, particularly the No Dealing Desk forex execution principle; we believe that it provides great reassurance to customers.”

FXCM’s numerous innovative services set it apart from the rest; a variety of different trading platforms, ensuring that there is a solution for every customer; No Dealing Desk forex execution advantage; Daily FX; and 24-hour customer service, with offices around the world mobile trading on iPhone and BlackBerry.

A market innovator
The latest innovation from FXCM is the Strategy Trader platform, which allows customers to create an automated trading strategy that will execute trades on their account whenever specified technical criteria are reached.

“The demand for automated trading strategies has surged over the past two years and this has led to the development of this new platform,” says Mr Niv.

“In the past, automated trading was something only the largest banks could enjoy; however, we have brought the same type of technology to the retail client. It’s no coincidence that retail customers are becoming savvier these days and we look to complement their increased knowledge by offering more sophisticated products.”
So what does the future hold for this market innovator? Mr Niv believes that the company will continue to grow and develop, but not at the expense of its core values.

 “We want to continue to grow the company and expand into new regions. However, we will not do this at the detriment to our efforts in innovation and transparency,” he says. “Trading foreign exchange on margin carries a high level of risk, and may not be suitable for all investors. Before trading the foreign exchange products offered by FXCM you should carefully consider your objectives, financial situation, needs and level of experience.”

Energy investors back CESP

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In July 2006, Companhia Energética de São Paulo (CESP) joined BM&FBovespa´s Corporate Governance Level One, which consists of a set of rules governing the relationship between the controlling shareholder, the board of directors, the executive board, the other company shareholders, and especially the capital markets. The adherence to BM&FBovespa’s Corporate Governance Levels better advertises the efforts of the company to improve the relationship with its investors and increases the potential for appreciation in asset value.

The rules of Level One largely undertake to improve methods of disclosure to the market and to disperse their shares among the largest number of shareholders possible. Thus, the main practices required to join are: (i) maintenance of a free-float of at least 25 percent of the capital; (ii) public offerings have to use mechanisms to favor capital dispersion; (iii) improvement in quarterly reports, including the disclosure of consolidated financial statements and special audit revision; (iv) monthly disclosure of trades involving equities issued by the company on the part of the controlling shareholders;  and (v) disclosure of an annual calendar of corporate events.

CESP stands out from other companies for going beyond the minimum requirements of Level One and has adopted the following corporate governance best practices which were incorporated into its byelaws: (i) participation in the BM&FBovespa Arbitration Chamber to settle any doubts of a corporate nature; (ii) 100 percent Tag Along – Right of Class B preferred shareholders to joint sale of shares on the same terms and conditions, in the event of sale of controlling interest; (iii) two year mandate for the executive board and the board of directors; and (iv) board of directors formed by 20 percent independent councillors.

Stocks distribution and properties
The paid-up capital stock of the company amounts to $3.5bn and is divided into 109m common shares (CESP3), 8m Class A preferred shares (CESP5) and 210m Class B preferred shares (CESP6). If there is net profit in the end of the period, all shares have the right of dividends up to 10 percent calculated over the value of fully paid capital stock represented by each class of shares, but the Class A preferred shares has priority in the distribution of dividends.

Investor relations area
CESP’s Finance Board has an Investor Relations (IR) area which coordinates the information release to the financial markets in general, investors, market analysts, financial institutions, regulatory and inspection bodies, through annual public meetings, teleconferences to discuss quarterly results, and one-to-one meetings with analysts, fund managers and investors.

Ombuds Office
On its website, CESP has a communication channel with the purpose of protecting the interests of citizens inside the company, receiving, explaining and answering all queries raised, including actions causing internal transformation aimed at improving the quality of services provided by the company.

Board of directors
CESP’s board of directors is responsible for setting general business policies and guidelines, including the company’s long-term strategy. The board consists of a minimum three and maximum 15 members, with two year terms of office and permitted re-election as provided for in the byelaws. The board meetings are ordinarily held once a month and extraordinarily whenever necessary and are held with attendance of the majority of its members in office. Its members are elected by CESP’s shareholders at a general meeting. One independent councillor is appointed by the minority preferred shareholders, one councilor is elected by the company employees, and two other independent councillors and the remaining councillors are elected by the controller shareholder, the Treasury of the State of São Paulo.

Executive board
CESP’s executive board is composed of up to five members, and is responsible for business management and the implementation of resolutions taken by the board of directors. The company directors take office for two years and re-election is permitted. They have responsibilities established by the board of directors, the byelaws and internal policy. Executive board meetings are convened by the CEO or at the request of the majority members of the executive board, and are held with the attendance of the majority of its members.

Audit committee
CESP’s audit committee operates on a permanent basis and currently consists of five staff members and an equal number of substitutes, elected at the general meeting for one year of office. The controlling shareholder or holder of common shares issued by the company appoints three staff members and their substitutes to represent it and the holders of preferred shares, as minority and preferred shareholder appoint two staff members and their respective substitutes to represent them. The main responsibility of the audit committee is to supervise the management’s activities and keep shareholders informed of its findings. For that purpose, as an independent body and unrelated to the independent auditors, it reviews the company’s financial statements and advises shareholders about their contents, in addition to reporting on matters relating to CESP’s budget, changes in its capitalisation, distribution of dividends and corporate reorganisations.

Risk committee
In 2008, the company started the project to implement the model for corporate risk management, based on the principles of the committee of Sponsoring Organisations (COSO) and Control Objectives for Information and Related Technology (COBIT).

The committee is composed of company directors, a representative of corporate Management and a representative of internal audit. The committee is required to support the CEO in defining the guidelines and strategies for risk management and controls, including risk appetite and tolerance, risk assessment and action plans submitted by the company managers and to advise and direct to risk management coordination, in line with the guidelines and strategies defined by the CEO.

Code of conduct
In response to the growing society demands, especially from the capital market regarding the disclosure ethical principles adopted by the company, in 2009 CESP implemented its Code of Conduct, which meets the demands of society on the adoption of ethical principles as guiding principles of the company’s activities, and should contribute positively to its internal and external relationship, raising its level of confidence level with all its partners (investors, suppliers, clients, creditors, government officials and its own employees).

Sustainability
CESP, aware of its responsibility to sustainability, has sought to align itself with the effort to contribute to the advancement of sustainable practices and has incorporated into its work schedule activities in tune with this subject. To undertake sustainable actions that contribute ultimately to the effort to assure the right to a life in harmony with nature for present and future generations, CESP has developed several environmental projects. Preservation actions are implemented in partnership with the scientific community in order to promote the exchange of information with agencies and research institutes in Brazil and abroad.

BM&FBovespa, the Brazilian stock exchange, launched its Corporate Sustainability Index – ISE – in 2006 to be a benchmark for socially responsible investments. The index is composed by sustainable companies that create value to the shareholder in the long term by being better prepared to face economic, social and environmental risks. Since its creation, CESP remains in the ISE index for the fifth year, being recently approved for the period from January to December 2011.

CESP is a signatory of the UNEP International Declaration of Cleaner Production, and is also running a climate change programme, aimed at promoting sustainable development, the exercise of social responsibility and environmental management activities. After the release of the second inventory of greenhouse gases in June 2009, recording the emission of 9,700 tonnes of carbon equivalent (tCO2) for the year of 2008, it was created a plan with a goal to reduce by 10 percent the greenhouse gases emissions of the year 2011 in comparison with 2008 emissions. The company also studies the inclusion of activities in the carbon market through the approval of clean development mechanism projects (CDM) of the Kyoto treaty and/or voluntary market.

Company profile
Companhia Energética de São Paulo (CESP) is a Brazilian public company controlled by the State of São Paulo government, whose main activity is clean and renewable electricity generation through a 100 percent hydraulic power generation complex. CESP is the largest generator of electric power in the State of Sao Paulo, responsible for approximately 57 percent of the energy produced in the state, and the fourth largest electric power generator in the country, producing almost nine percent of all electric energy generated in Brazil.

CESP’s power generation complex consists of six power plants with total installed capacity of 7,455.3 MW, located in the basins of rivers Paraná, Tietê and Paraíba do Sul. The six dams are strategically located in the economic centre and most populated Brazilian region and are critical for the operation of the Brazilian National Interconnected System (SIN).

IMF: Barbadian economy will grow 2.5% in 2011

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With the collapse of natural gas and oil prices, Trinidad and Tobago operated on a budgetary deficit to the tune of TTD3.8bn in the 2010 fiscal year. Net public sector debt is estimated at 49.4 percent of GDP, and the budget deficit is expected to grow to TTD7.7bn in 2011 while debt levels remain at just under 50 percent of GDP.

If the government intends to borrow locally to meet the deficit, now is as good a time as any as interest rates are very low. The respective yields on 90–day and 180-day Treasury bills have fallen from 1.44 percent and 1.51 percent in November 2009 to a mere 0.35 percent and 0.48 percent respectively in November 2010 (keep in mind that in November 2008 the 90-day Treasury bill rate was 7.17 percent). The government of Trinidad and Tobago came to the market with four bond issues during the year:

– GOTT 5.95% 2023 – issued at 5.75%
– GOTT 6.50% 2025 – issued at 6%
– NIPDEC 6.25% 2028 – issued at 6.25%
– NIPDEC 6.10% 2028 – issued at 5.9%

Some of these issues were oversubscribed and the lower issue yields indicate that in such a low interest rate environment, investors were willing to accept a lower rate. Additionally, the Central Bank of Trinidad and Tobago has lowered the repo rate to 3.75 percent from 5.25 percent at the start of 2010. As a result, the entire TT Dollar yield curve has trended downwards since 2009.

In their World Economic Outlook, the IMF indicated that Trinidad and Tobago’s economy should have expanded by 1.2 percent in 2010 and estimated growth of 2.5 percent in 2011.

Thankfully, the economy’s lacklustre performance did not affect Trinidad and Tobago’s credit rating in 2010 which remains at A/Baa1 (Standard and Poor’s/Moody’s), but other countries in the Caribbean were not as fortunate. The majority of Caribbean tourist arrivals originate from Europe and the depressed economic conditions in the EU, along with the imposition of a distance based duty by the UK on British flights, negatively affected the regional tourism industry and the economies that depend on it.

On 22 October 2010, Standard and Poor’s downgraded the foreign currency sovereign credit rating on Barbados to BBB- from BBB, just one notch above junk/speculative grade. The downgrade was triggered by rising concerns over Barbados’ debt profile. As at the end of August 2010, the government of Barbados recorded a gross debt level above 100 percent of GDP. The IMF believes that public debt could reach 115 percent by March 2011. Barbados’ tourism industry generates approximately 50 percent of its foreign exchange earnings and accounts for 15 percent of GDP. Given the downturn in tourism, Barbados’ GDP contracted by one percent in the first half of 2010. This compares favorably to a contraction of 7.1 percent in the first half of 2009.

Indicative of weak demand, the inflation rate in the first six months of the year was estimated by the Central Bank of Barbados to be in the region of 3.3 percent. Unemployment in June 2010 increased slightly to 10.6 percent from 10.1 percent in June 2009.

In an attempt to improve the island’s revenues, VAT was increased from 15 percent to 17.5 percent as a ‘temporary measure’ for an 18 month period starting on 1 December 2010. The excise tax on gasoline was also increased by 50 percent along with a hike in bus fares from BDS $1.50 to BDS $2.00. Tourist arrivals have shown some signs of recovery with a 3.8 percent (year on year) increase by October.

The Barbados dollar yield curve remained relatively stable during the year. The yields on 90-day and 180-day Treasury bills fell from 3.48 percent and 3.5 percent in 2009 to 3.3 percent and 3.31 percent respectively in November 2010. The Government of Barbados came to the market with several new issues:

– GOB 2013 T-note at 4.25%
– GOB 2016 T-note at 6%
– GOB 2019 T-note at 6.5%
– GOB 2020 Debenture at 6.625%
– GOB 2030 Debenture at 7.75%

The IMF expects that the Barbadian economy would contract by 0.5 percent in 2010 but projects growth of 2.5 percent in 2011.

Jamaica lies 1,900 km to the west. During 2009 it was pummelled by all the major rating agencies, but was able to recover some of its former credit rating strength in 2010.

The credit rating recovery was largely due to the approval of a $1.27bn Stand-By Arrangement (SBA) by the International Monetary Fund. The SBA seeks to “support Jamaica’s plan to recover from mounting government debt, weak economic growth, and the effects of the global economic crisis.”

The SBA became necessary following the continued deterioration of the Jamaican economy. The island remains heavily indebted with a debt of 120 percent of GDP. Like Barbados, tourism is a major part of Jamaica’s economy, contributing some 20 percent to GDP. Remittances from Jamaicans working abroad also contribute approximately 20 percent to economic activity and this, along with tourism, makes Jamaica’s economy heavily dependent on external factors. In 2010, an improvement in tourism was noted with a 4.2 percent (year on year) increase in arrivals by August. Additionally, bauxite plants on the island that were closed in 2009 due to poor market conditions reopened in 2010. The IMF predicts that if the government’s plans are implemented, growth rates will increase from -3.5 percent in 2009 to 0.5 percent in 2010. Growth in 2011 is expected to rise to two percent.

Also contributing to the recovery of Jamaica’s ratings (and also a prerequisite of the SBA) was the Jamaica Debt Exchange. The exchange, offered in January, sought to manage Jamaica’s debt repayment by exchanging existing Jamaican dollar denominated debt for new debt instruments at lower interest rates and longer maturities.

Jamaica’s debt refinancing will also benefit from the lower yields on Jamaican dollar securities as the yield curve fell considerably over the year (See Figure 3). The yields on 30-day and 90-day Treasury bills fell from 14.41 percent and 15.46 percent one year ago to 8.06 percent and 8.19 percent respectively in September 2010.

During the same period, Jamaica’s 270-day and 365-day Treasury bills fell from 16.89 percent and 17.16 percent to 8.51 percent and 8.73 percent respectively in 2009. The Bank of Jamaica has lowered the rate on its benchmark 30-day certificate of deposit to 7.5 percent from 12.5 percent at the start of the year.

As the new year begins the region still has a long way to go to achieve a sustainable recovery. Notwithstanding the useful initiatives taken by individual island states, the revival of the Caribbean economy ultimately depends on the revival of the global economy. This, unfortunately, is not certain to take place in 2011.

Kris Sookdeo is an analyst in the Research Department of First Citizens Investment Services

Markets reward good governance

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Good corporate governance helps all businesses to improve their performance, raise market trust and attract business. In the case of Abu Dhabi Commercial Bank (ADCB), good governance can help develop its investment, loan and deposit businesses.

Since the global credit crisis, banks worldwide have lost much market trust; investors shunned banks because they could not be sure about the true nature of bank assets or liabilities. Banks are central to healthy, functioning financial systems, particularly in the UAE; therefore strong corporate governance, which develops market trust, is of vital importance for the entire sector.

As part of a strategic review in 2005, ADCB started to restructure its products and services. In 2007, the company hired International Finance Corporation, a division of the World Bank, to help it develop a three year ‘road map’ to meet the highest standards of corporate governance. This road map was based on the requirements of Emirates Securities and Commodities Authority Corporate Governance Code, the requirements of Abu Dhabi Securities and Commodities Market ADX, draft guidelines from the Central Bank, and global best practices and principles such as the UK’s Combined Code.

These initiatives have resulted in the following achievements:
– In 2009 Hawkamah awarded ADCB ‘Best Bank in UAE’ at its Union of Arab Banks Corporate Governance Awards
– In 2009 ADCB was the first bank in the GCC to meet the stringent disclosure and transparency requirements to sell bonds to US investors (144A programme)
– In 2010 World Finance awarded ADCB ‘Best Corporate Governance in the UAE,’ placing ADCB among many well known global blue chip companies
– ADCB has been featured by World Bank as a case study for its corporate governance achievements.

Steps taken by the bank include the reorganisation of its board and board committees, reorganisation of management committees, extension of its disclosures in the annual report, focus on more regular and transparent market disclosures, regular board evaluations, focus on board skills and training and amendments to the bank’s articles of association.

As a result ADCB will be ready to respond to and action the requirements of the Central Bank, after it presents its anticipated corporate governance rules.

A key challenge for ADCB is to ensure it maintains its commitment to its four key principles of corporate governance – transparency, responsibility, accountability and fairness – through all of its transactions. Another challenge is maintaining the correct balance between the board and management – the board’s role is to guide and set strategy, and set clear and appropriate delegated authorities. It will be important to avoid any tendencies to micro-manage while maintaining appropriate oversight.

The recent downturn in global markets has affected market conditions for all banks. ADCB has been transparent about the provisions it has taken and the reasons for them, and has maintained a prudent approach to provisioning in circumstances where a different approach may be taken. This approach, and the bank’s general commitment to good governance will, in the long term, enhance market trust and confidence in ADCB and, when the bank’s historic issues have passed, will ensure that the bank trades at a premium to its peers.

One of the major challenges is to maintain disciplined governance processes during periods of strong economic growth. It is easy to see the effect of governance weaknesses during downturns, but less easy during profitable periods.

In the GCC in particular, locating independent directors with strong professional experience is and will continue to be a challenge.

An investment driven recovery

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While five-year budget plans are always an invaluable tool for government economists and those involved in the finance industry, after the upset and uncertainty of 2005-10, economic forecasting is of interest to absolutely everyone. But while the recession was the story of the last five years, the focus of the next five is the progress of the recovery and ensuring its continued success.

When it comes to economic forecasting, Oman-based financial services firm United Securities has seen a number of budgets come and go, with the directors personally having an even greater wealth of experience. With economic stability and confidence among investors forming a key part of the organisation’s business, the global situation and local stability are of great importance.

Mustafa Ahmed Salman, Chairman and CEO of United Securities and a key player in Omani commerce for over 30 years, explains that despite the recent extreme turbulence, the recovery is already cementing itself. “There is no doubt that in 2010 we have definitely seen a global pattern of recovery, especially when looked at in comparison to the results for 2009,” he says. “However it still remained below expectations, even in the Middle East, which suffered much less than other parts of the world. Nevertheless, we expect to recover these ratios in 2011 and see a return to solid growth in the region. On a global level, recovery will almost certainly be guided by US economic conditions and corporate earnings, which will deliver repercussions to most of the world.”

According to Mr Salman, the most important recovery strategy to be incorporated into all countries’ five year plans is government spending, particularly over the next two to three years. “Even now in the countries that are leading the recovery – that is to say India, China and, on the other side of the world, America – we see that government spending is the cornerstone of their recovery plan,” he says. “We cannot expect private companies to have much involvement in the recovery just yet, unless they work in areas that will see government expenditure, such as infrastructure.”

He also cautions against continuing with short-term solutions over the longer term, such as the Federal Reserve’s Quantitative Easing II programme. “There is no doubt that, while ‘printing money’ goes against traditional economic reasoning, it was the right thing to do at the time and it helped the world to quickly recover from the crisis. It was a very good short-term strategy, but it is possible that in five years time we may even see some negative effects from QE2, which is why it cannot continue as a long term solution.”

Realistic expectations of recovery are also important. “The growth rates immediately before the recession in 2007-8 were extraordinarily high, but businesses and governments got used to them and saw them as normal,” he explains. “We must realise that a return to stable growth is actually a return to 2005-6 levels. We are expecting growth to return to these levels in 2011-12 and that this will produce stability and prosperity world-wide.”

Investment for growth
This return to growth over the next five years will be as strong in the Middle East as anywhere else, presenting an ideal opportunity for investors. The Middle East was fortunate as it was not hit as hard as other areas of the world and recovered more quickly. Part of the reason for this quicker recovery is that the region’s economy is guided by oil rather than other sectors such as banking. This guiding force has produced some very strong growth in the Gulf States, particularly in Oman and Qatar. “For 2011 onwards we are recession free and, providing of course that there is no sudden drop in oil prices, we expect to see very strong growth,” says Mr Salman.

The five year plans for the budgets of the GCC are once again a key component of this recovery. The most important element of these budget plans is government spending strategies, which are focused largely on improving infrastructure, particularly in Oman, Saudi Arabia, and Qatar. “In Oman, the next five year plan is very strongly focused on infrastructure spending, with a 113 percent increase from the previous five year plan in terms of total investment size, with a similar rate of growth in this area planned in Saudi Arabia,” explains Mr Salman.

“Qatar is of course hosting the 2022 Football World Cup, so this five year plan and the next one will naturally be focused on the $100bn investment planned for that project. But it is not only an event that will benefit Qatar but the Middle East as a whole and the GCC in particular.”

The GCC countries are well known for the comprehensive nature of their economic strategies and their successful planning. As such, these Arab states are keenly aware of their reliance on oil as an income stream – it provides up to 70 percent of the countries’ revenue – and have appropriately incorporated potential for fluctuations in the market into their budgets for the next five years. While the price per barrel of crude oil currently stands at $85-$90, the five year plans of the GCC countries assumed a budgeted price of $50-$60 per barrel. Taking this into account ensures that there will be enough surplus available to see them through the intervening years should this happen. Nevertheless, with Qatar alone holding 15 percent of the world’s gas and oil supplies, the region’s prosperity largely depends on the price of these commodities.

However, the governments of the GCC are working to shift themselves from this sole dependency, and the investment in infrastructure going on all over the region is an integral part of that shift. “The five year plans will open up so many new areas and, in Oman, will increase employment by 10 percent, creating around 275,000 new jobs for Omanis,” says Mr Salman. The level of government spending that will drive this job creation over the next five years will be double that of the previous period – $78bn compared to $36bn. “Government spending in Oman will mainly be focused on expanding and improving the road network, airport construction, education and a large level of investment in town planning. In our opinion, this is a very good decision on the part of the government and a strategy that will change Oman for the better – it will bring the country into a new era.”

Rebalancing the economy
All of these developments present a significant opportunity for foreign investors. The Muscat Securities Market (MSM), the only stock exchange in Oman, has been faring well despite the downturn. Mr Salman has been intimately involved with the exchange since its inception in 1989.

“The MSM was up as a whole during 2010 by around six percent,” he says. “Taking into account the government’s budget plans and expectation of growth through its projects for this year, our view at United Securities is that the MSM is expected to grow by up to 13-15 percent during 2011 on stronger earnings growth momentum. We have based this on the capability for growth in the construction sector, which will be helped by an increase in government spending in this area over the last five years.

“Oil prices are a part of these calculations too but if you look at the budget, Oman is working to reduce its dependency on oil as a source of government revenue from 80 percent to below 60 percent by 2020,” he says.

“The tourism sector is an important part of this shift and is starting to deliver a good return on investment. Undoubtedly this is the right time to make this rebalancing of the economy.”

Looking at the overall outcome of the 2011-15 five year plan, Mr Salman expects the GDP of Oman to increase by 6.1 percent. “All the plans and strategies that are in place here will mean that Oman will become a place of great interest to global investors from many sectors,” he says. “Opportunities are already opening up and with the completion of new roads, their numbers will increase even more. Of particular interest will be the tourism and retail sectors and we encourage global investors to look at those growth areas. The petrochemical and industrial sectors will, of course, remain important for foreign investment opportunities and for the country’s economy.

Additionally, the new port and dry dock of Al-Duqm, located on the eastern seaboard, will be completed within the next five years. This development will position Oman as a key strategic hub for global companies wishing to trade in the Middle East and Asia, particularly India.”

All of these factors make it clear that, over the next five years, Oman will become a key player on the international scene outside of the traditional areas of oil and petrochemicals. While maintaining steady growth and a strong position in these industries, it offers those looking to do business overseas the opportunity to enter into a country that has an increasing range of options for investment in a growing number of business areas. The completion of this next five year plan will bring about opportunities that are equally important for companies looking to strategically expand their investment portfolio in growth markets as it will be for the country itself.

Peru pushes through pension reforms

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When it comes to pensions, Prima AFP is one company that certainly has both its country’s and customers’ interests at heart.

Prima AFP goes that extra mile to offer its affiliates an individual service, ensuring they are kept properly informed and advised on all subjects regarding their pension fund during their active years and through retirement.

World Finance spoke to a representative for Prima AFP to find out what drives the company to be so affiliate-focused and committed to Peru, the thoroughness of its investment process and success, their concern for offering their affiliates a properly informed service, the effect the private pension system has had on the country, and the truth behind the increase in the amount on money its managers can invest abroad.

Private vs. State
Peru’s pension system is split between the government-owned system and the private system. The government-owned system (ONP) is a defined benefit system, but there is also the option of the private pension managers, or Administradora de Fondo de Pensiones (AFPs), that work under a defined contribution system.
AFPs are private financial institutions aimed exclusively at managing pension funds under the individual account modality. This allows an affiliate to receive a retirement pension based on his or her contributions and the returns obtained by the investments made by the AFP.

Peru’s whole private pension system was established in the 1990s during a time of financial crisis and the virtual collapse of the state-run pension system.

Prima AFP is a private pension fund company based in Peru. It is a subsidiary of Credicorp (NYSE BAP), the first Peruvian financial group to be listed on the New York Stock Exchange.

An alternative system
Credicorp identified both a gap in the market and an opportunity to complement its lines of business, and decided to create its own pension fund management firm to consolidate its position as the leading financial group in Peru. As a result of Prima AFP launching into the market, the sector became more dynamic and other competing AFPs decided to lower their service fees.

Prima AFP officially entered the market on 8 August 2005, joining the private pension system as the fifth AFP in a market that had been stable for more than 10 years.

According to Prima’s spokesperson and CEO Mr Ruben Loaiza, the company “was established as an alternative for affiliates, with a value proposition based on strong backing from Credicorp itself, experience on investment management, permanent information and assistance, all at a modest service fee, which up to now still remains the lowest in the market.”

Government-owned pension crisis
The current model of private pension system was established in 1991, when the Peruvian Treasury was facing serious financial difficulties. The government-owned pension system had insufficient funds to meet its pension obligations. An analysis by the Peruvian Institute of Economics revealed that the required fund size to support pension liabilities would have been close to $10bn, out of which only three percent was funded at that time. Eventually the government system fell into a crisis, adversely affecting pensioners’ quality of life.

As a result, a defined contribution system started to take form, with the aim of obtaining good pensions for Peruvian workers. A law was enacted in December 1992 that created the defined contribution system and set forth that AFPs could start operations in July 1993, but coexisting with the government-owned system.

Pension’s reform effect
This system restructuring has been crucial to the growth and development of Peru as a whole, with the reform generating an increase and overall improvement in savings and how they are composed.

Mr Ruben Loaiza explains: “In its 17 years of existence, the private pension system has invested approximately $10bn in the local non financial private sectors: 46 percent in mining, 14 percent in energy, 13 percent in construction, nine percent in foods and beverages and six percent in telecommunications. It has also made a significant contribution to improving the country’s infrastructure, having invested $3.4bn, of which 61 percent has been in the energy sector and 20 percent in transport infrastructure.

“However, the AFPs do not just benefit Peru through financial contributions alone; there are several other ways in which they help the country. A private pension system also motivates people to work in the formal sector and remain in employment for a longer period of time.

“The funds managed by the AFPs also contribute to the development of the capital market in various aspects, including better quality of regulation, improved corporate governance and transparency, higher specialisation and the development of new financial instruments. It also contributes indirectly to improve the country’s credit rating and to increase the size of the capital market.”

The importance of the affiliate
The company’s main objectives are strongly affiliate focused, with Prima aiming to obtain excellent returns for its clients on a risk-adjusted basis, so that its affiliates receive the best retirement pension possible. Prima also holds customer service in high regard, promising to provide customers with top-quality service both during their active years and their retirement.

“Through our communication plan, our affiliates are kept informed about the contributions to their funds, the performance of the funds managed by us, the different types of pension which they can choose from when they retire, the economic and financial situation and Prima’s investment strategy, as well as any news concerning the AFPs,” says Prima’s spokesperson. “We also organise investment conference calls, allowing our affiliates to receive first-hand information from our Investment Management executives. Moreover, there is a service available to all affiliates through which they can receive information about the contributions to their funds and the balance of their personal accounts in the form of text messages on their mobile phones. All these services are totally free of charge.

“In regards to the advisory service, our clients have several service channels to direct their questions or requirements, either in person, via e-mail or by phone, according to their needs and availability of time.”

Growth during the ‘worst financial crisis in decades’
Prima makes all this possible through its successful investment strategy and good risk management. The company essentially seeks to obtain excess returns – relative to its benchmark – through selection of individual securities, predominantly in the Americas.

For Prima, the Americas in particular offer the right balance of distance and familiarity of language, culture, regulation and reporting standards, to provide a sense of comfort when it comes to making an important investment decision.

An experienced research team provides in-depth country, industry and company analyses, resulting in high conviction investments, while the investment team works favouring secular over cyclical investment theses to reduce the reliance on global growth for investment success.

These investment methods resulted in some of Prima’s portfolio companies to grow at double-digit rates through 2008 and 2009, in the context of the worst financial crisis in decades.

The real challenge
AFPs as a whole must invest roughly $2bn each year of new client contributions alone. This primarily goes to fund opportunities in the local markets, particularly in infrastructure, but generally these opportunities do not suffice to meet the fund’s growth. Therefore, Prima’s real challenge is finding new opportunities beyond Peru’s borders and working out the registration of each individual security with their regulator. The Superintendencia de Banca y Seguros (SBS, the regulatory body for AFPs, banks and insurance companies in Peru) first needs to ensure eligibility criteria is met and then it needs to approve it as an eligible investment for all pension funds.

Prima AFP has previously led the way when it comes to new registrations, being responsible for more than 89 percent of new foreign stocks registered with the SBS in 2010.

“We find investment candidates in multiple ways,” Prima’s representative explains. “Each investment professional, from research analyst to portfolio manager, has access to global sell-side research, travels to investment conferences ranging from macroeconomic to industry-specific forums, participates on analysts calls, visits companies – domestic and international – and spends time researching in-house, based on all imaginable sources of information available. Tentative investment opportunities then emerge, which are elevated to the SBS for registration.

“Our research analysts are specialised by industry and are encouraged to find the best investment alternatives within their space, regardless of location, currency or stock exchange. We also search for investment themes, for example the growing middle class in emerging markets, and look for the ‘best way to play the theme’, which could turn out to be a company, a mutual fund, or a combination of these two.

So how does Prima assess available investments to ensure success for both the company and for their affiliates?
According to Prima’s spokesperson, every member of the team has a yearly target for new investment ideas, which is thoroughly analysed and discussed in an internal investment committee with the most senior members of the investment team. “New ideas are brought to the table frequently, particularly relating to foreign investments, following the gradual increase of the limit to invest abroad: now at 30 percent but with potential to be increased gradually to 50 percent of assets under management.”

Investment abroad
Peru’s Central Bank has been gradually increasing the limit on the amount that private pension fund managers can invest abroad throughout the year, from 22 per cent to 30 percent of assets.

Prima’s representative believes that clients should view this increase as a very positive one for several reasons.

“First, the ability to diversify the investment portfolios has improved substantially. On one hand, the local market is highly concentrated in mining, which may be seen as attractive through the current commodity cycle, but poses a high concentration risk whereas foreign markets offer exposure to various themes, sectors and industries that may provide a greater risk/reward balance than some local investments.

“We also gain portfolio flexibility through foreign markets, as we would generally invest in more liquid securities abroad.

“Last but not least, we perceive a shortage of available investment opportunities in the local market to meet our growth in assets through new client contributions.”

Prima is adamant that it has been, and will continue to be, supportive of initiatives aiming to increase the limit for pension funds to invest abroad, believing that the benefits for its clients will outweigh the potential negatives.

Ideally, says Prima’s spokesperson, each investment should be analysed on its own merit, and location should take a secondary role in the investment process. Furthermore, increasing the limit to invest abroad will not jeopardise Prima’s ability to fund large-scale infrastructure or other projects in Peru, either through equity or bonds.

To the future
With the country’s expected growth and the increased generation of formal jobs, Prima expects the number of affiliates to the AFP system to continue to grow in the future.

“In our opinion, the integration of new workers will be more dynamic in the provinces in comparison with the year 2010,” says Prima’s representative.

The company also believes that some of the government reforms in the capital market and the labour sector will make it possible to maximise the benefits obtained by the AFPs in the interest of the workers. Among such reforms, Prima feels it is important to develop a mechanism to ensure a retirement pension for self-employed workers, facilitating their incorporation into a pension system. The self-employed have often been overlooked when it comes to the Peruvian pension system, mainly because participation is not mandatory for them. In contrast government and private employees who enter the labour market are required to choose between the two systems.

“The system expects to reach approximately five million affiliates and more than 100,000 pensioners by 2011,” says Prima’s spokesperson. “We also expect that the overall assets under management of the AFP system will exceed $35,000m, allowing the AFPs to further contribute to the funding of infrastructure projects, which are so necessary to improve the country’s competitiveness and job generation, in addition to continue improving the pensions.”

A stronger market position
As far as Prima AFP is concerned, Mr Loaiza believes that it will further strengthen its leading position in the market, growing in the number of new affiliates, and customer care will continue to be imperative.

“We will keep our affiliates well informed and will provide them with advice throughout the retirement process. We will expand our coverage in the provinces by opening new branches to be closer to our affiliates and will continue to support the incorporation of self-employed workers.

“We also plan to continue with the Quality Management model (ISO 9001:2008) and will further work to improve the efficiency ratios of our processes for the benefit of our affiliates.

“Regarding the fund investment management, we strive to consolidate our position of market leaders by delivering excellent returns in the AFP system. To achieve this, we will maintain our objective of identifying investment opportunities, domestically and abroad, that provide the best possible balance of risk and reward based on a rigorous fundamental analysis and always with a long-term view in mind.”

All figures shown are up to December 31 2010. Calculations made by Prima. Source: Superintendencia de Banca y Seguros del Peru. For more information www.sbs.gob.pe

Greece under reform for long term growth

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Today Papapolitis & Papapolitis is at the forefront of the legal market in major foreign direct investment transactions in Greece. It has witnessed the development of corporations and projects in Greece, from the early days of penetrating the market, up to today where these corporations owned by foreign investors play a major role in their respective industries within the Greek market. As such the firm can offer a key insight into the highly rewarding venture of investing within the Greek market.

In early 2010 the company argued in a similar article that the new structural reforms and incentives laws that were among the most competitive in the EU would make Greece a big attraction for foreign investors.

For the last year the Greek economy has been in the global spotlight – primarily because of its sovereign debt crisis – and has found itself in the centre of the financial crisis along with other countries of the EU.

During 2010 Greece has also demonstrated that it has become a reform-oriented, outward looking economy that is focused on long-term and sustainable growth. In 2010 a vast number of structural reforms have taken place, amending the fundamental pillars the Greek economy and society have been based on.

These major reforms have impacted taxation, employment laws, trade unions, licensing procedures and the way many industries operate today in Greece. Among these major reforms the Greek government has also made significant efforts to amend the structural framework for foreign investment in an attempt to entice investors to the country.

Although the structural framework for investment support in Greece still revolves around three institutional pillars – the Investment Incentives Law, the National Strategic Reference Framework 2007-13, and Public Private Partnerships – new laws will soon come into force that will further eliminate bureaucratic procedures and provide new types of incentives including government grants and tax holidays.

As the (soon to be amended) structural framework stands, the following incentives are offered (currently some of the most competitive incentives in the EU):
1) cash grants that can reach up to 60 percent, covering part of the expenses of the investment project by the Greek State;
2) leasing subsidies that can reach up to 60 percent, that cover part of the payable instalments by the Greek State relating to a lease that has been entered into for the use of new mechanical or other equipment;
3) wage subsidies that can reach up to 60 percent, provided for employment created by the investment;
4) tax benefit that can reach up to 60 percent, which allows income tax exemption on non-distributed gains. This benefit is effective upon completion of the investment for the first ten years of operation and is created through a tax-exempt reserve.

The government has also introduced the ‘fast track’ procedure – a new method of accelerating the licensing procedure for major strategic investments in Greece. This fast track is applicable in energy, tourism, industry, advanced technologies and other innovation projects including those strategic investments which come under the investment law.

The fast track attempts to tackle the most major impediment that foreign investors face when penetrating the Greek market – Greek bureaucracy and licensing procedures.

As such fast track works as a mechanism for accelerating and enhancing the licensing procedures for implementing investments, whether these are based on the private sector or are obtained through public private partnerships.

The Greek prime minister has also stated that a foreign direct investment taskforce will be created under his personal control in order to speed up decision-making processes and overcome bureaucratic hurdles.

In addition Invest in Greece – the country’s official Investment Promotion Agency – is tasked with identifying market opportunities; providing investors with general assistance, analysis and advice; assisting in negotiations with public authorities; and providing aftercare support. This is a highly successful, free of charge tool for foreign investors seeking to penetrate the Greek market.

Trimming the red tape
Bureaucracy still remains the biggest hurdle that foreign investors face when entering the Greek market, and it is precisely this obstacle that the new reforms are attempting to overcome, especially for foreign investments.

At the time of penetrating the market, a legal advisor with local nous as well as expertise in international business practice and foreign investors’ corporate goals and mentality can be most valuable.

The combination of new major opportunities and the new framework offered by the government’s reforms have placed Greece as a country of great interest for foreign investors in 2010.

In 2010 there were a number of notable foreign agreements and investments. The Qatar government signed a memorandum with the Greek government expressing interest in investing as much as $5bn in areas of the Greek economy such as tourism and real estate. The shipbuilding group Abu Dhabi Mar announced its decision to invest in Greek shipbuilding through the acquisition of a majority stake in Hellenic Shipyards.

During the visit of the Chinese prime minister in October 2010, Greece and China signed a memorandum to boost cooperation between the two nations and announced 14 deals which amounted to the biggest single investment by China in Europe. Under one of the agreements, Cosco Pacific will extend its reach with the construction of up to 15 dry bulk carriers in Greece. Cosco Pacific also took over cargo management at the Piraeus port – the largest in Greece – on a 35-year concession worth $1bn last year.

The Chinese construction company BCEGI also signed an agreement to develop a hotel and shopping mall complex in Pireaus.

In October 2010 Greece and Uruguay also signed two bilateral agreements on economic and tourism cooperation.

Finally, in the banking sector the National Bank of Greece successfully raised €1.8bn through the combined issue of new shares and convertible equity notes – an offer that was oversubscribed by 1.8 times.

Approximately 208,000 shareholders from 77 countries got involved in the rights issue.

In conclusion, 2010 was a year of major reforms and some significant foreign investments in Greece. Certainly reforms aim for Greece to attract even more foreign investment in 2011. These necessary reforms that the Greek government is undertaking will hopefully take Greece to a next stage that will allow for long term and sustainable growth, while offering very competitive incentives to foreign investors.

Swedish law practices respond to growth

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Sweden is one of the largest countries in the EU. It is the leading economy of the Nordic region, with the largest population and a GDP almost 50 percent greater than any other Nordic country. It also prides itself on having an open economy and a stable political and social climate: it is ranked first in the world in The Economist’s Democracy Index and seventh in the United Nations’ Human Development Index.

Due to its size and sophisticated legal system, Sweden has a well-developed business and transaction climate – and as such has seen the same recent ups and downs as the rest of Europe. However 2010 was largely a year of recovery from the global financial crisis, and proved to deliver a positive turnaround in terms of transactional volume in the region, especially during the second half.

This trend was reflected in the legal market. The Swedish legal sector has historically been a competitive one, populated primarily by domestic practices. However the last 10 years has seen a trend of more and more international firms establishing themselves in the Swedish market, so that today there is a diverse mix.

Established in 1953, Cederquist is among the older domestic establishments, with an office in the centre of Stockholm and approximately 100 lawyers working in all fields of business law (except tax). However its relatively modest size means that it retains the ability to adapt with the times, and so continues to be internationally recognised as one of the leading actors on the Swedish legal market.

The developing sector
In Sweden 10 years ago, a lawyer was a specialist to whom people in need of legal counsel turned for assistance, and all one needed to succeed was a well-known name and a positive reputation for professionalism and reliability.

Today those expectations remain, but also so much more. The modern Swedish lawyer must be a businessperson as well as a legal expert, and must maintain extensive knowledge of the market at large. The modern lawyer must be an administrator, a project leader and a problem solver; she must be creative, sales-oriented, pragmatic, efficient and available at all times. Ideally, she will be one step ahead, approaching the client with a solution before the problem arises.

These are the expectations that Cederquist, as a law firm at the forefront of change, has focused on satisfying for the last five or six years – while at the same time maintaining the best practices and professionalism of its half-century history. This has meant engaging with clients to assess what they expect from the market, while working on internal structures, culture and tools to remain at the vanguard of the sector.

At the same time, the company has been focusing on expanding its expertise offer. For instance, the firm has been well-known for a long time as a market leader within banking and finance in Sweden. What was noted and confirmed during 2010 was that they also had a comprehensive offer – second to no other top-tier firm – with regard to the sort of skills needed in transactions and other Corporate/M&A services, such as general M&A, Corporate Real Estate, and Competition and Public Procurement Law. This was something that the firm had been focusing on and something that it started to communicate to clients seeking assistance within these different areas during the last year. The full offering was also something the firm communicated in a new way when approaching clients in other markets. The result was that Cederquist was consulted in two of the most prestigious international deals on the Swedish market: the Saab Spyker deal, and the deal involving Geely and Volvo.

But what are the strengths that have led to the great reputation in these areas today? Cederquist’s banking and finance practice is highly international, in the sense that there is almost always a cross-border element in each deal. It acts for lenders and borrowers (although more commonly for the former), international and domestic banks, and other providers of funds tend to dominate the client list.

The Cederquist banking and finance practice has expanded rapidly over the last years – it has seen tremendous growth and today the market share is substantial. When surveying the market, the overall opinion is that over the last several years Cederquist has repeatedly demonstrated that they are a leading top-tier law firm in the banking and finance sector. This opinion finds support in directories, such as the Legal 500 and IFLR 1000, among the leading market players and in the number of high-end deals the company has completed in the last year.

Internal improvements
But still, to be in the vanguard of the market one needs to develop one’s offer, and not just rely on existing work. In addition to traditional activities within the core financing practice, Cederquist has been highly involved in the field of work-outs and restructurings, and represented a wide variety of clients within this field, including lenders, borrowers, equity investors and potential purchasers of companies facing financial difficulties during the last couple of years.

In developing its offer, the practice has focused on three different areas. The first has been documentation quality and fine-tuned working procedures, which have enabled them to meet the extremely tight timetables frequently set by market players to produce and turn around the requisite documentation. The second focus area has been strong project management. The third focus area has been the retention and support of a highly dedicated team of associates and assistants who share the firm’s philosophy of strong team work. With this in mind, all the junior lawyers are properly trained and encouraged to develop and take on increasing responsibilities under the supervision of more senior colleagues – this organic growth helps to develop the firm’s robust and positive culture.

During 2010, Cederquist attracted several prestigious matters of a cross-border nature. Representing, as stated earlier, Geely and Spyker in highly competitive and/or publicly monitored acquisitions, and marking for each of the clients their entry into new markets and/or segments, must be an unrivalled achievement for any law firm. The achievement was made possible as a result of a young but experienced and diverse team having received much of its international training by leading its Swedish clients’ M&A-activities abroad. During the last few years much effort has been expended on building relationships with top-tier firms with international reach and capabilities in the legal areas deemed important from a Swedish/Nordic perspective.

What can be seen is that Cederquist, as a relatively small but important Swedish player, has managed to look forward while being mindful of its history. It has managed to build a strong and interesting practice, delivering the services and values that today’s clients demand. Of course the market is continuing to change, and to keep up they need to maintain their focus and dialogue with both clients and the market. But by maintaining its historic professionalism, while keeping its focus on the legal sector’s future, it seems to have found a good path for further success.

Partnering foreign investors

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Apart from representing various clients from the country, for a long time Ana Kolarevic and her law office have assisted foreign clients interested in investing in Montenegro. Those are the leading foreign investors who started investing in Montenegro more intensively after the restoration of Montenegrin independence in 2006. Most of the clients of Ana Kolarevic and her office are the foreign physical and legal persons – many of them with the status of strategic investors for Montenegro – who chose the Ana Kolarevic Law Office precisely because they wanted the best lawyer and the best team.

In the state which restored its independence relatively recently and which is faced with significant infrastructural problems and obstacles on its path to Euro-Atlantic integration, it is not easy to find highly professional legal assistance and a proper response to the problems foreign investors may encounter.

Highly professional legal assistance is exactly what the Ana Kolarevic Law Office team provides to its foreign clients, putting all its efforts into ensuring understanding between foreign investors, their business habits and expectations on one side; and the business environment, institutions of the system and constantly adapting standards and regulations on the other. The advantage of Ana Kolarevic Law Office lies precisely in the knowledge of local circumstances, the mentality of the Montenegrin people and the way that Montenegrin institutions function, as well as the mentality, business ethics and ambitions of its clients.

The unique quality of the Ana Kolarevic Law Office lies in the diversity and quality of the services it provides to its clients, as well as in the personal experience of Ana Kolarevic gained through her engagement in law practice and judiciary during several decades where she held the position of a judge in the Basic, Higher and Supreme Courts.

In such a small market as Montenegro, a narrow specialisation is almost impossible and therefore the majority of lawyers have to practice all fields of law. However, Mrs Kolarevic managed to specialise in a way, since she has never practised criminal law.

Ana Kolarevic Law Office has established a good cooperation with one of the most reputable Austrian law offices – Lansky, Ganzer & Partners. This reputable office, which has a strong presence in central and south-eastern Europe and elsewhere, has chosen Ana Kolarevic Law Office as its partner in Montenegro. In this way, Ana Kolarevic Law Office has become part of the international network of legal experts with international experience and strong knowledge of local circumstances deeply rooted in their business environments.

For its contribution in the field of law practice, Ana Kolarevic was awarded The New Economy Legal Award for Best Business Lawyer in Montenegro for 2009 and the World Finance Legal Award for Best Lawyer in Montenegro for 2010 and 2011, while her office was awarded the World Finance Legal Award for Best Corporate and Commercial Firm for 2011.

Montenegro is a Mediterranean country and future EU member, with a remarkable culture and biodiversity, a dominantly liberal concept of economy and a low profit tax rate (only nine percent) making it very attractive for foreign investments. It has always been a politically stable country, even in the period which was turbulent for the region. That is the key advantage for Montenegro when it comes to the potential for foreign investments. In spite of the fact that Montenegro is not a member of EU, the official currency used in Montenegro is the euro.

After the restoration of independence in May 2006, the Montenegrin economy experienced rapid growth and development, particularly in the field of real estate and construction. This period was characterised by significant direct foreign investment inflow, strong development of the tourism sector (particularly in terms of inflow of foreign tourists), and the start of many greenfield projects (several of which were by clients of Ana Kolarevic Law Office).

Unfortunately, unlike the positive trends that characterised 2006 and 2007, the trends were negative in 2009 and 2010 – due in part to the global recession, but local factors (poor assessments in real estate and construction, and incorrect risk assessment in the banking sector) also contributed. These were the problems and the new situation that domestic and foreign companies and entrepreneurs doing business in Montenegro had to deal with.

In spite of the negative trends, Montenegro recorded a relative growth in the field of tourism – 7.7 percent in the first 10 months of 2010 compared with 2009 – and modest growth in BDP. Most importantly, Montenegro achieved the status of EU membership candidate.

In the last couple of years a significant step forward has been made in eliminating business barriers and stimulating the development of small and medium-size enterprises, the role of which should be dominant in the Montenegrin economy. In that respect, Montenegro adopted a whole set of new laws, drafted with the support of European experts, that are aligned to European legislation and standards and aimed at encouraging entrepreneurship and eliminating bureaucratic barriers.

Another positive development is that the recession and economic crisis created the conditions for more realistic prospects and ambitions, which is a good basis for new foreign investments and long term sustainable projects.
Aspirations for an ‘overnight profit,’ too high prices, the lack of professional attitude and expertise, insufficiently quick changes in institutions and the lack of infrastructural capacity, together with the global economic crisis, contributed to the Montenegrin recession and economic crisis. And it was precisely the crisis that proved the need to face these problems and work on the process of solving them.

The significant progress that Montenegro made in strengthening its institutional capacities is reflected in the fact that Montenegro got the EU membership candidate status. Montenegrin institutions are in the process of adopting and implementing European standards to prepare Montenegro for future EU membership.

Montenegro is also in the process of NATO integration. In the NATO summit held in Lisbon in November 2010, NATO welcomed the significant progress that Montenegro made in the field of Euro-Atlantic integration and Montenegrin contribution to the safety in the region and in general, as well as the active engagement of Montenegro in the process of the Membership Action Plan (MAP), which shows determination of Montenegro to join the Alliance.

All of this creates a good ground for new investments, for strategic investors and long-term sustainable development projects.

In the time of economic crisis and recession, the role of lawyers is essential and indispensable.

Ana Kolarevic Law Office has been assisting most of its clients from the time of their first arrival to Montenegro. The office followed them and their development at the very beginning, in the period of economic boom but also in the time of the recession and gradual consolidation.

Ana Kolarevic Law Office has always had a sincere relationship with its clients. Avoiding both pessimistic attitude and exaggerated optimism, it has always provided its clients with an objective view – a precondition for high-quality decision making.

The core of the Ana Kolarevic Law Office is the rich and extensive experience of Ana Kolarevic – this makes it a natural partner of foreign investors. It is her knowledge, professional attitude, development of a full confidence-based relationship with the client, and the certainty that comes from her realistic attitude, her analytic capacities and proper assessment of all factors. With her and her team, clients are firmly on the ground when it comes to assessments. This realistic perspective ensures a positive outcome to the relationship.

Ana Kolarevic and her well organised team of young professionals, lawyers and associates work according to the principle of one-day-at-a-time on the issues that are within their field of competencies. From first greeting to final solution, Mrs Kolarevic and her team of young professionals offer clients the confidence and certainty of experience combined with the energy and tenacity of youth.

Turkey; industry attracts PE

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Mostly because of the experience Turkey gained by its domestic financial crisis in 2001, and also due to the strong legal and financial system created afterwards, the global financial crisis did not affect the financial markets of Turkey as it did the rest of the world. This evidence of its strong financials, coupled with Turkey’s  return on investment ratio and time rates are much more higher compared to its competitors, caused a significant increase in investments by private equity firms and interest in the country.

Within the Turkish market practice, private equity capital is primarily sought by companies that are financially distressed but operationally viable and unable to process profitable investments due to lack of adequate financial resources; as well as by non-distressed companies aiming to develop their existing business, or entrepreneurs who wish to exit from the companies they have incorporated. Investors usually stay two to seven years in a company and after restructuring and management of the company for a few years, the investor exits through selling its shares to a strategic buyer, taking the company public with high returns or by selling the target company to another private equity firm.

Although Turkish shareholders traditionally have sceptical opinions towards private equity firms, Turkish companies are more open to the idea of private equity today. The concept is sometimes misunderstood and it is a common idea that an investor’s motive is always to get hold of the joint control of the firm through minority shareholding. This belief causes a mismatch between the shareholders of the target and private equity firms. In fact, private equity investments aim to obtain significant control of a (usually private) company in the hopes of earning a high return. Control is sometimes achieved through acquisition of a majority stake in the company or through certain voting and/or management rights granted to the investor which has acquired a minority shareholding in the target company.

Observing the history and background of private equity acquisitions in Turkey, it is clear that no specific industry or type of company has typically been the targets of the private equity transactions. The interests of investors range from food and beverage (Mey Içki and Yudum), retail (Beymen, For You and Migros), transportation (UN Ro-Ro) and media (Digiturk), to the health sector (Acibadem, Medical Park and Memorial Hospitals), pharmaceuticals, IT and real estate. However, there happens to be an evident lack of interest or suitable targets in three main industries: financial services (especially banking), textiles and tourism.

Furthermore, significant private equity firms such as Pinebridge (AIG), NBK, NBGI, Global Investment House, Bancroft Group, Qatar First Investment Bank, Bridgepoint, Carlyle Group are showing their interest in the Turkish market by establishing their liaison offices in Turkey. Moreover, Turkey based funds such as Turkven Private Equity are growing their fund sizes.

General legal structuring of PE investments
Due to the lack of specific legislation regulating private equity investments, they are governed by agreements that are comprehensively drafted and negotiated by the parties. Since private equity investments in Turkey are generally realised by acquiring the target companies’ shareholding, and such acquisition is realised through participating to a capital increase and/or a sale of shares; the main instruments that are used for such acquisitions are share purchase agreements or share subscription agreements. The parties of these agreements may agree to govern these agreements by a law other than Turkish law. However, in Turkish legal practice, local parties prefer to govern the agreements by Turkish law. Turkish law is a modern, solution-based and flexible legal system. On the other hand, the flexibility provided under Turkish law is not unlimited and certain provisions should be drafted in the agreements to ensure their enforceability. Swiss law is also preferred as the governing law since the legal fundamentals of Turkish law are reflected in Swiss law.

In addition to the importance of choice of law in share purchase agreements or share subscription agreements, representation and warranty items are the provisions which are of central importance, since the framework of the liability of the seller towards the private equity investor is determined through these provisions. Under Turkish law, share transfer is considered as a sale of shares (rights) exclusively and is not considered as the sale and transfer of the enterprise in general. Therefore, the liability of the seller is limited with the qualifications of the shares and cannot be extended to the qualifications of the enterprise automatically. In order to extend this liability, representation and warranty provisions are used in agreements. However, not the representation and warranty items themselves provide this extension. The legal character of representations and warranties should be carefully determined.

The second important instrument used in private equity investments is the shareholder agreement. Standard provisions of a shareholder agreement such as transfer restrictions, board representations, and veto rights of the investor are common features in Turkey as well. Furthermore, as the investors stay with the company for a short period of time and then prefer to exit from the company that they invested in, exit mechanisms such as tag-along, drag along rights or initiation of a public offering, which can be the major deal breaker issues, are also regulated under shareholder agreements.

With its innovative and dynamic legal approach, Esin Law Firm has played and is playing the protagonista within the legal practice of private equity transactions of Turkey with its six partners and 31 associates. The firm has a strong practice in mergers and acquisitions, real estate, corporate law, dispute resolution and competition law as it was awarded the best M&A, best Real Estate and best Dispute Resolution Law Firm by the 2011 World Finance Legal Awards. Esin Law Firm’s diversified and talented team covers all aspects of M&A transactions and provides high quality and efficient services for private equity firms as well as local shareholders and has a reputation for satisfying both the needs of complex foreign investors and local shareholders.

For more information www.esin.av.tr