Turkish dealflow picks up despite lingering uncertainty

Once billed as one of the most promising sub-markets in CEE private equity, Turkey has seen patchy levels of dealflow in recent years, somewhat failing to live up to the expectations placed upon it. Last year showed a modicum of improvement after a very quiet 2013 – with unquote" registering a 25% increase in the volume of deals, while the overall value of these transactions jumped from around €270m to €1.3bn year-on-year.

Kerim Turkmen, partner and head of the Istanbul office at Mid Europa Partners, remained underwhelmed, however. "Last year was relatively slow when it comes to dealflow, with few sizeable control deals on the private equity side, or on the M&A side in general," he says. "For this year, it is difficult to pass judgement based on just two months, but we are seeing more activity in the market since the beginning of the year; whether that translates to more completed deals or not remains to be seen."

Promising signs
Recent evidence does point towards activity picking up, with unquote" recording five private equity deals in Turkey since the beginning of 2015. Abraaj just announced the latest of these, a minority investment in e-commerce business Hepsiburada believed to amount to around $400m.

Prior to that, Investcorp acquired a majority stake in Arvento Mobile Systems, a telematics company. Earlier in February, Abraaj and the EBRD backed mattress retailer BRN Sleep Products. Back in January, Syntaxis Capital made its first investment in the country by providing equity and mezzanine to glass products manufacturer Uğurlu Cam. US firm Elixir Capital Management also invested $4m in maternity and baby e-commerce business Annelutfen. On the exit front, BC Partners finalised the sale of half of its 80.5% stake in supermarket chain Migros Ticaret to Turkish retailer Anadolu Group, in a deal that valued the company at TRY 6.4bn (€2.3bn).

Whether this hot streak can continue in the coming weeks remains to be seen, as some of the factors that affected dealflow last year are still at play. The country's particularly busy political agenda is certainly one of these. Turkey held no less than two elections in 2014, namely municipal elections in Q1 and a presidential ballot in the summer. The Turks will have to return to the polls later this year for the country's general election, due to take place in June. Although the ruling AKP party emerged victorious from 2014's contests, and is looking to cement its power in the upcoming parliamentary elections, such events usually foster a ‘wait-and-see' attitude among private equity players.

"This busy political timeline has led to a greater degree of caution from international investors, as well as from domestic players. Combined with global macro developments and changing risk perceptions, this has led to a dampening impact on activity on the ground, which is not surprising since dealflow is ultimately a reflection of confidence levels," notes Turkmen.

Other indicators point to a more promising year for incoming investments in Turkey, though. For starters, one of the main issues affecting GPs looking to do deals in the country has been pricing – with the strong interest shown by foreign investors leading to intense competition. Turkmen believes the macroeconomic and political uncertainty has had a silver lining in that regard, providing a cooling effect. "Buyers reacted immediately, and sellers as expected take longer to adjust, so there is still a lingering mismatch – but it is already lower than it was a couple of years ago," he says.

Provided it does not totally discourage sellers from trying their luck on the market, this reduced level of competition could present interesting prospects for local private equity players. But even firms focusing on the wider CEE region would do well not to forget what made Turkey popular in the first place.

"Now is arguably a better time to invest in Turkey than it was two or three years ago, given the reduced amount of competition," argues Turkmen. "We are certainly still looking at the market – under-penetrated consumer markets, local service sectors and healthcare sectors present very interesting opportunities. There also tends to be a lot more primary dealflow in Turkey, with a healthy amount of opportunities that can be sourced from families and entrepreneurs – although this creates its own challenges, since reaching agreements and securing control is almost always more complex than in secondary buyouts."

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