Friday Letter Talking Turkey

Private equity in Turkey has been on the up for a few years now, without ever quite taking off. But stars seem to be aligning in its favour.  

Private Equity International's annual Turkey Forum in September is always one of our favourite conferences to attend. It's not just the beauty of the setting, or the calibre of the delegates, or the warmth of the welcome — although that all helps. It's also the sense that this is a private equity market on the verge of very big things. And this week, that was more true than ever.

The conference saw local GPs like Turkven, Actera and Rhea rubbing shoulders with regional players like NBGI Private Equity and Invest AD, as well as global funds like Kohlberg Kravis Roberts — just a few of the 17 firms that apparently now have some representation on the ground in Turkey. As well as local professionals, the conference also drew delegates from the Middle East, Europe and the US.

It's not hard to see where this interest comes from. On the opening day of the conference, by happy coincidence, Standard & Poor's announced that it was upgrading Turkey's local currency credit rating from BB+ to BBB-, pushing Turkish debt into investment-grade territory again for the first time in more than 15 years. The ratings agency said this was due to “continuing improvements” in Turkey's financial sector, along with the “deepening of local markets”.

But the upgrade – which some would argue is long overdue — is also a reflection of Turkey's economic strength. While the developed economies stutter along with near-zero growth, Turkish output jumped by 10.2 percent in the first half of this year — faster even than China. It has a large, young population — two-thirds of its 73 million people are under 30 — and a burgeoning middle class. Particularly in light of the travails of its near-neighbours in the eurozone, Turkey looks like an increasingly good bet.

Buoyed by these attractive fundamentals, private equity activity is increasing in the country. More deals are in the offing, more funds are being raised, and — thanks partly to successful deals like BC Partners' partial realisation of its stake in supermarket chain Migros Turk — more exits are being considered. There was a real sense of optimism in Istanbul this week; a sense that this is a market on the way up, with plenty of room to grow.

Of course it would be wrong to pretend that there are no obstacles in the way of this growth. The Turkish economy looks set for a slowdown next year — and even if this doesn't turn out to be as drastic as the pessimists suggest, even low single-digit percentage growth is going to feel like a painful contraction. This is bound to hit business sentiment and valuations. Turkey is also still running a sizeable current account deficit, which is largely why its foreign currency credit rating is still a couple of notches below investment grade.

On the other hand, it's hard to ignore those demographics. And as the FT's chief foreign affairs commentator Gideon Rachman pointed out in his keynote speech at the Forum, Turkey occupies an enviable place in the post-Arab Spring world: it serves as a model of how a stable, democratic, predominantly Muslim country can be run, while its political and financial strength will only increase its diplomatic heft. By the same token, its businesses can surely become regional powerhouses in the reconstructed Middle East — which presents great opportunities for private equity.

Who knows — perhaps in a few years’ time, we’ll finally be able to start describing Turkey as ‘emerged’, rather than ‘emerging’.