James Douglass and Tom O'Neill of Linklaters -

The Constitutional Court decision on July 30 that rejected calls to ban the ruling the ruling Justice and Development Party (AKP) and president from political life, marked a return of confidence for one of the world's largest and most robust emerging economies.

Uncertainty relating to the outcome of the case was a cause of some worry and there were signs of a slowdown in foreign investment activity in the period leading up to the court decision. This slowdown was exacerbated by the international economic climate, although Turkey has to date not been as badly affected by the global credit crisis as some other countries.

Now that the storm clouds have cleared, M&A demand in Turkey is getting stronger. What is interesting about the current situation is where the foreign money is coming from. Historically, Turkey has been the target of mainly European and US investors, with a recent surge in private equity investment. More recently, however we have seen a wave of Middle Eastern money coming into Turkey through sovereign wealth funds and private companies looking to invest in the country's emerging sectors. Initial investment flows from the Gulf were largely in the real estate sector but investment targets have become increasingly diversified. In many ways, Turkey meets a sovereign wealth fund's investment criteria perfectly - a large and stable economy with a host of opportune sectors that have not yet been accessed by the international investment community.

Historically, the banking sector has seen the most FDI activity, with 50% of equity in Turkish banks now owned by foreign investors. However, international M&A activity in the sector has declined as the list of targets begins to dwindle. The privatization of the remaining state-owned stake in Halk Bank is still to happen, but may represent the last major prize in this sector.

The growing middle class in Turkey and the relatively young population is fuelling the rise of investment opportunities in healthcare, with a growing number of international acquisitions of health insurance assets and private hospitals as well as generic pharmaceuticals. There has been relative underinvestment in healthcare to date and private equity firms have been quick off the mark.

The privatization process in Turkey, particularly in the energy sector, has been undertaken at a variable pace, but energy will be a very large M&A play in the coming years through the privatization of electricity generating and distribution assets, pipeline projects and renewable energy. Turkey has a need for investment in its electricity generation and distribution assets and there are ambitious plans for renewable energy, particularly in wind power, where Turkey could be one of the largest wind power producers in Europe. More generally, in the renewable energy sector, Turkish companies are emerging as international players, using expertise developed at home in emerging markets that are vying for cheap, alternative ways to generate power.

Overall, Turkish business is becoming increasingly international in its scope and plans for expansion with joint ventures involving some of the world's largest multinationals in the telecoms, electronics, consumer goods and insurance sectors. That said, outbound M&A by Turkish conglomerates may not initially reach Indian levels with massive takeovers abroad, but instead - although there will no doubt always be notable exceptions - business relationships will continue to follow linguistic and historic links, seeking opportunities for JVs and smaller strategic acquisitions in central Asia and the Balkans.

In view of developments in energy M&A and various pipelines, Turkey's relationship with Russia will become increasingly important. Lukoil has recently acquired a number of downstream businesses including Akpet, a Turkish petrol and petroleum products producer and Turkey's sixth largest company in terms of market capitalization (around $500m). For Gazprom, which also has an existing footprint supplying gas to Turkey, the country may serve as a transit point for Russian natural gas exports to some countries in Europe and the Middle East. With its existing involvement in the Blue Stream and Trans-Balkan gas pipeline and the planned South Stream pipeline, Turkey will be playing a major role in pipeline politics and it will be interesting to see how the country will manage its role as an East-West bridge, particularly in view of the current schism between Russia and the West. As such, we should expect that M&A in Turkish energy will be very carefully watched from all sides.

Turkey should see this next phase in its development as an opportunity to further improve on many developments which, to date, have helped to rebuild investor confidence. More diversification in the concentration of economic power, important alliances being formed between Turkish companies and major multinationals, continuing alignment of competition legislation with that of the EU, an FDI law which addresses key investor concerns and an expected overhaul of the Commercial Code are all welcome moves by a government that has displayed a business-friendly approach to economic management.

Turkey's political independence along with a strong and very large economy have helped it to weather negative international developments comparatively well and to advance its reputation as a focus for foreign investment.

What Turkey should do now is to show policy consistency. For example, on the energy side, the initial investment framework models for greenfield power generation were very successful in attracting foreign investment and financing. Subsequent models, albeit forced on various governments by court decisions or the terms of the IMF package, have hindered subsequent foreign investment. When we did our first deal in Turkey in 1996, the regulatory back-up was world class. Around eight major projects were financed in the five years following. Since then, however, the record has not been so strong. Investor confidence is returning to Turkey and it is now down to what is an exciting, robust and independent economy to demonstrate a more predictable investment climate for the long term.

James Douglass and Tom O'Neill are London-based partners at Linklaters and co-heads of the firm's Turkey desk

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