Friday Letter: The trouble with Turkey

During the worst of the US and Europe's recent economic woes, many LPs sought solace in emerging markets, where GDP growth was more robust. Turkey was one of the countries that benefitted as a result.

However, as the US and Europe moved out of recession, emerging markets started to lose some of their lustre – particularly as their performance failed to live up to expectations.

And Turkey, once the darling of these markets, has suffered more than most. The country has had a difficult time recently, thanks to an unfortunate combination of economic worries (notably the current-account deficit and currency volatility), domestic political unrest (like the mass protests about a corruption scandal last year), and security concerns on its borders.

The growing influence of the Islamic State (IS) in Iraq and Syria – which is right on Turkey’s doorstep – is a particularly pressing issue for the country at the moment. In Istanbul this week for our annual Turkey Forum, PEI saw one of the effects of this first-hand: scores of Syrian children (whose families have been flooding across the border as refugees, much to the consternation of ordinary Turks) were begging for money from drivers stuck in the city’s notorious traffic jams.

No wonder, then, that one European LP confessed to us last week that deploying capital in Turkey was not exactly high on their agenda.

Against this backdrop, it’s also not surprising that the GPs in attendance tended to steer the conversation away from the macro environment. Kerem Onursal, a director at Turkven Private Equity, told delegates that although the country’s economy grew less than three percent last year, Turkven’s portfolio grew more than 30 percent, in dollar terms. “We don’t look at how the economy is doing; we just try to grow our portfolio,” he said (adding that his firm had invested more than $1 billion in the last twelve months). Yes, the currency is volatile, he admitted. But because private equity invests over the long term, this evens itself out. “On some deals we win, on some we lose.”

There are still plenty of reasons to see Turkey as an attractive investment destination. Perhaps the most significant is its demographic advantage: the country boasts 76 million inhabitants, about 20 percent of whom are under the age of 14, according to Eurostat figures from 2012. The country – which likes to see itself as the bridge between Europe and Asia – also has a burgeoning middle class. That adds up to a compelling consumer opportunity (and not just in the distant future, if the throngs of late-night shoppers in Istanbul this week are anything to go by).

And while European and US GPs often complain about the ferocity of competition driving up valuations in their regions, the Turkish market remains extremely under-penetrated. Private equity currently accounts for about 0.1 percent of Turkish GDP; in the BRIC countries the equivalent figure is more than three times that, while in the US it is 10 times that, according to Winfried Nau, director at German development finance institution DEG. Compared to big emerging markets like China and India, the market isn’t particularly crowded – which could benefit both GPs and LPs.

What’s more, now Central and Eastern Europe has fallen slightly out of favour, and sanction-hit Russia has become an even more difficult place to invest, some LPs believe that Turkey will pick up some of the capital originally earmarked for this region.

Unfortunately for Turkey, most of the LPs still banging the drum for the country this week were development finance institutions. As Jean-Philippe Burcklen, deputy director of equity fund investments at the European Investment Fund, put it: “We [remain positive about Turkey; but] if you were to ask international LPs, maybe the situation would be different, because they are not as close to the market as we are.”

Still, it’s not all bad news: it recently emerged that The Abraaj Group is currently in market trying to raise $500 million for its first dedicated Turkey fund. That kind of implicit endorsement from a high-profile emerging markets GP ought to prompt a few more investors to take another look at Turkey. And despite its current challenges, that could turn out to be a wise move in the long run.