Turkish GPs face ‘adjustment’ period

Mounting macroeconomic concerns are making deals harder to execute in Turkey – but easing competition may help bring down valuations, delegates heard at PEI’s Turkey Forum in Istanbul.

While Turkey’s fundamentals remain strong, macroeconomic uncertainty is likely to trigger a slowdown in private equity activity this year, according to prominent local practitioners.

Speaking at Private Equity International’s Turkey Forum this Tuesday, panellists explained that the country hadn’t been spared by the recent bout of bearishness towards emerging markets – with slowing growth and a weaker currency among the downturn’s most obvious symptoms.

“Private equity volumes picked up in 2006 during the credit boom, and also following the collapse of Lehman Brothers, as investors were searching for yields. But now, for the first time in a while, this seems to be changing: macroeconomic developments are impacting sentiment towards Turkey,” said Kerim Türkmen, a partner at Mid Europa Partners.

This has started its take its toll on deal activity in the country, concurred Murat Özgen, chief executive officer at Is Private Equity. “The geopolitical and economic environment is weighting on business. So doing deals could become more difficult, because there will be a valuation gap for a short period of time – like we have seen in 2009.”

The same was said regarding exits, with volatility on the stock exchange making it difficult to seek IPOs and currency issues potentially weighting on returns. But strategics’ interest in quality assets remains strong, argued Seymur Tari, managing partner at Turkven Private Equity. “We haven’t felt any of the chill in the last few months. We are still able to exit portfolio companies on very healthy multiples. If anything has changed maybe it is the fact that Western private equity is less active in the country – maybe because they are less bullish on Turkey, maybe because they have more to do at home.”

Speakers also pointed to an expected 'silver lining': easing competition for deals bringing down frothy valuations. “Last year we complained about an increase in valuations expectations,” said Ahmet Tataroglu, executive director at NBK Capital. “Now we’re likely to see a normalising of these expectations. Obviously there will be a lag in terms of realising these expectations, but in terms of doing the right investments the right time is approaching.”

This cautious optimism was shared among other panellists. In particular, Turkey continues to have promising long-term economic prospects, Özgen pointed out, with GDP growth still clocking in at 4.4 percent this year.

Türkmen added that the Turkish private equity market remained a very diverse one – with opportunities across a variety of deal size and industries – which meant some sectors and individual companies could even benefit from the recent change in market sentiment.

That is something the most sophisticated LPs would probably factor in, said Türkmen. For Turkey-focused funds currently on the fundraising trail, however, the challenge would likely be to revive enthusiasm among Western LPs. “The most topical issues, such as the impact of the Fed’s tapering, do come up. So it’s true that LP enthusiasm is more tapered. There are real risks – but at the same time you can find businesses immune to these risks,” he said.

In the long run, panellists expressed hope that new, local investors would help make up for some of the shortfall. “Many funds right now are receiving interest from the local LP universe, said Tataroglu. “There is an increased level of education in the market. New doors are being closed and others are being open.”