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Turkey: Beyond the protests

Despite recent protests, Turkey remains a strong market for private equity investment, write Ted Cominos (pictured) and John Faurescu.

After a month of demonstrations, a semblance of calm has returned to the streets of Turkey’s major cities. It was against this backdrop that a group of European private equity professionals gathered for the annual EVCA Forum in Istanbul. The unrest had all but dissipated, with one or two residual protests here and there around the city.

As one might expect, the protests were one of the issues du jour at the Forum. What might their effect be on a country that has proved to be one of the world’s powerhouses of economic growth, as well as one of its most exciting markets for private equity investment? Will it slow the economic juggernaut? Time and policy will tell, but for now at least Turkey’s recent economic performance remains too enticing to not warrant a serious look.

Turkey’s economic growth has been extraordinary. Even with the global financial crisis taken into account – from which it has not been immune – it has seen an average annual growth in GDP of 5.4 percent in the last eight years: a better growth rate than that of Brazil.

Ted Cominos

The private equity industry, meanwhile, has been increasingly seeking to participate in this economic rising tide. In 2012, there were 57 private equity-backed investments in Turkey, the largest annual number ever, according to data published by Deloitte. The deals were split roughly half-and-half between international and domestic private equity firms.

As a law firm, we look at Turkey through two lenses. First, we are an adviser to the M&A community, both those buying and selling businesses within the country and those using it as hub to access capital and investment opportunities throughout Central and Eastern Europe and the MENA region. Second, we are an investor ourselves; we have recently made public our intention to open an Istanbul office during the course of 2013. Having advised on a number of deals in Turkey over the years, our decision to establish a permanent presence in Istanbul is testament to both our long-term commitment to the market and our bullish view of its unrealised potential.

As an advisor to many financial sponsors transacting in Turkey, we have not seen any M&A deals disrupted in a meaningful way, nor do we expect to. It is clear that while the protests have grabbed headlines, they have not clouded the view of investors that the Turkish growth story is based on strong fundamentals and is worth buying into.

Where the protests have had a tangible financial effect is the Istanbul Stock Exchange. From its high in late May, the National 100 Index lost as much as 24 percent of its value by the end of June. It has latterly recovered a fraction of this, but is still a way off its peak. This has the obvious effect of making IPOs a less attractive exit option and we have seen this played out in the pulled IPO of Emlak Konut REIT. 

A less frothy public market, however, could have a positive effect on M&A activity by bringing down the high valuations that have proved to be a stumbling block to Turkish deals in the recent past. News that BC Partners has reportedly hired bankers to advise on the sale of portfolio company Migros Ticaret can be viewed as a positive sign that the M&A market will function as normal. 

As an investor in Turkey – once established, Istanbul will be the 16th city in which we have established a presence – our bullishness has not been dented. The recent protests seem to us more like a small chapter in the ongoing story of Turkey’s rise to prominence: a sign, even, of a maturing economy with a functioning democracy. 

Turkey’s demographics, diversifying business base and supportive investment climate make the country a compelling place to be. It is also of significant strategic importance, acting as a hub for inbound and outbound investment across Central and Eastern Europe, the Middle East and North Africa. None of this has changed since May. Turkey is still the region’s leading example of democracy and a burgeoning capitalist society. As it works towards membership of the European Union, its importance to both financial and corporate investors will continue to grow.

Ted Cominos is a partner and chair of the international private equity practice and John Faurescu is an associate at Edwards Wildman.