Friday Letter Turkish private equity must deliver proof of concept

Strong fundamentals alone are not enough to make global LPs bet big on Turkey’s burgeoning economy.   

Turkey, on the face of it, is an emerging private equity investment opportunity too good to be missed. For a limited partner hoping to add some spice to their international fund portfolio, surely this country of 75 million has it all. Or has it?

Things to like about Turkey abound. After just over 10 years of private equity deal-making, a track record is emerging that analytically inclined LPs can get their teeth into. Granted, there haven’t been many exits from the 300 or so institutionally backed transactions on record. But neither have there been many failures, and several sponsors, including Actera, Abraaj and TPG Capital, have enjoyed realisations from exits that make for compelling case studies.

In addition, Turkish private equity benefits from a supportive government as well as improving deal flow as family owners and entrepreneurs have gained a better understanding of what the industry has to offer them. According to local insiders speaking at Private Equity International’s fourth annual Turkey Forum in Istanbul this week, there may now even be the prospect of a drop in asset prices, thanks to a behavioural change among sponsors and investment bankers who are still bullish, but not as bullish as they used to be. 

Most importantly, Turkey’s economy still has growth (the European Commission forecasts a 3.2 percent GDP increase for this year and around 5 percent for 2013), which cannot be said about many markets in the world. “Macro beats everything, even a fool can make money when there’s growth” said TPG Capital’s veteran value creator and EVCA chairman Vincenzo Morelli at the Forum. And even though by his own admission Morelli was exaggerating, the point is difficult to refute: in an expanding economy, everything else being equal, making worthwhile private equity investments is easier than it otherwise would be.

Despite all this, and notwithstanding the fact that Turkey’s high-profile firms Turkven and Actera did well with their fundraisings last year, it is not the case that international investors are piling into Turkey funds indiscriminately. Instead, many continue to treat the market with a mix of curiosity and caution.

Take LGT Capital Partners for instance, the €40 billion alternative investment specialist and private equity fund investor based in Pfaffikon, Switzerland. Covering Turkey for the firm is Istanbul-born partner Cem Meric, who together with his colleagues is tracking some 70 Turkey-focused managers and building a growing database of Turkish deals. But LGT has yet to invest with a local manager.

Speaking at the Forum, Meric cited a number of reasons for this. LGT already has some Turkey exposure through regional funds investing in the country. There’s currency risk that warrants consideration. And in the final analysis, Turkey for all its obvious appeal remains a largely unproven market with largely unproven management teams. You’re buying country risk and manager risk. (And yes, there has been remarkable economic growth in recent years [9.2 percent and 8.5 percent in 2010 and 2011, respectively] – but for any investor adjusting returns for the risks they took to generate them, there would have been a simpler way of capturing the uplift: by investing in the rapidly expanding Istanbul stock exchange.)

In no way was this LGT’s way of giving Turkish private equity the thumbs down. What it was saying was merely this: we won’t rush things until we have proof of concept.  Step forward, teams with a demonstrable record of backing businesses in Turkey profitably. As soon as more local firms are in a position to do this, there can be little doubt that more international investors will come into the market.