Planting flags in Turkey

Landing at Istanbul’s Ataturk Airport in late November, one could be forgiven for thinking not much was waiting below. Dense, grey fog enveloping the landscape belied the thriving metropolis nearby.
In a way, it was a fitting entrance for the crowds of private equity professionals descending on the city for PEI’s first annual Turkey Forum. No one was quite sure what to expect, but what they found surpassed their expectations. Over the course of two days, non-Turkish delegates voiced surprise over the momentum gathering in Turkey’s growing private equity market and its sophistication despite its relative infancy. Turkish delegates, meanwhile, were overwhelmed by the level of interest registered by regional and global players.

Setting things straight

During an onstage interview, the chairman of the Istanbul Stock Exchange (ISE), Huseyin Erkan, sought to reassure the gathered delegates that his platform wants to work alongside private equity. He confirmed that the exchange wants to see an increased number of small- and medium-sized business exit via IPO and would support any related measures to make the action easier for private equity sponsors. 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. Hundreds of heads in the audience bobbed their approval.

He also sought to dispel the perception that the ISE resents take-privates. Despite the exchange’s aim to increase its listings (roughly 300 companies are traded on ISE),  he noted that delisting is a necessary part of a financial market’s development and integration and that he supports pending changes to the commercial code that would simplify public-to-private transactions.

Migros: case study for Turkish take-privates

Such support is welcomed by firms like Cinven, the London-based private equity firm that began looking seriously at Turkey in about 2006. “To make the market more dynamic and more interesting, for instance regarding public-to-privates, there needs to be some legal improvements,” says Yalin Karadogan, head of Cinven’s emerging Europe investments. “In Western Europe, there is no ambiguity about the laws; in Turkey, the law doesn’t exist, for instance, to squeeze out the minority shareholders and take full advantage of the tax deductabilities, so every deal is a case study.”
making history

One “case study” so far is the country’s biggest LBO to date, the $3.2 billion take-private of supermarket chain Migros by fellow London-based private equity firm BC Partners.

“As we’re experiencing now, we own 98 percent of Migros as a public company, with part of the remaining 2 percent probably in the hands of people who have forgotten about [their shares],” says Nikos Stathopoulos, the BC partner who led the deal. Were it a take-private done in another country, most of which have a squeeze-out threshold of 90 percent to 95 percent, BC would have delisted the company by now. “The benefit, apart from anything else, would be the fact that we wouldn’t need to go through the usual quarterly reporting requirements, presenting what we’ve done as well as our strategy, just for 2 percent of shareholders.”

Implementation of the squeeze-out law will bring Turkey even closer to the European and US markets in terms of modernising M&A and will encourage further bidding for public companies, he adds.

Some technical issues aside, it’s not difficult to see why this “frontier market” is increasingly on the radar of international GPs. Turkey has a large economy: Its GDP – $729 billion in 2008 and $552 billion in 2009 – typically ranks among the world’s top 20 and economic growth is expected to outpace Western nations for years to come. Despite a 6.5 percent contraction due to global recession last year, the IMF has projected Turkey’s economy will recover quickly, growing 3.7 percent in 2010, compared to a global economic growth projection of 3.1 percent.

Its population also stands out from Western neighbours because of its youth. Roughly half of its 73 million inhabitants are under the age of 30, according to World Bank estimates.

 “Apart from it being a very large market with a very young and growing population, it has shown increasing positive macro trends with decreasing interest rates and inflation and a more stable currency,” BC’s Stathopoulos says.

Geographical hub

Turkey’s multitude of companies – many of which are still family controlled – are prime candidates for private equity ownership that can bring about expansion into new domestic and regional markets. What sets it apart from other emerging markets in this regard, however, is where Turkey sits on the map.
“We view Turkey not only as a standalone market, but more importantly as a connecting point in a broader region,” says Serkan Elden, managing director and head of Eurasia for PineBridge Investments. Formerly known as AIG Investments, the group has been investing intermittently in Turkey for the past 15 years.
“It has this unique nature,” concurs Cinven’s Karadogan. “A Turkish company could grow into geographically adjacent regions like the Balkans, the Middle East, Western Europe, Central Asia or North Africa, so the opportunity to internationalise companies is substantial.”

Building momentum

Larger scale private equity players aren’t the only ones eying Turkey’s potential delights. NGBI Private Equity, the private equity arm of the National Bank of Greece, in 2008 established a €100 million Turkey fund it plans to start investing in SMEs, according to investment director and Turkey head Mete Ikiz.
Many local professionals and institutions in Turkey are also considering the creation of captive or standalone private equity firms. For example, Garanti Bank, already a significant player on the acquisition financing side of the Turkish private equity market, is in the midst of creating a SME-focused joint venture with a more established private equity partner, says Metin Ar, chief executive of Garanti Securities.

Despite the increased interest and optimism building in the country, there are, of course, still challenges for the private equity industry to confront that are unique to Turkey, as well as those found in most emerging markets.

These challenges will be met head on, judging by the substantial energy and determination displayed by Turkey’s active (and soon to be active) GPs.  Already, for example, 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 seasoned private equity managers, Murat Çavusoglu, co-founder and managing partner of Turkey-focused Actera Group, 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.”