Privatization in Turkey

This week the Pre-MBA World Tour traveled to Istanbul in order to better understand the current business environment in Turkey and to see what types of opportunities might be available to CBS students and alumni during the next decade.

Before arriving, we knew that (as the song goes) Istanbul was once Constantinople. But we didn’t know that Turkey is currently undergoing a significant social, economical and political transition. And somewhere in these winds of change lie several interesting opportunities.

For nearly 25 years, Turkey has been attempting to transfer its state-owned businesses to the private sector. Following a financial crisis in 1994, and another in 2001, the country’s financial system has finally shaken off hyperinflation and has begun to privatize many sectors of its economy.

Furthermore, since 2005 Turkey has been in negotiations to join the European Union. Many of the requirements to join the EU have provided an incentive for Turkish policymakers to change the way business is done.

Among these changes has been a significant movement toward privatization, and this movement (along with a new currency to curb inflation) has made foreign investors more confident. Private equity has begun to flow into the economic system, and GDP has been growing at nearly 8 percent per annum.

Although many people believe that Turkey won’t be admitted into the EU for another five to seven years, the changes that have been made to prepare for this transition have positively impacted the economy.

Whether Turkey should join the EU remains a controversial issue, yet there are clear benefits. One is that Turkey has a young and dynamic population that can contribute immensely to the workforce in Europe (where the average age of the population is increasing every year) and thus can play a role in increasing Europe’s competitiveness with such countries as China and India.

In addition, an interesting political shift has arisen relating to the election of the conservative AK Party. The AKP won the election in August 2008 for the second time, which led to the stabilization of the Turkish economy and an increase in foreign direct investment. The AKP has very strong connections with the United States and has a vision of using aggressive economic growth vision to gain admission into the EU, yet ongoing judicial debates and the party’s nonsecular policies have created uncertainty about its sustainability.

While these controversial topics remain to be tackled on an international level, Turkey is experiencing GDP growth, a stronger currency (fluctuating between 1.18 and 1.39 USD/TRY) and a lower inflation rate, leading to increased urbanization and development at the intersection of Europe and Asia.

The natural beauty and historical richness in this melting pot have increasingly attracted tourism in the past 10 years, and Istanbul remains the center of Turkish history, culture and business. We have found Istanbul to be a wonderful city full of diversity and opportunity.

For more information about the CBS Pre-MBA World Tour, visit www.cbsworldtour.com.

What to do in Turkey

If your fascinated by Turkey and have always wanted to go, but have some sort of reservation about going, your not alone. I've heard lots of people say that they've heard its not safe to travel alone, or its not safe for women to travel without men in the group, but I don't think those impressions are justified (at least for Istanbul anyway).

I think I speak for our group by saying that we've found Istanbul to be a very friendly city, and possibly one of the most hostpitable in Europe. If your going to Istanbul, here are a few things you should be sure to check out:

- Fortress of Europe
- Turkish Bath (hamam) at Süleymaniye Mosque (a must do!)
- Topkapi Palace, Hagia Sophia, Blue Mosque
- Paddle boat on the Golden Horn
- Basilica Cistern, Hippodrome
- Dolmabahce Palace
- Cruise on the Bosporus
- Grand Bazzar, spice market
- Walk along Istakal street (near Taksim Square)

A few great foods/snacks to try:

- Dondurma (sticky ice cream served with a sword)
- Turkish delight (stick, yet satisfying)
- Turkish tea/coffee
- Fresh fish
- Nargile/Hooka

Prices are quite affordable in Turkey. The currency is the New Turkish Lira and prices are generally about 50% less than they are in western Europe. The bazaars are also a great place to test out your bargaining skills.

One last thing. Go to Reina! It's one of the hottest lounge/club/restaurant in Europe.

Fostering the Entrepreneurial Mindset in Italy

In order to better understand the business environment in Italy, we attended a private equity conference where we had the opportunity to meet with the US Ambassador of Italy.

After a successful career at his eponymous named private equity firm (Freeman Spogli), Ambassador Ronald Spogli entered the US State Department where he believed it was in the best interest of the United States to help modernize the stagnant Italian economy. The embassy recently established an initiative called the Partnership for Growth, which is designed to help foster the entrepreneurial mindset in Italy through four main objectives: 1) stimulate the venture capital industry and promote Italian entrepreneurial role models; 2) modernize the country’s capital markets; 3) spur innovation by protecting intellectual property rights; and 4) send Italian students to US schools to learn the American way of doing business.

In fact, the Italian venture industry is really quite nascent. A major constraint is that the entrepreneurial mindset--which is quite common to most people here in the US--is a very foreign idea to most Italians. One of the reasons for this lack of entrepreneurial drive is the fear of bankruptcy. In the US, most new businesses fail… and it’s okay to fail and try again. But in Italy, if a new business fails, it’s not just the business that fails, the entrepreneur’s personal life might be ruined as well (e.g. no longer able to vote, never get another loan, social failure, etc.).

A second reason is that Italian investors are not typically comfortable with stomaching the risk required for PE/VC investments; they prefer to invest in more traditional asset class such as public equities and bonds. As evidence, consider this statistic: in the US, pension funds typically supply nearly 60% of the total capital invested in new private equity funds. In Italy, pension funds supply only 1% of such capital.

The Embassy is already seeing some good results. Last year, they sent several Italian investors to Silicon Valley in order to learn the American approach to venture capital. Within three months or returning to Italy, these investors have already established a formal angel network and have reviewed nearly 200 new business plans! There was a great amount of energy in the air at the conference.

One thing that makes Columbia Business School unique is the experiential learning model, which simulates the entrepreneurial experience. At Columbia, the idea of a business a plan competition (for example) is well understood, but in Italy it is a whole new concept.

Italian students attending Columbia Business School (and participating in organizations such as NOVA) will obtain a unique and well-fitted experience to help them serve as catalysts for change in the renovation of the Italian economy. They will not only learn new ideas, but will also obtain the skills and the network required to put these ideas into practice.

Private Equity: The Secondary Market

Ten minutes south of Zurich is a little town called Zug. In Zug, we had the opportunity to meet with a few folks at a publicly listed investment firm called The Partners Group, which is one of the major players in what is referred to as the private equity secondary markets. Below are a few things we learned about PE “fund of funds”.

A typical private equity fund is composed of “limited partners” (LPs) and “general partners” (GPs). The limited partners contribute the money to the fund and the general partners go out and find companies to buy and then manage these investments on and active (or passive) basis. Because the GPs are doing all the work to make the LP’s richer, GPs are compensated in multiple ways (e.g. a percentage of assets under management, carried interest, co-investment rights, etc.). The LPs are typically institutional investors, wealthy individuals or another PE fund (called a fund of funds).

A fund of funds is basically a PE fund that, instead of directly acquiring companies, invests in other PE funds that do. Most fund of funds invest in new PE funds. This is called the “primary market”. This process involves LPs analyzing GPs track records and their proposed investment strategies; valuation is rather subjective because there are no assets in the fund yet… it’s very similar to a venture capital investment where the investor is evaluating the management team and their ability to executive their proposed business plan. As the GPs begin to aquire companies, the net value of fund changes in a pattern that is referred to as the “J-Curve”. I won’t get into the details of how the J-Curve works, but I’d highly suggest Goggle for more info.

Now, let’s discuss what happens when an LP (that most likely owns holdings in several funds) decides to liquidate its own portfolio. If it’s a large LP with several investments, it will hire an investment banking firm to conduct an auction process that is very similar to any other sell-side deal (build a book, build a list, call the list). If it’s a smaller LP, it may opt to find a buyer on its own through an independent finder. The finder is simply a match maker and doesn’t conduct an auction process, so they are typically compensated 50-75 bps rather than 1-3%. This process of one LP buying the investments from another LP is what the secondary market is all about. The idea is to buy out other LP interests at an inflection point (hopefully the bottom) on the J-Curve. This provides an opportunity for the secondary investor to achieve a higher IRR because it doesn’t have to wait out the early years of the PE fund when there are no cash distributions to the investors.

Switzerland – More than Cheese and Chocolate

If I had one pre-conception of Zurich, it would have been from all the movies… you know, where the bad guy has his crony wire the ransom payment to his Swiss account in Zurich. It turns out, that there are a number of reasons why the banks in Switzerland have gotten such a noble reputation. Sure, Switzerland has several tax advantages, but the main thing that sets the Swiss accounts apart is their high level of confidentiality, primarily due to Swiss banking laws. The simple act of opening a checking account is nothing short of the stereotypical process seen in the movies where the client is taken into a sealed room in the back of the bank and given an electronic key to open the safe. The names of most clients aren’t even known to employees.

Zurich is the “private wealth” capital of the world. Nearly most of the bankers in Zurich focus on convincing high net worth individuals ($10m+) to hand of their money for a management fee. Fortunately, we had the opportunity to visit with a few Columbia alumni working at UBS and Credit Suisse to get some inside information about the whole process. Basically, in order to be successful in PWM, you need to be good with people, know your stuff, and have an entrepreneurial drive. There are two types of wealth managers: hunters and farmers. As you’d expect, hunters bring in new clients and new money for the firm to manage and farmers are typically stewards over existing accounts.

So what should you consider if you’re thinking about working in Zurich?

Upside: low tax rate (10%), mountains and lakes within 2 minutes from the office, great transportation, very clean city, amazing chocolate, high paying jobs, reasonable rent, clean air, good hours, centrally located (1-2 hrs to anywhere in Europe), and you don’t need to speak Swiss, German, French, or Italian (the 4 official languages) to live there as nearly 90% of the population also speaks English.

Downside: very expensive (e.g. equiv. of $300-400 for shoes, $15USD for a combo meal at McD’s, etc.), small town with not much to do, really uptight laws, regulations and fees, Swiss are very nationalistic and often dislike foreigners, and finally… you might just get stuck there because you never want to leave.

Frankfurt: the other Mainhattan

Frankfurt is much different than I had anticipated. What I expected to be a quintessential German town, turned out to be a very modern city, which strangely reminds me of Charlotte, North Carolina. Although it is a much smaller city than London or Paris, Frankfurt has the tallest buildings in Europe and because it sits directly on the Main River (pronounced Mine) it is often referred to as the other “Mainhattan. It also has an un-proportional amount of investment bankers, giving the town its other nickname “Bankfurt”.

There seems to be lots of advantages to working in Frankfurt. Because most of the companies operate in several foreign countries, most business is conducted in English. So if you don’t speak German, you can still get by okay. That said, you would be much better off working for an American-based firm, rather than one of the three large Frankfurt-based firms (Deutsche Bank, Commerzbank, and Dresdner).

Another advantage is that the city is very affordable to live in. Euros spent on rent go much further than they do in any of the other major financial city centers; you also have the convenience (and luxury) of being able to drive your Mercedes or Porsche to work around town without having to worry about finding a place to park. Compared to Paris or London, prices for everyday goods are nearly half the price in Frankfurt. The public transportation is excellent (you don’t even need to swipe your card to use the subway, trolley or bus), but since Frankfurt is a small, clean, and pedistrian city, you can pretty much walk anywhere you need to go.

Clearly one of the downsides to living in any small city is the dearth of nightclubs, restaurants, and cultural centers. Although Frankfurt seems to have many of these things, one thing it does lack is diversity.

For more information about the CBS Pre-MBA World Tour, visit www.cbsworldtour.com.

"With great power comes great responsibility" -- Spidy's Uncle

While here in Paris, we met with a few CBS alumni, including the President of the Alumni Club of France. Among the many intriguing items we discussed, one important theme seemed to leave us with yet another perspective on our careers: responsibility. Much like the famous line from Spiderman, "With great power comes great responsibility", we were reminded that, as new Columbia Business School students, we are now part of a larger community that has the ability (and inherent responsibility) to make a positive difference in the world.

One of the great aspects about Columbia is its diverse and global student body and alumni organization. Our community does not just include New York, it encompasses the entire world. During this trip I have been reading “Making Globalization Work”, by Professor Joseph Stiglitz. It has been a real eye opening experience to realize that perhaps “another world IS possible”. As leaders of our next generation, it will be up to us to solve the challenges of globalization. Globalization is happening whether we like it or not, but how it should happen is the question.

Paris - First Impressions

After a long week in London, the journey has now moved across the English Channel and arrived in Paris.

I’ve always had France high on my short list (ok, my long list) of places to go someday, even thought I have often heard clichés such as “it’s a really dirty city” or “they all hate Americans and refuse to speak in English”.

After being here for few days, I can say that I have not met a single unfriendly person yet, nor I have I seen anything I would consider “dirty” other than the dirt itself. It’s true. There are a lot of un-paved areas around most of the monuments and people are forced to walk in the dirt. What’s with that anyway?

But if you look past the actually dirt (and a few random red-light districts like Moulin Rouge), you will find a beautiful city with friendly people and excellent cuisine, art, and culture. To top it off, you also have a number of monuments with breathtaking grandeur.

A few random observations and recommendations: The street market near Sentier, paying 1 EU for a bike to ride around anywhere, don't rush to see all the tourist sites; to really appreciate Paris you have to slow down and let it consume you.

There were a few things that really caught my attention and made me think… why do they do it what way, or even better… why don’t we do it that way? Stay tuned for our subsequent blogs called: Innovations from Abroad.

For more information about the CBS Pre-MBA World Tour, visit www.cbsworldtour.com.

The cost of earning a living in London

Today we met with a few US expats who are currently working in London. Robert works at JPMorgan in the credit risk department where he is responsible for making trades to hedge certain risks that the JPM assumes on behalf of its corporate clients. The other expat, Simon, works at a US-based hedge fund called Davidson Kempner Partners, where he is responsible for managing a portfolio of assets using an investment strategy called “event arbitrage”.

Instead of writing about the investment strategies and career perspectives of these two individuals, I thought (since we will be learning this at Columbia anyway) it would be more interesting to discuss the true cost of working in London. In an earlier blog, we discussed the cost of visiting London, but that was just the beginning. If you plan to actually work in London, you’ll need an apartment (or flat) which is likely to run you between £300-400 per week (translation: $2,500 - 3,400 per month). Most expats receive some type of housing subsidy, which helps reduce the cost, but that’s still just one side of the equation.

You’ll also want to consider that your salary and/or bonus might be in USD (and much of the time it is). This will subject you to additional foreign exchange risk, which for the last several years anyway, has only shrunk the paychecks for most US expats. And if you’re expecting the company to feel sorry for you, and give you a step up in pay, do bet on it. That said, if you are into betting, you can hedge your forex risk by selling USD early in the year, and buying it back when you get your bonus. Assuming you then get the bonus you were expecting, you will have offset the exchange risk you experienced between those two periods of time.

Another major consideration is tax. If you’re a US citizen, you are required to pay US taxes—regardless of where in the world you earn your money. This means that you’ll have to pay tax not only to Uncle Sam, but also to the Queen of England (can we call her Aunt Lizzy?).

I’m sure we’ll have more ideas on this topic once we get to Dubai.

For more information about the CBS Pre-MBA World Tour, visit www.cbsworldtour.com.

Restructuring: is now the time to get in?

Today we visited with a lovely fellow (as they say here in England) at Blackstone who works in the corporate restructuring group.

Following are a few highlights from our conversation:

Restructuring is a fairly new concept in the EU; not very many banks or corporations are very familiar with the practice, so it’s a fairly nascent market. The UK has much stricter bankruptcy laws, which mean that the whole restructuring concept is a bit trickier to deal with. Blackstone is one of the few firms doing restructuring deals in the EU, but Houlihan Lokey and Lazard are a few of their main competitors. The restructuring market is much more saturated in the US, but it remains to be a very small (and cut-throat) community.

At most firms, restructuring generally falls under the "advisory" business, but is very different from M&A or capital markets. While M&A transactions typically involve a fairly straightforward auction process (build a book, build a list, call the list), restructuring deals are much more complex and unique. Why? Because they involve several more parties per transaction and are often less predictable. Most companies undergoing restructuring transactions are over-levered and have serious operational issues in addition to their capital structure (i.e. a liquidity crisis). Also, there is much more tension and drama involved because there is generally a losing party involved; so unlike an M&A deal (where each party is excited about their newfound "synergies"), restructuring generally involves a bit of pain for the equity holders during the de-leveraging process. Unlike an M&A deal, banks are typically brought in and retained (hired) by the creditors, rather than the corporation or the equity holders.

As most of us know, restructuring is a counter-cyclical business. For those that are less familiar with the term, this means that when the market is hot, the restructuring guys get to play golf on the weekdays, but when the market crashes (and all the other bankers get laid off), these guys roll up their sleeves and get to work.

At the first open house, we were all giving each other high fives for timing the market just right and getting into b-school at just the right time. A lot of people are thinking about going into restructuring in order to capitalize on the much anticipated recession, but is now the right time?

It's yet to be determined, but (according to my new friend at Blackstone) chances are... it’s too late. Restructuring isn't something you get into for the short run; it's a very specialized practice that takes a few market cycles to really understand the business and get to know the players. It also has a short window of opportunity because, unlike the weather in London, there are typically more sunny days than rainy days in any given market cycle.

That said, Blackstone hasn't seen any significant increase in restructuring deals... yet. It seems that most of the de-leveraging has been taking place in the capital markets, but hasn't yet hit the corporations, who seem to still have a lot of cash on their balance sheets. A few bad quarters and this could change very quickly.

Okay, there it is. I'll end with saying that I don't have a restructuring background, and most of this information was derived from one conversation, so I'd love to hear anyone else's thoughts about the matter. Is now is the right time to get into restructuring?

Feel free to post comments on any of the blogs. They are here to make us all smarter, so feel free to add any additional insight you might have!

For more information about the CBS Pre-MBA World Tour, visit www.cbsworldtour.com.

Lunch with the local Parish

This morning I was awoken by church bells (something I'd only really heard in the movies) and I decided that, since I was in England, I should naturally try out the Sunday service of the Church of England. As an American protestant, I have visited a few Roman Catholic cathedrals in the states, but have never visited an Anglican church, let alone even really known the difference between the two (besides the famous schism from Rome by King Henry VIII).

After service, I decided to stay and visit with a few of the local members and soon got invited to tea with the priest. Tea turned into a full meal and pretty soon I found myself laughing and sharing stories with several members of the Parish's leadership team (sorry, not sure what the correct word is). It was fascinating to see that behind the tall hats, shiny robes, and complicated words they were ordinary people who had similar interests and even a sense of humor!

For more information about the CBS Pre-MBA World Tour, visit www.cbsworldtour.com.

Yes. It's confirmed. London is expensive.

A few weeks ago, I had a friend give me a good tip for London... "London is the only place in the world where you can buy nothing and you're money will still disappear". That seems to be a true statement.

As I've shopped around at various stores around town, I've come to conclude that a handy rule of thumb is that the numbers on all the price tags are basically the same as NYC, only the units are in pounds instead of dollars. So imagine your favorite pair of Tommy jeans... instead of $80, they would be £80 (or $160). That turkey sandwich in NYC for $12 would be $24 here in London.

Try this one of for size: Gas (or petro as it's called here) is approx £1.8 per liter (or $3.6/liter = $14.61/gallon. Think about that next time you're complaining at the gas pump.... or when chosing between a hybrid or an SUV.

As of today, the exchange rate was 1.97 USD to GBP. That said, that's the bank rate you would get only if you used your debit/credit card (assuming no exchange rate fee from your bank). If you wanted to convert your cash, you would have to do it at an exchange booth. At the last booth I noticed, the "buy and sell" rates for USD and GBP was approx 1.91 and 2.04, respectively. We're meeting with a currency trader tomorrow and will hopefully get some additional insight into the forex markets and what makes those spreads widen or narrow.

For more information about the CBS Pre-MBA World Tour, visit www.cbsworldtour.com.

London - First Impressions

I'm still not sure how I plan to structure these blogs, so I'll just start with a bulleted list of my first impressions in each city. Hopefully, over the course of the week, as we obtain deeper insight into each city's cultural treasures, we will be able to see which of the impressions were more or less accurate. So here goes...

- Surprisingly not much different from the US
- Feels a lot like Boston (I guess they call it NEW England for a reason)
- The subways and streets are very clean (curious, as there are no garbage cans on the streets)
- No street signs. Oh wait, they're on the buildings... ok, never mind, London has street signs too
- Transit system is very sophisticated. Double-decker buses seem like a great idea.
- PDA (i.e. making out in public) seems to be the norm. I'm guessing this is just a taste of what to expect in continental europe...?
- Beer advertisements all seem to emphasize "all natural ingredients". Curious if this is just a recent marketing trend, or an ordinary cultural preference.
- Not as diverse as expected
- Everything closes around 6 PM.

This is just from the first 12 hours... I'm sure there will be lots of other observations to be made, and lessons to be learned, over the next 5-6 days in London.

For more information about the CBS Pre-MBA World Tour, visit www.cbsworldtour.com.

Let the adventures begin!

Welcome to the first blog posting for the CBS Pre-MBA World Tour. For those of you who may be tuning in for the first time, this blog is dedicated to covering the adventures, first impressions and learning experiences of several Columbia Business School students during our summertime journey to nearly 20 cities around the world.

Our first stop begins in London where we plan to visit with a few of our future Cass of 2010 classmates and the local alumni chapter.

For more information about the CBS Pre-MBA World Tour, visit www.cbsworldtour.com.