Turkey’s Military Pension Fund Reaps Windfall

Despite tensions between Turkey’s generals and the Erdogan government, the military pension fund is making the most of the country’s pro-business policies.


For emerging-markets economies, it’s a sign of maturity to develop truly world-class enterprises. Mexico can boast of cement producer Cemex, Brazil of aircraft maker Embraer, South Korea of electronics giant Samsung or automaker Hyundai.

In Turkey arguably the best claim to such lofty status belongs not to an industrial company but to a pension fund — and the military’s at that. Ordu Yardimla¸sma Kurumu, or OYAK, as it is known, operates like a private equity fund rather than a portfolio investor, is more profitable than any of Turkey’s family-run conglomerates and enjoys a higher credit rating than the government. The man responsible for that success, Co¸skun Ulusoy, is a military history buff who approaches the art of the deal like a general preparing for battle. Since taking over as CEO in 2000, his investing acumen has helped OYAK deliver a sixfold increase in retirement benefits to the country’s military brass — and earned him a reputation as Turkey’s Warren Buffett. He describes his strategy bluntly: “We buy companies, manage them, turn them around and sell them for big profits.”

After a run of stellar returns, however, Ulusoy today finds his 22.41 billion Turkish lira ($14.4 billion) fund threatened on two fronts. Rising political tensions between Turkey’s military and the moderate Islamic government of Prime Minister Recep Tayyip Erdogan, whose pro-business policies have contributed to OYAK’s stunning success, are threatening to undermine the country’s economic gains. At the same time, a deepening global recession is thrashing stock markets around the world, slowing capital inflows into Turkey and provoking a sharp slide in the lira. The sudden deterioration in the investment climate threatens to dent the pension fund’s returns and stall Ulusoy’s plans to expand internationally.

Notwithstanding those challenges, OYAK’s bold commander remains remarkably upbeat about the outlook. The pension fund has amassed an acquisition war chest of $3.2 billion, thanks to astutely timed divestments of some of its banking and insurance holdings in the past 18 months — at virtually the peak of the market. Although he put his shopping plans on hold late in 2008 because of the global market turmoil, Ulusoy hopes to find attractive assets at even cheaper prices in the upcoming year.

“We have plenty of cash on hand for future investments,” the blunt, 58-year-old executive tells Institutional Investor in an interview at OYAK’s spartan offices overlooking the Bosporus in central Istanbul. He says potential targets include construction, energy and mining projects in Europe and North America. “We definitely want to go abroad, and this is the time to diversify,” he says. “We can’t keep all our investments in Turkey for risk reasons.”

Those risks have ratcheted up sharply in recent months. Weakening global demand has taken a huge bite out of Turkey’s exports. In the third quarter of 2008, GDP expanded by an anemic 0.5 percent compared with the same period in 2007 — the slowest rate since 2002. Yarkin Cebeci, an Istanbul-based economist for JPMorgan Chase & Co., predicts growth will slow to 2.5 percent in 2009 from 3.5 percent in 2008. The lira plunged by 26 percent against the dollar in October alone and was trading just below 66 U.S. cents in late December, down 24 percent for the year. The Istanbul Stock Exchange’s 100 index was off nearly 53 percent since the beginning of the year. And according to Cebeci, foreign direct investment into Turkey will likely have fallen to less than $15 billion by year-end 2008 from $22 billion a year earlier.


With the global credit crisis reducing inflows of foreign loans and investments upon which Turkey has depended for its high economic growth, the government has been forced to turn to the International Monetary Fund for the fourth time in ten years. Negotiations were under way in December for an IMF loan that could reach $40 billion. (The Turkish government hopes to announce a deal in January when an IMF delegation is scheduled to visit the country.)

Still, given the tough environment, Ulusoy plans to go ahead with his international expansion plans, says OYAK chief investment officer Caner Öner. He acknowledges that OYAK companies are vulnerable to the sliding stock market, and “returns may be affected as a result of decreasing dividends,” but notes that the $3.2 billion the pension fund has set aside for acquisitions is distributed between lira, dollars and euros — and is mostly liquid.

As markets and growth projections have tumbled, political friction has mounted between Turkey’s secular establishment, which enjoys strong backing from the military, and Erdogan’s ruling Justice and Development Party, known by its Turkish initials AKP. The government earlier this year passed a law to allow women to wear headscarves at Turkish universities. Opponents promptly challenged the move in the constitutional court, arguing that the change violated the secular traditions established by Mustafa Kemal Atatürk, who founded modern Turkey in 1923.

The court overturned the headscarf law in June, but one month later it narrowly rejected a request by the country’s top prosecutor to ban the AKP, which would have provoked a political crisis and forced early elections. The court decided instead to cut state funding to the party in half. The ruling sparked a brief rally in Turkish markets, but tensions between the military and the government flared anew in October when 86 people, including several retired generals, went on trial on charges of carrying out assassinations and bomb attacks in a bid to sow chaos and provoke a coup to overthrow the government. The case is not expected to end for at least several months.

The infighting between the military and the government is no small irony — retired army officers, after all, have benefited economically as much as anyone in Turkish society from the Erdogan government. The AKP took power in 2001 when the country was struggling to recover from a severe economic crisis that had forced it into the arms of the IMF. Erdogan’s government implemented IMF-endorsed reforms that slashed inflation to single digits, fostered robust growth of 6 percent a year and attracted unprecedented inflows of foreign investment.

OYAK took advantage of that turnaround to generate average annual returns of 47 percent from 2000 to 2007, compared with an average annual rise of 14 percent on the Istanbul stock market during the period. The fund generated net income of TL3.2 billion in 2007 alone, up 54.2 percent from a year earlier. Ulusoy, a former banker whose father was a military doctor, likes to point out that OYAK’s 2007 profits easily outdistanced those of the Koç Group (TL2.29 billion) and Sabanci Holding (TL969.5 million), two giant Turkish business conglomerates.

OYAK has steered clear of politics, preferring instead to focus on performance. The fund avoids investments in defense-related activities, pays taxes like any other business and is not subsidized by the government. At the end of 2007, OYAK had 235,818 members, of whom 36,390 were retirees. Besides a lump sum for retirement — a brigadier general who put in 30 years of service received TL270,910 in 2008 — members can buy homes at a price just above construction cost and take out personal loans from the pension fund’s credit union.

OYAK’s stellar performance has won it a reputation of near-infallibility among Istanbul’s financial elite. “They are Turkey’s only real institutional investor,” says Mehmet Sami, an executive board member at ATA Invest, an Istanbul-based brokerage, who has sometimes found himself on the losing side of business battles with the pension fund. In 2005 he advised Luxembourg-based Arcelor (acquired by India’s Mittal Steel the following year) as it competed with OYAK to acquire steelmaker Erdemir. “Their cash flows and returns are fantastic, more like a successful private equity fund than a pension fund.”

OYAK’s private equity strategy was born of necessity. The fund was founded in 1961, one year after a military coup brought to power a government that sought to ingratiate itself with the electorate by broadening social security coverage to include blue-collar civil servants and creating independent, private pension funds for groups such as the military and the police. Only OYAK, with its unique approach to investing, survived. When it began collecting 10 percent of its members’ monthly base salaries, it soon faced the problem of what to do with the capital — it was the 1960s, and there were no money-market accounts or local stock exchange listings. It appeared that OYAK’s only investment option was to put the money into savings accounts, but individuals could do that on their own.

Instead OYAK opted to buy companies and use their dividends to finance its members’ pensions. That led to a private equity approach to investment decades before it was popularized in the U.S. and Europe. “Because there was no effective corporate governance in Turkey — no transparency or clear accounting rules — the only way to know that you were doing the right thing with members’ money was to acquire enough of a stake in a company to join management and see how well it was being run,” explains Ulusoy.

OYAK took majority stakes in domestic companies that operated in iron and steel products, cement and concrete, food processing and distribution and financial services and also formed a few joint ventures. In 1969 it picked up a 49 percent stake in an automobile venture with France’s Renault Group, which owns the remaining 51 percent. The company now dominates Turkey’s car market and has become a major exporter to the European Union. In 1994 giant French insurer AXA acquired 11 percent of OYAK Insurance Co. for $9 million and over time upped its stake to 50 percent. In February 2008, OYAK sold its half of the firm to AXA for €355 million ($525 million). In 2004, OYAK took a 24 percent share in a partnership with Germany’s Evonik Industries that operates a coal-fired power plant, Isken, that produces 7 percent of Turkey’s electricity. It has since upped its stake to 49 percent.

Ulusoy received a doctorate in economics from the University of Pittsburgh in 1980, then returned to Istanbul, where he held positions at Citibank, Morgan Grenfell & Co. and Turkey’s Halk Bank. From 1988 to 1994 he was CEO of the largest state-owned lender, T.C. Ziraat Bankasi, and from 1994 to 2000 headed Koç Consumer Finance Co.

A few months after he became CEO of OYAK in June 2000, a banking crisis gripped the Turkish economy, causing the lira to tumble and interest rates to soar. Ulusoy responded by suspending acquisitions and slowing down credit union lending to the pension fund’s members. He also converted OYAK’s cash holdings from lira into dollars. It was unusual, to say the least, for the military’s pension fund to bet against the country’s currency, but the move paid off spectacularly when the lira plunged by 52 percent against the dollar in 2001 alone. “The economy remained troubled through 2000 and 2001, but because all our liquidity was in dollars, we made a lot of money.”

Besides his banker’s résumé, Ulusoy boasted longtime personal ties to the armed forces. He grew up an army brat, moving around the country as his father, an ophthalmic surgeon in the armed forces, was posted from base to base. Though Ulusoy served only briefly — completing Turkey’s required 18 months of military service as a naval officer — he has lectured on military strategy and history, subjects on which he is a passionate aficionado. He splices business explanations with quotes from warfare philosophers like Carl von Clausewitz and Sun Tzu. On OYAK’s need to grab a bigger share of Turkish steel production, he says, “There’s a war going on; just look at what’s happened with world steel prices, and everybody is trying to capture steelworks.”

On a more pragmatic level, Ulusoy developed ties with military officers when he was CEO of Ziraat, which handled much of the armed forces’ payroll accounts and personal loans. He contends that familiarity with the military gave him the necessary backbone to demand more independence than any of his predecessors at OYAK had. When the pension fund’s board offered him the job, he agreed to accept only if it stayed out of management decisions. “I told them it’s like the signs in the Greyhound buses in the U.S. that warn passengers: ‘Stay behind the line and don’t talk to the driver,’” says Ulusoy.

He brought a few colleagues with him: Öner, OYAK’s CIO, and Aydin Müderriso˘glu, vice president for new business development. Like their boss, both have doctorates, Öner in public and international affairs from the University of Pittsburgh, and Müderriso˘glu in business administration from Pennsylvania State University. Müderriso˘glu was vice president for strategic planning for the Koç Group while Ulusoy was there, and Öner worked under Ulusoy at Ziraat Bankasi as executive vice president.

The trio’s arrival shook OYAK to the core. The pension fund had always operated as a secretive enterprise that never showed its books to anyone. Shortly after assuming control, Ulusoy announced that the pension fund would begin publishing annual reports. With his new leadership team, he also decided to adopt international financial reporting standards at OYAK and at all 60 companies in which it had investments. And he implemented a hiring ceiling that has kept the pension fund’s total of employees at 200 since 2000.

OYAK’s board members endorsed the changes because Turkey’s economic crisis threatened to undermine the pension fund, which had seen its net income drop 19.7 percent, from $431.6 million in 1999 to $346 million in 2000. A year later, thanks largely to Ulusoy’s currency speculation, net income rose to $476.7 million.

But the Ulusoy team continued to raise eyebrows. Particularly controversial was a decision to raise outside financing for future acquisitions. “Some board members screamed that OYAK never borrowed, that it was outrageous to take loans we didn’t need,” says Ulusoy. But he went ahead and took out two syndicated loans in 2004 to raise $240 million. The money was used to purchase OYAK’s initial stake in the Isken power plant.

The new transparency and financial track record quickly paid off with credit ratings from both Standard & Poor’s and Moody’s Investors Service in 2005, the first ever granted to a Turkish nonbank company. Today, OYAK’s ratings of BB from S&P and Ba2 from Moody’s are higher than the Turkish government’s BB- and Ba3 ratings. “OYAK invests in low-risk targets that provide long-term, stable, recurrent dividends,” says Stuart Clements, a London-based credit analyst for Standard & Poor’s. The pension fund set its sights on the large state companies that the government was putting on the auction block in 2005, in particular, the biggest state-owned steel group, Ere˘gli Demir ve C,elik, or Erdemir. It’s the country’s only producer of integrated flat steel used in automobiles and domestic appliances, and it also produces long steel, used in lower-value products for construction and infrastructure projects. With steel prices rising worldwide, spurred on by demand in China and India, OYAK’s executives were convinced they could not afford to let Erdemir slip away. Before the auction, the steelmaker had a market value of $3.3 billion. Ulusoy’s $2.96 billion bid for less than half the shares — which valued the group at $6 billion — far exceeded the government’s most optimistic expectations. But Erdemir’s market value rose to a high of $8.5 billion in June 2008, and OYAK purchased enough additional shares to give it slightly over 50 percent ownership. (As a result of the global economic meltdown, Erdemir’s market cap had plunged to $3.52 billion by mid-November). The pension fund used nearly $500 million of its own money and borrowed the remaining $2.5 billion to finance its $2.96 billion outlay. OYAK reported $110 million in cost savings at Erdemir in 2006 and another $50 million in 2007. In the first half of 2008, net profits were TL854.8 million, a 118 percent increase over the first half of 2007.

The pension fund’s most profitable deal to date was the $2.67 billion sale of OYAK Bank in June 2007 to ING Group, the Dutch banking and insurance company. When Ulusoy took over as chief executive in 2000, OYAK had a small, debt-ridden bank with 11 branches and a single ATM that didn’t work. Rather than cut its losses, the pension fund decided to increase its banking footprint. “We pursued a traditional military strategy and went on the attack,” says Ulusoy. In 2001, OYAK bought state-owned Sümerbank, a money-losing conglomerate of six small banks, with 135 branches and 230 ATMs, for $36,000 and a commitment not to sell Sümer for at least five years. Sümer and OYAK’s small bank were merged, given a $700 million capital boost and renamed OYAK Bank.

By 2006, OYAK Bank was offering corporate, small business and retail banking services through a countrywide network that had grown to 349 branches and 1,094 ATMs. It boasted 10,000 small and medium enterprises and 1.2 million consumers as clients. The bank ranked sixth among private sector banks, with TL12.5 billion in assets in 2007; net profits increased 29 percent that year, to TL135 million.

But OYAK Bank faced stiffening competition from larger foreign rivals including Citi, the Dutch-Belgian Fortis Group and France’s BNP Paribas. “How were we going to compete with the big boys?” asks Ulusoy. “We knew it would be a lot more costly for us to borrow than for them.” He found a willing buyer in ING, which was concerned it was losing out in the foreign scramble for Turkish banking assets. “The multiples were ratcheting ever higher, and there were a dwindling number of banks that fit our needs,” says John McCarthy, chairman of ING’s Turkish subsidiary. ING paid 3.26 times book value for OYAK Bank, and Ulusoy was exultant. “To get back almost $2.7 billion on a $36,000 investment in six years — now that’s what I call a good private equity story.”

The pension fund has also sold its holdings in retail operations in recent years, including a supermarket chain and a tire company. The asset sales have given OYAK its $3.2 billion stash for acquisitions. The domestic energy sector is emerging as one likely target area. According to the National Energy Forum of Turkey, the country will require $125 billion in new energy investments by 2020.

But Ulusoy saves his real enthusiasm for investment plans abroad. He and his team are poring over targets in Europe and North America, including bridge, energy and mining projects.

Credit rating agencies endorse the idea. “If OYAK had more investments based in countries with a higher credit rating, then its financial profile would probably merit a higher rating,” says S&P’s Clements.

The global financial crisis and Turkey’s political tensions continue to dampen growth prospects, but Ulusoy remains optimistic. After all, he points out, the country was undergoing a far worse crisis when he arrived at OYAK. “If we survived that, we will survive anything that comes out of this situation.”