Turkey: Emerging from the MIST

Turkey is well established as an investment hotspot and interest from international investors continues to grow. Recently, Goldman Sachs' Jim O'Neill identified the country as one of the new rising stars of emerging markets dubbed MIST (Mexico, Indonesia, South Korea and Turkey).

"Private equity in Turkey has come a long way in terms of the presence of both GPs and advisers who understand the market," says Ahmet Faralyali, managing partner at Mediterra Capital.

Faralyali explains that Turkey's human capital is rich and provides a good base to educate the next generation of business leaders on both the buy and sell-side. Moreover, an economy with an impressive 8.5% GDP growth rate in 2011 desperately requires infrastructure investment to improve future growth capacity.

Interest from international investors in Turkey continues to grow

"Our government takes private equity very seriously and supports it as a part of its economic policies," Faralyali continues. Yet, the construct of a limited partnership is not provided for in Turkish legislation, which is why most Turkish funds are domiciled in other jurisdictions. However, increasing governmental support, including a recent proposal to enable investments from business angels, shows Ankara is willing to engage further.

On an international level, Turkey's outlook is improving as well. Fitch upgraded the country to investment grade status in November 2012 and public debt equates to just 38% of GDP – significantly less than most EU nations. In response to attention by investors, the Turkish lira has appreciated 5% against the US dollar since the beginning of 2012.

"Turkish GPs receive capital from two major groups," Faralyali continues. "Large equity cheques come from the big North American pension funds, and American and European funds-of-funds. Smaller commitments focused on the mid-market come from international financial institutions, like the EBRD."

But Turkey's largest trade partner and investor, the European Union, is more than underperforming at the moment. As the eurocrisis is blazing in the background, Turkey's GDP growth fell to 3% in 2012. Faralyali expects 2013 to be a better year, but he is aware of the threats: "If Europe is sick, it is impossible for Turkey not to feel it. We will probably see 3.5-4% GDP growth next year, while it would be 5-6% in a healthy global economy."

Turkey could be Europe's rising star, if Europe would just embrace it. Turkish prime minister Tayyip Erdogan has given the EU the deadline of 2023 to offer his country the accession to the Union. Otherwise, it would turn the other way, towards the Middle East.

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