Oyak, the €5.5bn pension fund of the Turkish armed forces, is to invest in foreign assets for the first time since it was established over 40 years ago. At present the fund's portfolio is 30% invested in financial instruments and 70% in private equity. "Internationalising our portfolio is one of our priorities in 2008," says Oyak CIO, Caner Öner.
Officially incorporated as a pension fund in 1961, Oyak has created a business conglomerate controlling some 60 subsidiaries and joint ventures ranging from cement factories and financial services to auto production plants, agro-chemicals, construction, energy, IT, security and tourism. Partners include Renault and AXA.
In 2006 the fund's reserves were €2.87bn, yielding 25.1% - well above the inflation rate of 9.7% - making it Turkey's most profitable business group. At end-2007 Oyak's total assets were estimated at €5.5bn.
Last year, Oyak sold its banking arm, Oyak Bank, to the Dutch ING Group for $2.67bn (€1.98bn). "We now have the cash flow to include new asset classes in our portfolio," says Öner. "We have decided to start investing abroad because getting good returns from the Turkish market is becoming increasingly challenging."
Oyak is currently discussing investment options with its advisers. "We have an open-minded approach to the investments we will make," says Öner. "Our exposure to international markets can be either through a money market investment or a private equity acquisition. Our main objective is simply to get better returns."
The timing of the expansion into foreign assets would depend on developments in the global economy, he added. "We will be ready to diversify abroad when interest rates come down."
Öner concedes that the global credit crisis might have an affect on the Turkish economy and perhaps indirectly impact on Oyak subsidiaries that export their products. "But even then, we do not expect the impact of the sub-prime crisis to be significant," he says.
Although officially a pension fund, Oyak can also be seen as a private equity fund because of its focus on growth financing. Öner compares Oyak to other foreign private equity groups and notes that competition for investment targets in Turkey is bound to increase in the future. "The Turkish private equity market is becoming increasingly attractive both for local and foreign investors. Privatisations are still occurring and many local companies have become interested in selling their assets," he says.
Oyak's most recent acquisition was 49.29% of Turkey's largest steel producer, Erdemir, for $2.96bn in 2005. Oyak has since focused on developing Erdemir's operations. Production capacity is expected to double in 2008, and Erdemir's estimated market capitalisation has increased to $7.4bn.
"No big ticket items were added to our portfolio in 2007," says Öner. "We were screening the markets for new investment targets, but the sale of the bank and the need to digest Erdemir kept us relatively busy."
Öner says he expects 2007 returns to repeat that of 2006. "Our investments in cement performed very well throughout 2007, automotive and energy investments also yielded sound returns," he says. "The acquisition of Erdemir proved particularly successful over the course of 2007." In the first nine months of 2007, Erdemir's net profits of stood at €318m.
In 2008 Oyak has plans to invest a further $2bn in the steel sector as part of an ongoing programme to convert the plant at Erdemir unit Isdemir from round to flat steel production.
A feasibility study is being conducted to determine whether to construct a third turbine at the Isken Sugözü power plant in partnership with German industrial group Evonik. "Energy is an investment that is bound to be fruitful and yield healthy returns," says Öner.
Oyak also operates private pensions operation Oyak Emeklilik, which was established in 2003 and manages assets of approximately €160m in six separate investment funds. Some 85% of its 145,237 members have opted for a private pension plan and 15% for a group scheme. In 2007, its assets rose 60%.
"The participation of companies in [group] pension schemes, which is expected to increase as foreign firms expand their operations in Turkey, will give a big push to the market in the coming years," says Öner. "Because private pension saving is still a relatively new concept in Turkey, some people regard private funds as a savings account or a life insurance policy. Consumers have much to learn about private pensions."