Turkish Target

Government enthusiasm for FDI, a modernising economy, a banking sector little touched by the credit crisis, family-owned businesses keen to sell, a country rapidly integrating with its European partners… these are just some of the reasons that Turkey has become a prime target for private equity activity in recent years, and why it may see a further updraft of investment in the coming months.

“Turkey used to be quite a volatile economy, with currency devaluations, military interventions and so on,” explains Kerem Onursal at Turkven, one of the country’s largest private equity funds with €300m in assets under management. “As a result, people diversified into lots of businesses so they could spread the risk. Now that you can make reasonable predictions about the level of inflation and interest rates, companies are concentrating on their core assets and spinning off those that don’t make sense.”

Turkven has played a role in one such spin-off, the sale of a controlling stake in the country’s largest grocery retailer Migros, by Turkish conglomerate Koc Holdings, for 1.98bn lira (US$1.7bn). Turkven took a minority share in the company as part of a consortium of investors headed by British private equity fund BC Partners. The deal finalised in May 2008, the largest ever Turkish LBO and among the largest such deals in the world following the credit squeeze, which began in the summer of 2007.

The Migros transaction showed that conditions in Turkey were distinct from elsewhere in Europe, as Mehmet Sami, executive board member at private equity advisory firm ATA Invest explains. “This is not a transition economy, it has been capitalist for a very long time, with a strong entrepreneurial base, whereas most of Central and Eastern Europe has only had a free market for the past 15 years. This means the number of sectors where investment is possible is huge.” Recent examples where ATA has played a role include food hospitality and buildings materials, while Sami lists financial services, healthcare and pharma, infrastructure, energy and logistics among the sectors that are attractive to private equity investors.

The country welcomed around US$50bn worth of foreign direct investment between 2000 and 2007, as the liberal government brought in new laws to encourage foreign ownership, including friendlier regulations regarding setting up a business and lower corporation tax. It has also introduced incentives to promote research and development and is considering a change in the law to allow ‘squeeze out’ transactions, where a private equity firm (for example) could oblige Turkish minority investors to sell shares in order to transfer debt to a listed target and benefit from tax-deductible interest.

Whereas the Turkish state owned 70% of the country’s economy in the early 1990s, it now owns around 30%, according to local experts. Of the €50bn in FDI up to 2007, 65% of it came from the EU. Much debate has centred on Turkey’s potential membership of the European Union, with an early signal coming in 2006 that membership would be – eventually – a formality, when the EU opened initial talks. No country has ever been invited to begin such talks and then failed to gain membership.

Since then, the situation has become less clear, as issues including support for Northern Cyprus and the country’s pro-Islamic government have pushed accession further away. But Mehmet Sami argues that becoming a member of the European Customs Union in 1996, giving Turkey access to duty free trade, was a very important step. Kerem Onursal at Turkven sums up the situation neatly: “The journey is more important than the destination,” he says.

Onursal points out that many large multinationals have been present in the country for years and are comfortable with the government and the economy, just as an increasing number of private equity firms have set up offices and begun to discuss deals. Kohlberg Kravis Roberts acquired shipping company UN Ro-Ro in 2007 in a deal that valued the firm at €910m. Equally, several Middle Eastern sovereign wealth funds have closed a number of recent deals, particularly in real estate.

As elsewhere in Southeast Europe, many companies are held by family interests and have a reputation for demanding excessive prices in order to sell. But as economic conditions overall have tightened, some are becoming more realistic, according to local experts.

More liquidity in the market, along with further privatisation programmes from central government – promised in energy and infrastructure, among other sectors, as it attempts to deal with its €40bn current account deficit – and the development of a local private equity industry should mean Turkey has a lively investment environment for some years to come.