Turkey gets back to business

Katharina Semke
03 November 2016

Tweet
Facebook
LinkedIn
Google plus
Send to

Despite a chain of troubling events in recent months, private equity should not turn its back on Turkey. Katharina Semke takes stock of past developments and finds fundraisers remain positive on the future

It has not been an easy year for Turkey. On top of the ongoing war in bordering Syria and terrorist attacks by Kurdish and Isis militants, the coup attempt in July 2016 was yet another blow for the country. This was one reason why the European Bank for Reconstruction and Development (EBRD) lowered its growth projection for Turkey: in an earlier report from 2015 the bank predicted GDP growth from around 3% in 2015 and 2016 to gradually recover toward an average of 4.5% in the following years. In its most current forecast, it paints a gloomier picture, predicting 3.4% in 2017, compared to 3.2% in 2016.

Despite these distressing tribulations, investment activity picked up prior to July, according to John Fitzpatrick, partner at law firm CMS: "Things started looking good in terms of investment. There was a lot of interest and activity. Deals that were on hold due to the prior instability went ahead." As the coup's aftermath continues to unfold, some activity is on hold again. "For investors, uncertainty is worse than knowing things are good or bad," says Fitzpatrick.

If you compare the number of deals on a year-on-year basis, Turkey seems to be still active. However, if you look at the aggregate value of deals there is a difference" – Demet Ozdemir, EY

According to an EY study, Turkey saw a total of 319 M&A deals in 2015, with disclosed values totalling $10.7bn. Two of them were above $1bn and accounted for 40% of total transaction value. The advisory firm estimates that the total transaction value in 2015 was $15bn, including non-disclosed transactions. EY recorded 133 deals in H1 2016, with an estimated aggregate value of $3.5bn.

EY partner Demet Ozdemir therefore predicts the numbers will look somewhat gloomier for 2016: "If you compare the number of deals on a year-on-year basis, Turkey seems to be still active. However, if you look at the aggregate value of deals there is a difference. In 2015, the transaction value was around $3.5bn according to our estimate. In 2016, the level is decreasing. Including the undisclosed transactions, it could be something like $2bn."

For EBRD, however, there is no need to worry about the country's economic stability: "The underlying long-term trend related to demographic fundamentals of the Turkish economy has not changed, with a young population and a growing and affluent middle class," says Anne Fossemalle, EBRD's director of private equity funds. "The focus in our underlying portfolio continues to be investments in consumer-driven businesses." The bank has committed to 10 Turkey-focused funds since it started its activity in the country. In 2016, six of the eight transactions made by EBRD-invested funds were made in the venture space. Fossemalle is convinced that the long-term investment pace will remain strong, despite the temporary slowdown.

Tales from the trail
Abraaj Group managing director Omar Syed seems to agree with this assessment and keeps a positive outlook on the current year. The firm announced the final closing of its first Turkey-focused fund on $526m at the end of July, less than two weeks after the coup attempt. The limited partners, he says, remain keen on putting their money to work in Turkey: "Regardless of the headlines, the underlying opportunities are strong. Turkey remains one of the top five high-growth-economies within the G20 and demographics remain favourable."

Ahmet Faralyali, managing partner of local private equity firm Mediterra, has a slightly gloomier perspective on the recent year: "On the one hand, LPs see the attraction due to generally high returns in the country with low risk and volatility. On the other hand, they are always waiting for the right time and more visibility into the future. That hasn't really presented itself. Fund flow into Turkey has been really slow." Mediterra started fundraising for its second fund Mediterra Capital Partners II in October last year. The vehicle has a target size of €300m, with a hard-cap of €350m. The investor did not comment on the progress of its fundraising.

Fossemalle predicts fundraising activity will pick up again next year: "In 2015, there were a number of fundraises and a lot of investors looked at the market positively. 2016 will likely be more modest owing to a natural cyclicality but many high-profile LPs are now committed to the country and will continue to look at it for both re-ups and emerging teams. In 2017, we expect to see the beginning of the fundraising of the two larger GPs in the country, Actera and Turkven."

Hopefully, those GPs on the fundraising trail can leverage recent successes. Actera scored one of the country's most impressive exits this year when it sold cinema operator Mars Cinema Group to Korean peer CJ CGV in an $800m deal. Actera made a 5x capital return on the sale, unquote" understands. Another noteworthy deal was made by Abraaj, which acquired a minority stake in local bank Fibabanka. The deal's size remains undisclosed, but Fibabanka claims to have $4.2bn in assets and a loan book of $3.2bn. Abraaj joined its LP, EBRD – which committed $75m to its Turkish fund – and the IFC in holding a 9.95% stake in the bank.

Look out for the second instalment of our Turkey series in the coming days.