Making inroads in Istanbul

It’s a country that links East and West, which sits on the European periphery but shares much in common with Arab neighbours. For private equity, the allure of Turkey is proving hard to resist.

“Turkey has emerged as one of the fastest growing large-scale economies of the world and as a regional leader with its young population of 74 million as well as its strong export base for Europe, Middle East and Africa,” says Mediterra Capital Management founder Murat Erkurt.

Yalin Karadogan, a principal at buyout group Cinven with responsibility for investments in emerging Europe, pointed out the demographics in Turkey were almost the exact opposite of Western Europe – instead of an ageing population, about half the population is under 35. He also called Turkey “an island of stability amongst its neighbours, and a shining example of leadership”.

So if its fundamentals are so attractive, why aren’t more investors clamouring for exposure to Turkey in the way they do for Brazil or China? Turkven founder Seymur Tari, interviewed by Private Equity International in November, argued that for investors to see Turkey as a “must-have” part of their allocation, the industry would need to build a strong track record of exits. Turkven, for its part, had already exited three companies at an average of 3.4x when Tari spoke to PEI back in November.

Recent deals suggest that process is getting underway for other firms, too. BC Partners, for example, had cause to celebrate in June following the sale of part of supermarket group Migros Ticaret for $380 million. The firm sold Sok, a discount retail subsidiary of Migros, to local corporate Ulker Group. BC acquired a 50.8 percent stake in Migros in 2008 in a $3.25 billion deal which remains the country’s largest buyout, later buying a further 47 percent alongside local firm Turkven and Italian investment group DeA Capital.

Actera Group and TPG Capital sealed an exit earlier this year when they sold alcoholic beverage maker Mey Icki to drinks company Diageo for an enterprise value of $2.1 billion. TPG led the buyout of Mey Icki for $900 million in 2006 with Actera as a minority investor. 

As well as exits, there have been new entrants and fund offerings in the market – more promising signs of growth. Mediterra held a first close for its debut Turkey-focused fund on €100 million in June, one-third of the way toward its target, while Actera, which closed its debut fund on €325 million in 2007, is understood to be chasing about €500 million for its second fund.

Meanwhile, Crescent Capital is raising a fund understood to be targeting about €200 million, while Abu Dhabi-based Invest AD has teamed up with Japanese group SBI Holdings to launch a $100 million vehicle targeting investments in the country. Firms seldom launch fundraisings without indicative support from LPs, so the slew of capital raisings suggests investors are increasingly interested in the country’s growth story.

But as with any emerging market, there are drawbacks. Turkey’s geographical position, surrounded by states likes Syria and Iraq, means it can suffer contagion from its neighbours. Memet Yacizi, head of asset management at Istanbul-based alternatives group Rhea, said for example that Turkey had been impacted by the so-called ‘Arab Spring’.

“On the positive side, the events have differentiated Turkey and also highlighted its stability. On the negative side, it introduced short term unpredictability for Turkish companies with strong MENA exposure.  In the last two years, LPs have seen that Turkey is unique and strong when compared to MENA or Central and Eastern Europe. Turkey does not fit into either category, because Turkey is a better long term bet than both,” Yacizi said.

Another obstacle private equity practitioners continue to face in Turkey is the reluctance of managers and company owners to relinquish control of their businesses, with many just viewing private equity firms as finance providers.

But dealflow is likely to improve, particularly as recent elections in the country should pave the way for several years of stability, a rare commodity in the region. In tandem with this stability, the conglomerates which dominate the corporate landscape in Turkey have started to offload assets which could be a fertile source of deals.

With GDP growth in the country predicted to outstrip European countries’ over the next 10 years, and exits demonstrating returns can be made, Turkey is poised to attract much more attention from fund managers and their investors. If that indeed occurs, then Turkey should soon transition from being a market people talk about as having potential, to a market where private equity activity is regularly and resolutely taking place. 

Turkey's opportunities and challenges will be examined in-depth at PEI's upcoming Turkey Forum.