Historically, Turkey has been a bit of no-go area when it comes to private equity investment, despite all the usual positive ingredients the country possesses.
According to Levent Bosut of PDF Corporate Finance, who is chairman of the Turkish Private Equity and Venture Capital Association: “In spite of the significant increase in venture capital and private equity activity in similar emerging markets and a mismatch of abundant deal flow and capital scarcity in Turkey, the institutional VC/PE activity in Turkey has been quite limited. Until 2005, the last decade saw less than US$50m a year invested in private equity deals.”
Bosut, however, is increasingly positive about Turkey’s prospects. “We are experiencing strong growth in investments, as well as interest from new international players, such as KKR, Carlyle and Texas Pacific, who are all looking at Turkey, as well as attempts to set up new funds,” he says.
Hakan Turunç, executive vice-president and head of merchant banking at Fortis Turkey (formerly DisBank), agrees. “Private equity has been in its infancy in Turkey, but deal flow has been picking up in the recent years thanks to the more stable economic and political environment and the availability of longer-term funding,” he says.
Seymur Tari, managing director of TurkVen, a Turkish private equity firm that has already made a number of investments, either alone or acting as a partner to Advent International, is quick to concur. He says there have been about 30 deals in Turkey to date and that there are currently a number of buyout deals in the US$100m to US$900m range that are near to being closed.
His own firm is among the first financial investors to have made a successful exit from a buyout deal. In 2003, TurkVen invested alongside Advent International to buy a 50% stake in Turkish pre-packaged bread producer Unmas. The business saw sales rise from US$17m per annum to US$40m per annum by the time the private equity players exited their stake to their strategic partners in the business earlier in 2006.
Tari believes such growth is achievable across much of the Turkish economy, which remains largely undeveloped. “The pre-packaged bread business, for instance, has a market penetration of just 1%, compared with 12% in Poland, leaving huge scope for organic growth,” he says.
“A private equity investor can identify a business with a 10% growth rate and solid cashflows that can be brought up to a 20% or 30% IRR even with the conservative leverage typically available – in the region of one or two times equity.”
He cites other fast growing business including Intercity, a fleet rental business that Advent International and TurkVen acquired in a 2004 buyout, which is growing at 100% per annum, again thanks in part to low market penetration.
Bosut points out that, on the whole, the Turkish market is much like those in developed countries, with family owned businesses in particular presenting challenges. He cites the problems of evaluating historic performance in a traditionally highly inflationary market, the importance of personal relationships, and what can be reluctance on the part of owners to dilute their control of a business.
In addition Tari says that in many cases owners are simply unaware of how private equity can work with them to develop businesses, which means investors must actively seek them out.
“Entrepreneurs are often unaware of their options in terms of MBO deals or refinancings, and deals are not as pre-packaged as in other markets,” he says.
Turunç of Fortis says that in the past valuation expectations of domestic firms were often too high to justify private equity investments, but he argues that now the newly available ability to leverage off solid cashflows, especially using longer-term financing options, is a likely driver of further transactions.
He feels that a recent increase in the availability of financing is set to have a major impact.
“The recent introduction of acquisition financing paves the way for sponsors to do LBOs, although the number of players in the market is still limited,” Turunç says.
“Without long-term debt, all funds could do were sole equity investments and this limited the universe of companies private equity could invest in to those with the necessary growth prospects to satisfy the PE-type IRR requirements.”
Turunç mentions in particular TurkVen/Advent, Is Risk, Bedminster Capital, Bancroft Group and Argos Capital among the home grown, regional and global players most actively looking in the market, with some global houses involved on a deal-by-deal basis.