Security Fears Take Shine off Turkey's Once-Booming Private Equity Market


JUNE 07, 2016

Istanbul. Once seen as a prime target for private equity firms, Turkey's allure has waned as security concerns and fears about President Tayyip Erdogan's growing authoritarianism have knocked investor appetite and the lira currency.

Turkey has been hit by a spate of deadly bombings this year  including two in Istanbul blamed on Islamic State and two in the capital Ankara claimed by Kurdish militants. The mainly Kurdish southeast has been scorched by violence after a ceasefire between militants and the state fell apart last year.

"The M&A activities of both strategic investors and private equity funds are very low so far this year," said Mehmet Sami, founding partner at Istanbul-based advisory firm Pretium.

"Some travelers, indeed some investors, are avoiding Turkey just because of security concerns," he said, a reference to the sharp drop-off in foreign tourist arrivals this year.

Turkey attracted some of the top names in private equity  such as US funds Carlyle and KKR  over the last decade, thanks to years of stellar growth and its enviable demographics, including the youngest population in Europe.

But it is now dealing with the spillover from a five-year-old Syrian civil war and Islamic State rocket attacks on its border towns. Heightening the tension, last year it shot down a Russian jet over Syria.

Mergers and acquisitions totaled $935 million in the first four months of this year, according to consultancy Ernst & Young, on track for the weakest year since 2009. Last year, M&A totaled $15.5 billion, down from $22 billion in 2014, it said.

"I think what's making investors pause and observe as opposed to rush to invest is the political situation and, to a certain extent, the geopolitical situation," said Nikos Stathopoulos, managing partner at buyout firm BC Partners.

BC Partners bought a majority stake in supermarket chain Migros in 2008, later increasing its holding to 80.5 percent.

The deal, worth around $3 billion, was the largest leveraged buyout in Turkey at the time. The fund last year sold half of its stake to Turkey's Anadolu Group for around $800 million and is on track to reap two times its original investment.

In 2007, KKR bought shipping company UN Ro-Ro Isletmeleri for about 910 million euros. It sold it in 2014 to local private equity firms Esas Holdings and Actera Partners in a deal sources said was worth about 700 million euros.

Larger transactions, though, are becoming more rare.

"Fundraising is really bad right now," said a senior executive at a local private equity firm, declining to be identified. "After Turkey downed the Russian jet the impact was enormous. People thought Erdogan was so unpredictable."

A steep fall in the lira hasn't helped. The lira lost a fifth of its value against the dollar last year, and 11 percent against the euro, hurt by worries about Erdogan's tightening grip on power.

Erdogan has repeatedly criticized the cost of credit in Turkey, equating high interest rates with treason, sparking concern about his influence over monetary policy.

The government has also cracked down on opposition journalists, and, most recently, Ahmet Davutoglu was ousted as prime minister last month after weeks of tension with Erdogan.

Rising consumer

The deals that have taken place are mostly focused on Turkish consumers, as investors bet that consumption may be able to weather the political storm. Turkey's population is expected to rise to more than 93 million by 2050, from 79 million now.

In April, South Korean movie theater operator CJ CGV said it would acquire all of cinema chain MARS Entertainment Group for 605 million euros, from Turkey's Esas and Actera, in what appears to be the biggest deal so far this year.

British private equity firm Bridgepoint said last week it was acquiring dried fruit and nuts producer Peyman from its founders and Esas, a deal sources have said was worth around $110 million.

Emerging markets focused private equity firm Abraaj said on Monday it had acquired a near 10 percent stake in Turkey's Fibabanka.

Still, potential sellers are not factoring in the political risk, asking a premium that investors are now unwilling to pay.

"Some of the quality assets in the country continue to grow regardless of the macro situation. That's what sellers will see. They will see the performance of their company is very strong. They will say: 'If I'm growing double-digits, I also demand a double-digit multiple'," said BC Partners' Stathopoulos.

Selcuk Yorgancioglu, a partner at Abraaj Group, said deal multiples were averaging high single-digits in Turkey.

For some long-term investors, though, Turkey will remain attractive, despite the political worries.

"These long-term investor circles do not really care how autocratic Turkey becomes, because they are already working with countries such as Saudi and others around the world with bad records on human rights," said Yusuf Muftuoglu, a senior adviser at global consultancy Macro Advisory Partners.

"In more strategic circles, the question is will Turkey be part of a new rising eastern bloc and turn away from the West. As long as it remains somewhere in between, the political risk is seen as manageable."