“The ones who underestimate experience, pay a high price for inexperience.”
April 2020

Private Capital Transactions in Turkey and Environs Going Forward | 30.04.2020

Online Brainstorming Session-2


Participants; Hubertus Van der Vaart – CEO and Co-Founder, SEAFAhmad Al-Saati – Managing Director, Albright CapitalSikander Ahmad – Managing Partner, NBK CapitalDenis Tafintsev – Senior Partner, Horizon Capital and Barış Öney - Founder and Managing Director, Globalturk Capital and EMPEA Turkey Representative.

Highlights of the Session

A Snapshot of the Current Status:

The GPs who have attended our Brainstorming Session were collectively investing in more than 50 countries from Asia to MENA, Eurasia, Africa and South America. It was therefore a very informative fact and idea sharing session where we found it very useful and had a number of takeaways. 

SEAF for example is operating in 30 emerging market countries, including India, Bangladesh and China as heavily populated ones. In many of their markets, life is far from becoming normal, even in China. 

In China, mass entertainment and sports events are still closed. The state-owned enterprises have opened up mostly for export purposes to cover for the demand. Private enterprises on the other hand, were allowed to open up but the owners of these private enterprises are legally and fully held responsible for the safety of their employees. Therefore, many businesses are asking most of their employees to continue working from homes or are staggering at work times to prevent overcrowding. Restaurants are required to, if they're allowed to open, have tables at least eight feet apart (approximately 2.5 meters). Fast food restaurants, like McDonald's and Starbucks are only allowed to have one person enter, order, take and get out; nobody can sit and eat in those restaurants yet. Domestic airlines are still not flying as before. When they fly, they are typically required to have five seats for every one person. Trains are running, but each passenger has six seats allocated to keep social distance.  Masks are the order of the day.

The reports on China being fully recovered are a bit far-fetched in that sense. On the contrary, China is very careful about a second wave and, given the strong control by government, they're reasonably strategic in terms of which sectors they allow to open.

Another interesting phenomenon is happening in many countries and likely to accelerate. Conventional banks are being challenged. High regulatory costs and expensive way of processing files are making their lives difficult. Therefore, people are increasingly going over the internet than they did before and transfer money over the internet for example. Trust is being built on online transactions. Amazon now is becoming a financier of its suppliers, displacing banks. They are starting to lend. And that means that people and businesses are increasingly going outside the banks for their financial transactions. Big shifts are being observed towards non-bank financial intermediaries and various forms of “fintech”. Finance is going to follow e-commerce, which means it could move away from traditional finance rapidly.

In Vietnam, the Government is reopening schools, and many public activities carefully. While initial lock down measures “flattened the curve”, economic necessity is requiring reopening of the economy. 

In all geographies, companies and people are getting into deeper debt—in part just because banks are deferring or accruing repayment. This is not just in emerging markets but also in the West. However, without fresh equity, growth seems unlikely, and without growth, no wealth is being created obviously. Many emerging markets were already over leveraged and these countries cannot print dollars, and will need equity from private investors or a shift in large institutional pension funds or insurance companies. 

Some sectors are doing better than others.  In Maghreb (i.e. Algeria and Morocco) and Vietnam for example, online services, online content sectors and online education are attracting a very healthy demand and it is believed they will remain strong post crisis. 

The picture is not homogenous for all markets; those countries that are furthest along on the COVID curve, consumer behavior is (slowly) recovering. In the countries which are heavily in it, consumer spending has fallen dramatically. Interesting side-effects from this is whether the savings rate in the United States during this period for example, will have increased or no, at least for the 20% - 30% of America, that has been able to work from home and therefore are spending less. 

India is facing a lot of internal migration among other challenges. These migrants, estimated to be more than 100 million, were performing many menial and low paid jobs in major urban centers, like Mumbai and Delhi.  However, with lockdown, they have no jobs and no income.  With India’s train system shutdown, the return of these laborers to their homes in north and east India is problematic to say the least.  Nor is the lockdown (extended again) easy to enforce in India, for example, it is virtually impossible for one to social distance him or herself in Mumbai’s densely populated slums. Hospitals everywhere are actually turning out to be taking care of just COVID patients, so as many as can delay elective surgery do so. Estimates are that hospital income in India is now down by 20-60%.


Finally, remittances—which are critical components of many emerging market countries, are 15-30% or more down—reflecting both COVID-19 lockdowns as well as the decline in oil prices in the Gulf and Russia. 

The virus has basically permeated to every geography where Albright Capital has investments or opportunities that they are looking to invest in. Different countries and businesses reacted differently, but with a focus on protecting employees as well preserving cash and meeting customer needs where applicable. In health care, one sector of interest, has experienced significant weakness as patient with elective and discretionary needs have postponed their visits. Also, immuno-compromised people do not prefer going to hospitals for treatment unless they absolutely have to. The way healthcare businesses operate may change a medical diagnosis, treatment as well as the delivery of medicine changes with the impact technologies like teleconferencing and healthcare apps. Contractual businesses like connectivity businesses in the tower and data center space have been doing well as demand for these services increases and the become ever more important in the everyday lives of consumers and workers. Food supply and delivery remains an area of interest.  

Businesses that have been dependent on global trade on the other hand, have been hit hard, e.g., component manufacturers in the auto sector. The question is, is this a temporary shift, or is this a permanent shift in a lot of these businesses? Will these businesses be brought back to the US and Europe or to nearby countries as businesses strive to become more resilient, rather than more efficient? Will people prefer purchasing goods made closer to home to ensure uninterrupted supplies? What if Apple moves its manufacturing to Mexico or other parts of Latin America for example closer to their customers in the US? Will companies set up regional manufacturing hubs closer to their consumers using Turkey, for instance, to supply goods into Europe? This will have a huge impact on the whole global economy and how business plans and projects are evaluated, funded and completed. What is clear is that global investment vehicles that can re-allocate capital across jurisdictions will become more important as the global supply chain realigns itself. In addition to assisting with the incoming dislocation, private investment channels will be important actors in channeling capital to countries that need to recover from the adverse effects of the Covid-19 pandemic. 

GPs are continuing to look for investment opportunities. Albright for example, have been looking into investments opportunistically across the emerging markets and have made a number of offers to businesses in Latin America, Eastern Europe and Turkey in December and January. The entrepreneurs and counter parties that may have been less inclined for patient and creative capital with a higher return threshold are starting to initiate conversations again. Such offers as well as new ones are being considered globally. Business like the Food Manufacturing, Financial Intermediation, Secondary Distressed Opportunities are being looked at or to be considered as they become more prevalent.  

For NBK, it is very difficult and if not no longer possible to differentiate which sectors are defensive and which are not. They invest in the Middle East and Turkey, and their primary focus has been the GCC countries. Everyone was affected from the COVID situation but beyond that the decline in oil prices. 

All companies, are trying to accumulate as much cash as possible. NBK is actively involved on a day to day basis and working with their portfolio companies to implement measures that would preserve cash in the companies. The focus is on the collection side as well as delaying unnecessary expenses. 

Also, the companies are fully drawing their existing bank lines, in case they won’t be able to in the future, since there is a lot of liquidity constraint within the banking system. It could be the case where additional bank lines may not be easily secured going forward. 

On the positive side, there are benefiting sectors as well. For example, temporary power businesses (generators) and some infrastructure projects are doing relatively well. There hasn’t been much decline. The education sector on the other hand is suffering. Parents are not very willing to pay fees for the summer and most of them are asking for refunds. So, there are many challenges there. 

Private equity funds in MENA are very busy trying to sort out their own portfolio company issues. New investments were not in the immediate agenda. Private debt is emerging though. 

The on-going investments are continuing but slow. Q2 numbers are being awaited in many of the current transactions to see whether resizing or revaluation will be necessary or not. NBK is focusing on private credit recently.

Horizon Capital team has been focusing on investing in Ukraine and Moldova for more than 20 years and, naturally, has developed a very good understanding of these particular markets. Having experienced several economic downturns in the past, Horizon Capital has developed several pillars of its investment philosophy, which proved effective during the current downturn. 

Horizon Capital’s investee companies have low level of financial leverage, where they had no debt coming into 2020, and no company in the portfolio had more than 1 times EV/EBITDA of net debt. This approach allowed the businesses to be more flexible in current situation and minimized insolvency and illiquidity risks. 

Since 2012, Horizon Capital has exclusively been investing into fast growing export-oriented businesses, with significant portion of the portfolio being allocated to internet and software companies. Since COVID-19 outbreak started, internet and software businesses in Horizon portfolio, by and large, continued to grow relative to last year with some businesses, for example, e-commerce experiencing significant acceleration of growth. Interestingly, despite obvious disruptions in global supply and distribution value chains, export-oriented businesses exhibit better results, on average, than business focused on local markets. Exports to developed markets – Northern Europe and the US – have proven to be particularly resilient. Local business, such as healthcare, naturally face the biggest challenges, so hands-on approach with focus on cost-cutting and CAPEX rationalization is key to preserve value in these businesses. 

Very interestingly, as quickly as few weeks after the initial shock of lockdown measures, Horizon Capital team observed early signs of recovery or getting back to “new normal” in some cases. For example, healthcare revenues started growing again just 4 weeks after initial drop. Similarly, the leading e-commerce company in the country  initially observed huge re-allocation of demand for various categories, with some categories falling 60% and some growing at more than 300% year-on-year, but the split of consumer demand among different product categories reverted much closer to pre-COVID19 structure in a matter of weeks. So, it is fascinating that this change is happening so quickly providing food for thought on potential speed of ultimate recovery in certain sectors. 

Turkey has seen the first incident on the 11th of March and since then people have been working mostly from homes. Of course, hospitals, the essential food, FMCG, medical and pharma suppliers, e-commerce and pharmacies as well as some bank branches have been operational. Lockdowns are usually over the weekends for everyone but 65 plus age and 20 below age people are banned to go out all the time. Travelling out of and into most of the cities are not allowed. Death rates are low. ICU units have been coping with the patients and not filled in. There is excellent capacity in the hospitals and quite a good healthcare system. Doctors, nurses and healthcare workers are creating wonders. People are being treated well at the hospitals and sent back homes. All in all, Turkey has been coping well so far. 

Not only that but Turkey has been sending PPE materials and medical aids to 50 plus countries including the US, UK, Italy and Spain. A lot of manufacturers, even it wasn’t one of their products, have been manufacturing oxygen breathing units and masks. Turkish Airlines is not going to fly any earlier than 28th of May for the domestic flights. International flights will probably start one by one to selective countries. A lot of new protocols are being worked on for restaurants, hotels, businesses, airlines and others and will start to be announced in the next few weeks. 

Turkey is a tourism destination. The Government is working towards regulations and new protocols on that front as well. They are determined to open the hotels in summer with those new regulations. 

At the EMPEA Globalturk Capital Conference in December 2019, it was discussed that businesses were getting out of the adverse effects of 2018 devaluation and high interest rates that followed. But the pandemic had a halt on most businesses.  

Fund Raising and Transactions:

Fund raisings and investments at final stages of diligence are generally moving forward but new ones are being delayed, since person to person meetings and operational due diligences are not happening. Most exits are on hold and seems like they are going to be postponed for the foreseeable future. Zoom and skype type calls are fine to a certain extent but it is not comparable yet to physically meeting people. Along those lines most initiatives are being delayed three to six months at least, in order not to deal with the COVID question, which have become almost the only agenda of all meetings. 

What to Expect Next:

Emerging Markets will desperately need capital. And if the IMF is going to distribute a trillion plus dollars into the emerging markets, they're going to need channels to distribute that cash. One of the most effective channels are DFIs. But DFIs may not be able to deploy this capital fast enough. Therefore, GPs and their local partners could be the alternate efficient channels for that money to be distributed to the ones in real need immediately. The key element is what kind of a format this money will be distributed. Would it be equity or a debt and if debt, then what kind of debt? 

The recovery out of the crisis will be slow and volatile and take a long time for things to come back. For example, in South America, the Argentinian Government shut down the country fully, whereas the Brazilian Government did completely the opposite. So, it is yet to be seen what will come out of such approaches. In the 1917 pandemic, it took people until 1922 to start normalizing again. Obviously, the world wasn’t as advanced as today, like people were not able to work from homes for example. Nevertheless, it took a long time to get over with it.

Emerging markets will likely to come out of this situation due to their continued high growth potential among other attributes. But for the first time in a long time, US funds may be slow to go to emerging markets. Since the US now finds itself with a 20% unemployment, pressure will increase among impact investors to invest in the US.  Currently approximately 80% of venture capital goes to California, New York and Massachusetts for example. Very little goes to places like Texas, Ohio and Georgia. Investors usually want to invest in nearby geographies, and at times like this, we should expect to see more money being invested in these “off-Broadway” markets—with a possible displacement effect vis-à-vis emerging markets, and especially those distant to the investors.  Maghreb, Levante, Turkey, Guatemala, Central America and Northern Latin America are much more likely to benefit from the shifts in the supply chain, as part of a move to increased resilience and a move away from pure globalization. 

Most governments are not in great fiscal shape. They are responding to COVID with increased expenditures and deferred taxation-financed by debt. While the fiscal health of most emerging market countries was better than the US and Europe, because they typically have debt to GDP ratios of 40% to 60%, these governments will likely have to borrow more as well—which may be difficult given the global debt markets and perceived currency risk. With high fiscal deficits, it is critically important to find ways to create wealth in emerging markets.  Unfortunately, it would seem that this will take some time. 

Another critically important issue also is the trade going forward, which is expected to get effected by the US-China, US-Europe, Europe-China conflicts on trade and corona virus matters.

Also, Brexit in the UK will continue to be an issue, where there is a timeline till the end of the year for the final agreement. It is hard for this to happen since there are many things to be handled till the end of the year and there is not enough time. However, the UK Government is inclined to postpone this because they feel like they can get a better deal out of it. EU on the other hand would like to postpone, because they want to withdraw more funds out of UK as long as they stay.

And there's an election in the US this year. Depending on what will be the case in November, if high unemployment and uncertainty continue through November, it may be difficult for President Trump to get re-elected. However, if vaccines are announced and economic growth will have recovered somewhat, he may yet win a second term.

Demand for Chinese products may decrease much more than expected as a result of China may be being perceived as the cause for the pandemic. A similar demand reduction happened after Second World War. American citizens didn’t buy Japanese products for quite a while. So, it's going to be very challenging for the next three to five years. 

Emerging markets on the other hand, may not remain as a cluster. Investments from now on could be more considered on a country by country basis, rather than putting countries into clusters of having common growth or behavior patterns. 

Turkey is expected to be one of the beneficiaries of the potential shifts in the supply chain, with its strong manufacturing and servicing base especially for Europe. Manufacturing of essentials, food production, medical equipment, medicine and many more are expected to be positively affected. So, manufacturing, healthcare, logistics and ecommerce is expected to benefit from this crisis. Sectors like retail and commercial real estate are expected to be severely hit. 


Though the recovery is going to take a long time, certainly not a V-shaped one, there will always be pockets of money chasing investments and many good investment opportunities. The ICT sector, essentials, food sector, cleaning products, medical equipment and the like are expected to offer good growth potential and will for sure attract investor appetite.

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