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Private Equity vs. Venture Capital and Applicable Turkish Legislation

Private Equity vs. Venture Capital and Applicable Turkish Legislation

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In today’s world, both globally and in Turkey, there are an increasing number of corporations that are in constant search of funding and investment either to grow a newly started promising business or to increase the profitability and efficiency of an already established business by moving it to the next level. In order to meet this need, there are also individuals or corporations, that is to say, investors, with the capital to provide the liquid injection in exchange for shareholding position or other certain benefits in the invested company.

From this context emerged a number of concepts that describe various ways of investor-company relations such as angel investing, private equity and venture capital. In this article, we will explain the latter two concepts, as they form the most frequently encountered methods of corporate investment and are frequently confused with one another due to their interconnected nature both in regulation and in application.

How Are Private Equity and Venture Capital Similar?

Private equity and venture capital are modes of capital investment that both concern third party investors or investing firms buying into a corporation that is in need of capital injection. In both of these forms of investment, the investors invest capital into a private company in exchange for equity, and usually aim to exit from this investment after it turns a profit for them.

Another similarity between the two approaches is that they are both hands-on investments, as in the investors will usually wish to be involved in the business, and may even wish to take a majority stake in the corporation in order to directly run it, or to otherwise be represented in the Board of Directors. While this means a change of control in the business against the previous shareholders, it also means new and valuable expertise coming along with the capital injection, potentially increasing profitability in the long term.

What Are Differences Between Private Equity and Venture Capital?

While private equity and venture capital models largely overlap, and are sometimes even used interchangeably, there are actually some key differences between the models in their target investments, shareholding strategies and exit strategies.

First of all, the models target vastly different types of businesses. Private equity investors generally look for established businesses that are struggling and in need of capital injection for one reason or another. Private equity investors buy into the business, make significant changes and improvements that help it turn a healthy profit, and then exit. This approach also means that private equity investors take on less risk, as they enter into an established business not with the expectation of multiplying their investment, but to return it back to a profitable situation, making a relatively low return on their investment in the process.

In contrast, venture capitalists are on the lookout for start-ups that offer unique and new perspectives on the market, which are usually corporations that are yet to ever turn a profit and still in need of further establishment of their operation in order to become an actual actor in the market. This approach comes with a much larger risk, as the venture capitalist is essentially investing in an idea. However, as the investment targets are small operations that are just getting started, the potential return is much higher, and the venture capitalist potentially stands to earn multiple times its initial investment upon exit.

Another point of dissimilarity between private equity and venture capital is the favoured shareholding strategy of the investor. While investors make sure to retain some of the control of the company in both forms of investment, private equity investors are much more likely to require a majority stake in the company, essentially giving them full control of the company in most cases. This allows private equity investors to act freely within the corporate structure and make any decision regarding corporate governance as well. In contrast, venture capitalists generally ask for a minority stake in the company. While this tends to cede some level of control and insight to the venture capitalist, the original shareholder, who is usually the origin of the idea, retains the ultimate decision authority.

Finally, the exit strategies of venture capitalists and private equity investors are also vastly different. As a private equity investor is looking for a quick and minor return, it aims to turn the company profitable as soon as possible, and looks for a quick exit afterwards. A venture capitalist, on the other hand, is looking for a substantial payout, and is willing to stick with the company over longer periods. In any case, after it is satisfied, the investor may exit the company via multiple methods such as an IPO, a trade sale or a secondary buyout.

Turkish Legal Framework on Private Equity and Venture Capital

As with any form of investment, corporate investors and the companies that are being invested in also require some form of regulation in order to streamline the investment process while offering protection against some of the risks. Therefore, venture capital and private equity investments are regulated areas in many jurisdictions.

In Turkish Law, there is no legal distinction between private equity and venture capital and also no legislation regulating the general aspects of capital investments. Instead, the Communiqué on Venture Capital Investment Companies of 2013 [“CVCIC”] and the Communiqué on Venture Capital Investment Funds of 2014 [“CVCIF”], both issued by the Capital Markets Board of Turkey regulate the formation and operation of Venture Capital Investment Companies [“VCIC(s)”] and Venture Capital Investment Funds [“VCIF(s)”], which are specific forms of companies and funds dedicated to capital investments. While the Communiqués do not specify the form of investment that should be undertaken by VCICs or VCIFs, they are more suited towards investors looking for venture capital investments.

Companies that are formed or operating under CVCIC must be formed as joint stock corporations with a share capital of at least 20,000,000 Turkish Liras, must bear the phrase “Venture Capital Investment Company” in their title, and must be publicly traded at present or in the future, with a free float rate of at least %25. There are also several other requirements that must be met by these companies and their founders, which are explained in detail within the CVCIC.

On the other hand, funds that are formed under CVCIF are not legal entities and are only funds that are formed by several licensed entities such as portfolio management companies or venture capital investment companies.

VCICs and VCIFs operate under the regulation of Capital Markets Board of Turkey, but are also the subject of many financial incentives as a result. The main benefit of VCICs and VCIFs are tax incentives. The revenues of VCICs and VCIFs are exempt from income tax, while dividends earned from VCIC and VCIF shares are also exempt from corporate tax. Companies that invest in VCICs or VCIFs also benefit from a variety of other tax incentives aimed to increase participation in venture capital investments.


As a developing economy, Turkey has an emergent market of start-ups, as well as a functional capital market, which creates an environment fit for foreign or national corporate investment of any form. CVCIC and CVCIF also help create an incentivised process for prospective investors looking to invest into Turkish firms.

Meanwhile, start-ups and other companies looking for investment should approach potential investors with a clear plan and proposal regarding shareholding structure and growth strategy in order to secure reliable investment that will help serve the companies while ensuring adequate legal and financial protection.

By Zahide Altunbas Sancak, Partner, and Aziz Can Cengiz, Attorney, Guleryuz & Partners

Guleryuz Partners at a Glance

We are Güleryüz Partners, an Istanbul based law firm, offering high-quality legal services to domestic and multinational clients.

Our team consists of energetic young professionals who are led by talented partners with strong academic backgrounds at prestigious universities in the USA, UK, and Germany, coupled with vast market experience exceeding a decade at top tier Turkish law firms. All our associates are fluent in English and provide legal advice in additional languages such as German and French.

Our practice ranges from complex disputes to sophisticated M&A and finance transactions. We provide niche legal services in a wide range of legal areas such as litigation and dispute resolution, local and cross border M&As, banking, finance and capital markets, venture capital investments and start-ups, and compliance and corporate governance (including data privacy, anti-corruption and white-collar crime, AML, and sanctions).

We value strong communication and information flow among our departments for the perfection of our legal services. This interdepartmental coordination enables us to take a more client-centric approach and to better understand and cater for the client needs. Our business perspective goes beyond providing excellent legal advice to our clients; we also collaborate with them as their business partners and offer them the entire legal ecosystem that they can thrive their business.  

As Güleryüz Partners, we heavily invest in our pro bono projects in Turkiye and work together with institutions, foundations, and other organizations to provide legal advice to the persons in need of help, while acknowledging the high costs usually associated with high quality legal services limit the access to justice for many people.

We also pride ourselves on fostering and promoting a diverse, equitable and inclusive work environment where every individual feels valued and respected.

For further information, you may visit our website at www.guleryuz.av.tr.