Turkey: Out of favour, but best not ignored

When the recent economic crisis hit Europe and the US and economic growth was nowhere to be found, many investors sought refuge in countries where GDP figures remained positive. Emerging private equity markets like Turkey benefitted as a result. Yet as the OECD countries started to improve, LP interest for emerging markets started to wane.

Turkish private equity, in addition to getting caught up in the general cooling, has also been hit by a worsening economic and political climate. The Turkish lira became unstable and has been fluctuating since, and economic growth has slowed from nine percent in 2010 to around three percent in 2014, according to OECD data. The country has also battled with political unrest, with the mass protests at Istanbul’s Gezi Park in 2013 against the rule of President Recep Erdogan a notable flashpoint. This June, Turkey will hold its parliamentary elections – the third time in 15 months that Turks will go to the polls, after municipal elections in March last year and presidential elections last summer – creating the potential for further political uncertainty. And alongside its domestic trepidations, Turkey is an uneasy neighbour to Islamic State (IS) in Iraq and Syria, resulting in security concerns on its borders as well as an influx of refugees.

Unsurprisingly perhaps, private equity deal flow in Turkey has been in steady decline in recent years, with 15 new investments completed in 2014, compared to 17 a year earlier, and 21 in 2012, according to data compiled by Mergermarket. One of the reasons for this is that international private equity firms have retreated somewhat, according to a number of industry professionals in the region.

“In 2014, we have observed that global private equity funds have been less active in the region compared to the local private equity firms,” says Demet Ozdemir, a partner in the transaction advisory services at EY. “Global PE firms have been very actively looking for targets but they haven’t been able to finalise many.”

And when they can’t find deals, they can easily go elsewhere. “The global firms don’t have to invest in Turkey, they can invest in other emerging markets in the world,” Ozdemir adds. This trend is also observed by Seymur Tari, founder of Turkven Private Equity. “[But] I don’t think that is driven by the fact that they necessarily feel Turkey is less attractive, but it is simply because the economies in Western Europe have improved so they are doing deals closer to home,” he says.

In a relatively immature market like Turkey, there aren’t that many large deals on offer. When they do come up, they will immediately be quite competitive, says Omar Syed, a managing director at The Abraaj Group. “The minute a deal is above $500 million it starts to become a large-cap transaction, which usually ends up in a heated auction process with significant competition from foreign private equity [firms or] strategic players. ” Foreign private equity firms are keen on Turkish assets, however, says Ozdemir. “Many global PE firms have therefore decreased their minimum ticket sizes in order to be able to take part in a growing and promising economy,” she adds.


Yet despite competition at the larger end of the market, and well-documented Turkish macro-economic woes, there are good investments to be done, argues James Tanner, head of corporate investment MENA at Bahrain-based Investcorp. “We do see many opportunities in food, consumer retail [and] telematics sectors,” he says. The firm has done four deals in Turkey since 2008, plus four add-on acquisitions. Investcorp recently acquired a majority stake in Turkish telematics company Arvento Mobile Systems, which Tanner says wasn’t bought at auction. “We were very fortunate that Investcorp had made a previous investment within that space called Fleetmatics. Due to the affiliation with the telematics space we were introduced to the founders of Arvento and built up a relationship, which ultimately resulted in the deal.”

Abraaj has also been active. In January 2014, it teamed up with the European Bank for Reconstruction and Development (EBRD) to acquire Yorsan, an innovative Turkish dairy business. “There has been a growing shift towards more branded products, which is only 50 percent of the market share, so there’s a significant growth opportunity in that space”, says Syed.

The trend is part of an ongoing, and rapid, modernisation of Turkey’s retail sector. Adds Syed: “In Turkey there’s also a big shift from unorganised retail to organised retail as well as a shift from offline to online retail. Turkey has a very high internet and mobile phone usage, with around 35 million Facebook users. Credit card penetration is also very high, which is an enabler for e-commerce.” Abraaj tapped into the latter segment with a high-profile investment in e-commerce platform Hepsiburada in February.