“Private Equity International asked us in 2004-05 if we wanted to advertise and we didn’t know what to say,” says Seymur Tari, founder of Turkish private equity firm Turkven. “In the end we wrote ‘we need three competitors to be top quartile’.”

Things have changed quite a bit since then. PEI’s database lists at least 16 Turkey-headquartered private equity firms and many more that dabble in a country that has tantalised and frightened investors in equal measure over the past few years.

Turkey has successfully positioned itself at the crossroads of Asia and Europe. Unlike other countries in the former, it’s a member of the EU Customs Union, allows full lira convertibility and places no restrictions on foreign ownership of companies. Unlike the latter, it’s growing rapidly. In the third quarter of 2017, gross domestic product was up 11.1 percent in quarter-on-quarter terms, according to the Turkish Statistical Institute. Two exits that Turkven made last year, of denim clothes manufacturer Mavi and Domino’s Pizza subsidiary DP Eurasia, realised euro multiples of 9x and 8x respectively – not too shabby.

Politricks

Still, political concerns are too strong for many to ignore. A failed coup against President Erdogan in June 2016 has resulted in a clampdown against people deemed ‘Gulenists’, supporters of Fethullah Gulen, who is accused of backing the uprising. A former ally of the president, his religious movement Hizmet counts on supporters in many sectors of Turkish society.

One development finance source, speaking to PEI in January, expressed concern about the impact of these policies on the workforce of portfolio companies. They also expressed concern that the power being wielded by the president could lead to rash changes to regulation that could make investments unviable over night.

“Changes to regulation in industries that are already heavily regulated – energy, financial services –  this is particularly feared,” he said. “And of course, the effect that could have on spending in the consumer sector.”

Perception gap

Tari believes that such concerns have little basis in reality. He points to the recent listing of Medical Park, which valued the private hospital chain at 3.95 billion lira ($1.04 billion; €837 million). Among the buyers in the share offering were Singapore sovereign wealth fund Temasek and Wellington Management, which has more than $1 trillion in assets under management. Temasek was also an anchor investor in the two aforementioned exits made last year.

“These are sophisticated investors – if the regulatory framework was not reliable these people would not invest,” he says. “And the regulation is best practice in this case.”

In fact Turkey, through its Investment Support and Promotion Agency, has made a particular effort to attract sovereign wealth funds, and many have come to view private equity as a low-risk way of getting initial exposure. ADIA, the Abu Dhabi sovereign wealth fund, first co-invested with Turkven more than a decade ago. International Commercial Bank of China and Bank of China have both acquired licences to operate in Turkey in the past two years.

Tari think these investors are well-suited to the country. They’re less focused on short-term metrics, which is especially important in the case of Turkey as fluctuations in the lira cause performance to look better than the reality in some years and worse in others.

“People who manage other peoples’ money, like the fund of funds, are much more sensitive to yearly fluctuations,” he said. “Sovereign wealth funds want to see long-time multiple returns. They want to give a dollar to you and see two or three dollars in many years, rather than an IRR number. I wish we could attract the Norwegian oil fund, for example. They could really change the market.”

The country remains remains the preserve of local private equity players, he adds. Advent, Carlyle and KKR are just some of the names that have tried to crack the market and subsequently withdrawn. Turkven last raised $1 billion for Fund III in 2012 and is set to return in 2018.

“We have good teams in Turkey – it’s really hard for them to come and take our gig,” he said. “Turkish banks are good banks with strong balance sheets and they want to lend to firms. They would rather lend to us because they know we will not just shut the door and leave, rather than western PE firms who can say ‘we give up, you take the company’.”