Nicholas Birch in Istanbul -
Hemmed in by a credit squeeze at home, the world's leading buyout groups are increasingly turning to Turkey, fuelling a boom in private equity deals. Whether this will be enough to replace privatisations as the main source of Turkish foreign direct investment (FDI), as some hope, remains doubtful.
Private equity deals are expected to top $2bn in Turkey this year, following the $910m acquisition of Turkish shipping company UN Ro-Ro by Kohlberg Kravis Roberts on October 9. In international terms, those figures are a drop in the ocean; in Turkish terms, they are huge.
Between 2001 and 2005, according to a recent report by Deloitte Touche, private equity deals totalled a mere $167m, with individual deals never more than US$20m. The turnabout began with two landmark deals in 2006, when Providence Capital acquired 45% of the digital TV platform Digiturk for $180m and TPG bought 90% of Mey Icki, a leading liqueur manufacturer, for $810m. As Turkey's first triple-digit deals, "these were final eye-openers for many large private equity investors who have started focusing on Turkey," says Baris Oney, Deloitte Turkey's corporate finance partner.
Since this spring, the Carlyle Group, Brussels-based Probel Capital Management and Kuwait-based NBK Capital have all opened offices in Istanbul. Turkish-run Antika Partners, Turkven and Dupem - a Standard Unlu special fund - have between them raised $1bn for Turkish investment.
For Kerem Gokten, manager of the $200m Dupem fund and an old hand in the business, the real change has been in the attitudes of Turkish entrepreneurs. "Before, we had to do all the running; now companies are beginning to come to us", he says. "These are people who do not want to sell, but who - in an increasingly competitive market - need discipline and financing." The publicity surrounding recent big deals, he adds, has succeeded in persuading many of them that "we are not trying to screw them."
This combination of international interest and local need is nowhere more evident than in the logistics sector. Two things attracted KKR to logistics. First, it's a sector that is expected to expand 50% in three years, piggy-backing on Turkish trade currently worth $250bn and growing rapidly. Second, it has a hard currency base that reduces the cost of financing deals.
Following UN Ro-Ro's lead, two other sector leaders, Barsan Global Lojistik and Ekol Lojistik, have started talks with international private equity funds within the last fortnight.
The retail sector has also attracted a good deal of private equity interest, particularly since Turkey's largest non-food retailer Boyner sold 30% of its shares to Citigroup Venture Capital International in May. Last month, Mehmet Hotic, a former Boyner senior manager who owns Hotic Shoes, announced he'd be following suit, teaming up with Turkven in a bid to buy Boyner brands Network and Fabrika. "We'll continue working together [with Turkven] whether or not we get" the brands, Hotic told reporters.
A partner with PriceWaterhouseCoopers, Adnan Nas agrees many second-tier Turkish companies still have some way to go to reach the management styles and transparency required by the giants of the private equity world. But with Turkish regulations surrounding private equity deals now pretty much in line with those in the West, he thinks there's little to stop a real boom. "10% of FDI to emerging economies comes to Turkey, less than 1% of private equity deals," he notes. "That alone shows the huge potential of private equity in Turkey."
This view is backed by Turkish Capital Markets Board chairman Tural Erol, who said back in May that, "the second wave of foreign investment is on its way." Turkish banks, until recently addicted to the Turkish treasury's sky-high interest rates, also certainly look keen to get in on the act. Amid stiff competition, it was Garanti Bank and Isbank that won the right to provide debt finance for the KKR UN Ro-Ro deal. "They offered the best rates", John Pfeffer, head of KKR's European retail sector, told reporters after the deal.
Yet some remain sceptical about some of the wilder claims made for private equity in Turkey. "I think there's a risk of heads being turned by a few early successes, in Turkey and in other emerging markets," says one leading European private equity investor.
"This is a seller's market," agrees Attila Koksal, managing partner of Standard Unlu. "The days of really sweet deals are over."
Above all, for all the interest that foreign private investors are showing in Turkey, local private equity remains limited in the extreme. Finansbank founder Husnu Ozyegin has set up a fund, and some of Dupem's capital is Turkish, but the other funds in Turkey are funded almost entirely from outside the country.
With pension funds in their infancy here, and institutional investors limited in amount and size, says PDF Corporate Finance head Levent Bosut, "there will not be substantial investment into this asset class in Turkey for many years to come."
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