It is clear that Turkey has yet to enjoy the success of some of its neighbours to the East or West in terms of private equity and venture capital activity – a fact that many find surprising given its 70 million-strong population, two-thirds of which is under 30-years old; its GDP growth, which has averaged 7.5 percent in recent years; and its long history of entrepreneurship.
“Despite the size of the country and the size of the entrepreneurship base and the different sectors you can find in Turkey, as opposed to a transitioning economy with limited resources, the size of the industry is tiny,” says Mehmet Sami, executive director with Ata Invest, a 17-year old Turkish investment manager that has helped pioneer domestic private equity advisory work since the mid-1990s.
Along with AIG Capital, Ata Invest helped launch the first Turkey-dedicated private equity fund in 2000. The $100 million vehicle remained the largest of its kind until mid-2007 when Actera Partners, a Turkish fund established by Ontario Teachers' Pension Plan and the Canada Pension Plan Investment Board, launched its debut fund with the expectation of raising €250 million.
“The mere fact that a $100 million fund up until 2007 was the largest, shows you how small the Turkish private equity industry has been,” Sami says.
He suggests the reason is that Turkish companies are typically family-owned enterprises that are “not starving for cash and resources, so therefore it's very hard to execute deals”.
But attitudes are changing, and there's now “overwhelming” interest in the country, Sami says.“Predominantly since 2005, on the back of improved politics and economics, Turkey has been attracting huge amounts of foreign direct investments.”
Two years ago is when Citigroup Venture Capital Investment, the London-based, emerging markets-focussed venture and growth equity arm of Citi, started to focus on Turkey.
“We were quite impressed with the structural reforms which were happening, the macro-economic policies of the government, and the kind of institutional reforms and privatisations that were underway,” says Sunil Nair, managing director and regional head at the firm.
In the past two years, more or less since Turkey launched talks for European Union membership, many more international firms have started scouring the market for deals. Nair observes: “When we started out two years ago, I didn't see as much competition there as we do now. Most of our competitors are now present.”
Indeed, Ata Invest's Sami points to two deals done by global private equity firms as turning points for Turkey's market, as both were majority investments that broke the $1 billion mark. TPG's 2006 acquisition of Mey Alcoholic Beverages, valued at roughly $1 billion, was the country's largest LBO until October 2007, when Kohlberg Kravis Roberts agreed a $1.3 billion buyout of shipping company UN Ro-Ro.
A growing number of Turkish funds and increased interest from international players, however, won't produce a step-change in the country's market overnight, Sami warns.
“For the newly raised [domestic] funds which total $800 million or $900 million, it will not be very easy to place the amount in their funds,” he predicts. “I would say there are opportunities. But it's difficult to source and execute opportunities.”
The task of putting money to work is perhaps even more difficult when it comes to venture capital, he says.
“There really is no venture capital there,” agrees Don Wood, a partner at Draper Fisher Jurvetson who oversees the veteran venture firm's vast global affiliate network. “But it feels like it's ready.”
Wood recently visited the country as part of the firm's due diligence process when scouting possible new affiliate groups and country locations, and said he was fascinated by it.
“We weren't going to jump into Turkey, but we were approached by some interesting people and ideas,” he says, noting DFJ has found two groups it believes would make good venture partners and is just starting the process of possible expansion.
In addition to finding partners with a similar outlook, DFJ considers a number of factors before launching emerging markets affiliate funds.
The mere fact that a $100 million fund up until 2007 was the largest, shows you how small the Turkish private equity industry has been
“We look at the specific demographic factors and economic and historical growth rates, and all the kind of indicators of what's going to make a great entrepreneurial environment,” Wood says. “Is there a long, 1,000-year history of entrepreneurial activity? Is it a democratic country? All those things give you some comfort and encourage us to go in earlier than we might otherwise.”
The other factor that makes a market like Turkey's attractive to venture capitalists is that valuations are about a fifth of what they are in Silicon Valley, Wood says.
“So with a small fund, a $50 million fund, you can fund 20 companies and the cost of building a company is lower,” he explains. “Now you have to be sure there is an exit plan for these companies, there has to be a public market or an acquisition path, and that's what's less proven in Brazil or Turkey or Russia. So we're having to do a little forecasting as to whether these emerging markets will in fact have strong exit environments, but we've seen that they can…where you have successful companies they find exits.”
There are other risks, too, says Roberto Pilotto, a director at PPM Managers, Prudential's London-based fund of funds arm which recently made its first commitment to a Turkish fund.
“It's obvious that there are a lot of potential shocks, and if you look at Turkey's recent history, there have been some hiccups. The currency is subject to short-term volatility; you have the obvious risk of terrorism; the Kurdish issue; and you have political risks,” he says. “But in general, we take comfort from the recent political developments and the fact that past shocks have always been absorbed relatively quickly.”
Investing in the Turkish fund, whose name he did not disclose, felt very similar to when PPM invested in Eastern European countries pre-EU accession, Pilotto says.
“Turkey at the moment is, as we all know, a question mark in terms of whether it will ever join the European Union,” he says. “But the reality is that economically, it's extremely integrated with the EU.” 80 percent of its foreign trade is with the EU, Pilotto adds.
The prospect of eventual accession to the Union is one of many reasons the Canada Pension Plan Investment Board jointly launched Actera, says Mark Wiseman, head of the pension's private equity and infrastructure investments.
“Turkey is an incredibly unique country,” Wiseman says, referring to its attractive demographics, and the rapid social and economic reforms that make it alluring for investors. “We would probably best describe Turkey as ‘Emerging Europe’… it's a country in a list of countries looking toward accession over time to the EU.”
Regardless of whether or not it becomes further enjoined to its Western neighbours, Turkey seems set eventually to attain a private equity market of a similar scale to many of them.
Ata Invest's Sami is cautiously optimistic. “It is a very, very young market for private equity,” he says. “Next year I think the [fundraising aspect of the] market will calm down and I think finding good deals to execute will be the most important thing. And, slowly, we should be seeing some exits.”