Friday Letter Turkish delight

Landing at Istanbul’s Ataturk Airport earlier this week, one could be forgiven for thinking not much was waiting below. Dense, grey fog enveloping the runway belied the thriving metropolis nearby.

In a way, it was a fitting entrance for the multitude of private equity professionals descending upon the city for PEI’s first annual Turkey Forum – no one was quite sure what they would find, but what they discovered surpassed expectations.

Over the course of two days, non-Turkish delegates voiced surprise over the momentum gathering in Turkey’s private equity market and its sophistication despite its infancy; meanwhile Turkish delegates were overwhelmed by the level of interest registered by regional and global players.

Once you take a closer look, it’s not difficult to see why this “frontier market” is increasingly on the radar of international LPs and GPs. As the conference’s many speakers made plain, Turkey’s large, high-growth economy is ripe for investment, its multitude of companies prime candidates for the operational and financial expertise requisite to expand into new markets. UK-based BC Partners last year led a blockbuster take-private of supermarket chain Migros Turk, while fellow London-based firm Bridgepoint just signed its first Turkish deal, the acquisition of a joint controlling stake in vehicle inspection company Tüvturk. Each purchase ties in strongly to the country’s growing middle class. Said one GP: “All manner of services and retail and the like are going to potentially be growth sectors as the GDP per capita vaults above the $10,000 level – it already is that around Istanbul”, where the level was closer to $20,000.

Turkey’s regulatory system was also lauded by many delegates, largely due to openness on the part of regulators to work with stakeholders and to create a framework in which companies feel they can operate successfully. This openness also seems to be at the core of an organisation that will be increasingly central to private equity deal flow, exits and overall financial market integration: The Istanbul Stock Exchange.

During an onstage interview, the chairman of the exchange, Huseyin Erkan, sought to dispel the perception that ISE resents take-privates, and to confirm that it has a desire to see an increased number of SME exits via IPO. Measures to make either action easier for financial sponsors would meet his support, he told delegates. Listed companies that have had private equity involvement prior to listing tend to outperform comparables, having had stronger operations and governance measures introduced by their financial sponsors, he said.

Erkan also revealed an imminent national campaign to educate entrepreneurs and local chambers of commerce on the benefits of public listings and moving companies out of Turkey’s vast “grey economy”. Private equity firms, he said, must be a part of this information campaign, so that Turkish companies understand the various capital raising options available and their benefits.

The education campaign must also extend to the public at large in terms of investing in capital markets. As one delegate pointed out, Turkey has more millionaires than it does residents with brokerage accounts, with 70 percent of the capital invested in the stock market coming from abroad. This, he said, should concern Turkish GPs because based on other markets’ experience, as domestic investment in equities and other securities increases, so too will the numbers of local limited partners for private equity funds.

As PEO argued last week, the involvement of local LPs in emerging markets is crucial not just for fund managers to be able to take part in an anticipated surge in deal activity, but because it bestows an important level of legitimacy and helps weave the asset class successfully into the country’s economic fabric.

This will happen sooner rather than later, judging by the substantial energy and determination displayed by Turkey’s active GPs. Already, they are vigorously tackling the wariness with which entrepreneurs may view private equity investment – a common problem in emerging markets. As one of the country’s most veteran private equity managers told delegates, “There is a Turkish saying … that translates to 'May God never force you to sell your company'. I think we've come a long way.”