Turkish Delight

Aston Martin, the British luxury carmaker, plans to open its doors next year to a gleaming new dealership in Suzer Plaza, a 154-meter skyscraper on the southern banks of the Bosphorus, an affluent area that also houses the five-star Ritz Carlton hotel and some of Turkey’s most expensive residential real estate.

This is Istanbul, home to 28 billionaires, and whose stock market has risen 35.6% so far this year. With GDP set to grow by 8% in 2010 and a thriving population of 72 million, one-fourth of which is under the age of 15, Turkey is the star of what Goldman SachsJim O’Neill has dubbed the “Next 11”—one of the next 11 territories after Brazil, Russia, India and China (the BRICs economies) to offer prospects of the biggest economic growth.

“It’s an economy on steroids,” says Ahmet Akarli, head of emerging market research, Europe, for Goldman Sachs.

The success story has attracted wealth managers from across the globe, evidenced by the rise of the Istanbul Stock Exchange (ISE) to $200 billion this October. Almost 70% of Turkey’s publicly traded stock is foreign-owned.

Fountain of Youth

Alex Tarver, product specialist, global emerging markets, for HSBC Asset Management, explains why there is growing interest in the country that sits wedged between its western neighbors in Europe and the Middle East. “Turkey has 72 million people with an average age of 28,” Tarver says. “A well-educated new generation that can slot into the labour force, once they have money in their pockets, become consumers and savers.”

It is an attractive counterbalance to Western economies that are struggling to prop up pension systems. Turkey’s economy grew by almost 11% in the first half of 2010 and “in the year to date to end-October the MSCI Turkey index has risen by 35.6%, compared to 13.4% growth for Europe, the Middle East and Africa [EMA],” Tarver says.

Regulation under Prime Minister Recep Tayip Erdogan has been robust, introducing “really good structural reform,” Tarver says. Foreign investors enjoy free transfer of profit and repatriation of capital rights on a par with Turkish nationals. Financial regulation has ensured a strong and mature banking sector, “not plagued by toxic loan exposure or sour mortgages,” notes Tarver. Bank liquidity is enviably high.

It’s an economy on steroids.”

Ahmet Akarli

The country is also marked by entrepreneurial dynamism. “Turkey has a long history of capitalist economic growth,” says Akarli. “The Turks have been merchants for 200 years and more. They like to buy and sell. They know how to run a business.” Akarli contrasts Turkey with the ex-Soviet economies, which still “have a lot to learn.”

Russia recently signed an agreement with Turkey that will complete gas and oil pipelines from the Black Sea port of Samsun to the fuel shipment hub on the Mediterranean at Ceyhan. Turkey’s first nuclear reactor will be built by Russia. The government has scrapped visa restrictions with Russia and Syria, facilitating both tourist and commercial trade across its borders.

For infrastructure deals, Akarli sees the small and medium enterprises (SME) sector as key: “Across Anatolia you can see the growth of smaller, entrepreneurial activities in textiles, foodstuffs—areas where there is low value-added, but business generation—and people employing hundreds and thousands.” Akarli describes the emerging middle class as “a tsunami.”

In October, the European Bank for Reconstruction and Development (EBRD) announced a likely commitment of between €10 million to €60 million ($13.7 million to $82.3 million) to a planned fund by Eurasia Capital Partners, which is looking to provide risk capital to this high-growth SME market.

Basak Vardar, M&A advisory partner in Deloitte’s Turkish practice, sounds a warning note, saying, “While there are fewer opportunities for venture capital, there are private equity opportunities.” She believes sectors linked to consumers, such as retail, health care, education and energy will drive this growth.

Turkey has the world’s 12th largest Internet market globally, while both mobile phone and PC ownership remain below the rest of Europe. Home-grown players include kariyer.net, Turkey’s largest online recruitment site, which is backed by Access Turkey Capital Group, and GittiGidiyor.com, an online consumer trading platform in which eBay acquired a minority stake in 2007.

Turkey is an attractive market with growing GDP, which is forecast to continue over the next two or three years at more than 5%, and favourable demographics with a young and growing population.”

Nikos Stathopoulos

Efe Kapanci, a Turkey specialist with HSBC Asset Management, sees opportunities not just in Internet pure plays, but more generally in the media space, as advertising revenue rises. Major companies, such as Digiturk, offer high-growth audiences and sales to match. Kapanci says “category killers and global brands” will be the winners.

Risk Factors

The risks are, to a large extent, those of any developing market. Nikos Stathopoulos, partner with U.S. and Europe private equity investor BC Partners, points to currency risks, even though the last two years have seen the Turkish lira show less volatility than the British pound, for example. Nevertheless, Kapanci says that the lira is not as liquid as hard currency and is expensive to hedge.

Inflation, especially when compared to other countries, including Brazil, is also relatively stable. Akarli says there is a concern that as the country attracts capital, the current account deficit may widen.

With elections next year, it is unlikely the government will tighten fiscal controls and “emerging markets are generally bad at managing demand, and Turkey is no different,” he says.

There are mixed views about Turkey’s appetite to join the European Union. Whether or not it joins the EU, “the process is vital and important,” Stathopoulos says. “Regardless of the outcome, the journey will benefit the country.”

However, Akarli disagrees, saying that “if Europe doesn’t pull and Turkey doesn’t push, then there is no strong impetus to reform.” He calls the process “gridlocked,” but equally sees Turkey’s internal economy driving positive change without the need for an external motivation.

Hot for Health Care

Many sectors in Turkey are dominated be a few large players, making it more challenging for new players to enter the market.”

Basak Vardar

Investors say Turkey has no shortage of attractive market segments. Health care, in particular, has seen a good deal of action:

• London-based Argus Capital partnered with Qatar First Investment Bank to acquire a 40% stake in Memorial Health Group, Turkey’s leading health care provider.

• In July, the British-based pharmacy group, Alliance Boots, lifted its stake to 60% in Hedef Alliance, which has about one-third of Turkey’s fast-growing pharmaceuticals market.

The Carlyle Group acquired a 40% stake in Medical Park Saglik Hizmetleri at the end of 2009. It’s the U.S.-based private equity firm’s second deal after buying a 50% stake in shipbuilder TVK Gemi Yapim in 2008.

Abraaj Capital, the Middle East investment firm, owns a significant holding in Turkey’s Acibadem Healthcare Services.

• And earlier this year, Rhea Investments acquired a majority stake in medical supplies firm Seta Medical Products, Turkey’s leading manufacturer of disposable medical products.

Turkey has all the most positive traits for investment found in our region: a youthful and growing population, a deep pool of managerial expertise, expanding trade links, an economy that is opening up and fast developing capital markets.”

Nazem Fawwaz Al Kudsi

Looking for Leaders

Investors are also hungry for mature companies with strong market positions. BC Partners closed what is believed to be the largest leveraged buyout ever done in Turkey in 2008, with its investment in retail food chain Migros Turk. The firm led a private equity consortium, which included Turkven, in a deal valuing its equity at $3.25 billion. It was the country’s first public-to-private transaction.

Turkey’s retail food market is estimated at $100 billion, but is highly fragmented. Migros was and is a market leader in its sector and to an extent food retail is a “defensive and growing sector” relying on strong internal demand, says Stathopoulos, who led the Migros deal for BC Partners. BC’s London-based office teamed up with Turkven, an affiliate of Advent International that invests in Turkish companies, partly “because we didn’t have a local presence,” he adds.

Stathopolous says that he is now looking to do more deals. Through the Migros investment, “we’re more familiar with the country and more comfortable with it,” he says. Sectors that attract BC Partners include those with high consumer demand, such as telecom, especially mobile, where penetration lags behind the rest of Europe, health care and energy.

Turkey’s strong market position in automotive manufacturing and vehicle inspection has also attracted investor interest. In October 2009, European private equity firm Bridgepoint took a controlling stake in Tuv Turk, Turkey’s leading roadworthiness inspection group, through its €4.85 billion ($6.7 billion) Bridgepoint Europe IV Fund.

In the same month, a partnership of Is Private Equity and HSBC completed a 35% acquisition of Havas, Turkey’s largest ground handling services company, for €180 million ($247 million).

An early entrant to the market was private equity firm Kohlberg Kravis Roberts & Co., which acquired the Mediterranean’s largest roll-on roll-off freight company, U.N. Ro Ro, for about €910 million ($1.3 billion) at the end of 2007.

HSBC’s Tarver sees “opportunities in infrastructure, industrials, energy and engineering” and points to a recent logistics deal. Ekol Lojistik was acquired for €50 million (%68.7 million) by Abu Dhabi-based investment firm Invest AD via its latest fund, Invest AD Equity Partners II.

Invest AD’s chief executive, Nazem Fawwaz Al Kudsi sums it up: “Turkey has all the most positive traits for investment found in our region—a youthful and growing population, a deep pool of managerial expertise, expanding trade links, an economy that is opening up and fast-developing capital markets.”