EMPEA “Views From The Field” Report Published
THE VIEW ON TURKEY
Baris Oney, Managing Partner, Globalturk Capital
After two parliamentary elections in Turkey this year, the Justice and Development Party (AKP) was finally able to establish a strong single party government against all expectations. This election frenzy caused investments to slow, especially over the previous five months. However, despite the slowdown, the number of private equity investments in 2015 increased compared to 2014. We expect this trend to continue, not only because many investments that were postponed due to political uncertainty are now expected to go through, but also because the government has a plan to reinitiate its structural and macro reforms to boost the economy.
The biggest challenge in the next few years will be exits, as private equity investors in Turkey look for new exit opportunities. We expect to see many exits in the coming years through trade sales since many companies are too small for initial public offerings (IPOs). This will create a good environment for strategic sales, as well as for private equity investors seeking secondary acquisitions. However, in terms of returns, private equity investors depend on external factors such as the strong U.S. dollar. The Turkish lira has lost almost 30% of its value in the last 12 months against the dollar, making currency depreciation an obstacle to earning good returns.
Another challenge is that for many general partners (GPs) operating in Turkey, their investment ticket sizes are above the market’s requirements. Therefore, competition gets fierce when a good opportunity arises. However, the real private equity need in Turkey exists for hundreds of thousands of small- and medium-sized enterprises (SMEs). There is a clear mismatch in the market between the size of private equity funds and the size of businesses that need capital. Turkey needs more GPs who are willing to take the time to invest in SMEs rather than in large companies.
Finally, while big international institutions like International Finance Corporation and European Bank for Reconstruction and Development have been keen on investing in Turkey in recent years, other private investors have been hesitant. There are, however, a number of GPs currently fundraising and a number of other investors that may renew their interest in Turkey. With this in mind, in 2016 I believe that Turkey will be top of mind for investors seriously considering making commitments to emerging markets private equity.