Local GPs rule the roost in Turkish mid-market

Turkish buyout activity was buoyant in 2017, with deal volume and value approaching the levels seen in 2014. After the seven deals witnessed in 2014, there were just four in 2015, which was followed by the country's least active year to date – only one deal was recorded in 2016 by Unquote Data. However, this changed last year, when the number of buyouts increased to six.

While aggregate value has never come close to the levels of 2014, when buyouts totalled £1.1bn, last year's deals came to a value of £382.2m, up from £107m in 2015 and £75.3m in 2016.

Growth rates of companies in the mid-market, influenced by Turkey's macroeconomic environment and increasingly wealthy population, are drawing the attention of private equity houses. Medium-sized companies are enjoying growth rates of 30% in an $800bn economy, according to Taxim managing partner Selahattin Zoralioglu. "We see a huge opportunity in the mid-market, where there are companies with high growth potential, but not enough funding to support their growth," he says. "[These are] not big enough for public market listing, and limited bank debt funding creates attractive opportunities for private equity investors."

Says Turkven CEO Seymur Tari: "We're seeing a 30% sales growth rate of companies in the Turkish market, with a 7% inflation deduction. By comparison, companies in western markets are seeing a 3-6% sales growth rate."

We see a huge opportunity in the mid-market, where there are companies with high growth potential, but not enough funding to support [it]" – Selahattin Zoralioglu, Taxim

Digitalisation and urbanisation are key growth drivers, in addition to consumer demand, which has historically meant the consumer space has been the favoured sector in Turkey, says Zoralioglu. To cite one example, casual dining is on the rise, he says, but the trend is not as developed as in the UK, with most people still more likely to dine at home.

When it comes to buyout leverage, Turkish banks typically finance deals for mid-market GPs, though it is harder to obtain local financing for both shorter and longer-term loans. Turkey is not a country with a lot of savings, Zoralioglu says. Bank debt in general is limited and hard to obtain.

Turkven CEO Tari says that while capital adequacy ratios are good, a deposit protection scheme is intended to protect the Turkish lira with typical loans limited to one or two years. Meanwhile bonds are limited to a two-year lifespan. These factors contribute to leverage levels being fixed at maximum multiples of around 3-3.5x, says Tari.

Outside looking in
Zoralioglu, who was a partner at Pamplona Capital Management in London before joining Taxim, says it is considerably more difficult to convince international investors to invest in Turkey than it is to get local investors on board. This is down to several factors, chief among them is that geopolitics have made the region a contentious spot for investments.

For Turkven's Tari, concerns around Turkish political stability are more related to bad PR than reality, while the main challenge to international backers is the level of market knowledge of local GPs. "We know every up and coming manager and CEO in Turkey and understand the consumer."

Similarly, Taxim's Zoralioglu says Turkey is too big a potential market to ignore for strategic investors, but that the mid-market can be a tough nut to crack. "We don't think of international private equity as real competition," he says. "Even though there are global and regional funds active in Turkey, these are part of bigger structures and are not fully committed to the Turkish market. They might make one or two deals every few years."

There are international players with the ability to ink larger deals in Turkey, though in recent years the space has been dominated by Abraaj and Actera. Zoralioglu also includes Turkven as a larger rival in the lower-end of the large-caps, noting that the firm's portfolio company Mavi Jeans, which listed in June 2017, was initially a mid-market company but had grown to a large firm when Turkven exited.

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