Turkish companies are a bargain, but will foreign investors listen?
According to Ed Ballard of penews.com, two flagship Turkish private equity funds “Actera Group and Turkven Private Equity, neither of…
According to Ed Ballard of penews.com, two flagship Turkish private equity funds “Actera Group and Turkven Private Equity, neither of which have raised a fund since 2012, are both seeking to raise new Turkey funds”. The timing is perfect as Turkish real assets have declined in value to decade-lows and owners may be more willing to sell than ever because of pressing debt burden. But, diminishing FDI and financial inflows suggest foreign investors are in no mood to sink money into the country, largely because of President Erdogan’s erratic policy choices and a quasi-State of Emergency prevailing in the country which negates law and order. The success of these two funds will determine whether the scent of bargains trumps “regulatory risks”.
Hot money, FDI leave the country
Net inflows into financial markets declined from $8 bn to $1 bn May-May according to official balance of payments accounts. Many bond fund managers are no longer interested in Turkey with its chronically depressed currency and a Central Bank which only pays lip service to inflation-fighting. Despite rapid currency depreciation eroding the hard currency value of wages and a fairly disciplined-diligent workforce, multinationals, too, have ceased investing in the country, as contract enforcement and property rights have bene cast into doubt by a perpetual State of Emergency, which is being maintained by draconian security measures, even though it is officially lifted. PA Intelligence has contacted two Turkish financial institutions which claim they have each more than a dozen mandates from multinationals operating in Turkey trying to sell. Moreover, accelerating outbound investment raises suspicion that some bosses are salting away their wealth abroad under the disguise of “foreign investment”.
While businesses are reluctant to discuss the matter in public, in private conversations fear of Erdogan’s erratic and arbitrary policies lies at the heart of the paucity of capex, with most begin afraid that unwittingly crossing the government or AKP could lead to sudden confiscation of assets or even arrest.
Private Equity Feels the Heat in Turkey
Actera Group and Turkven Private Equity, neither of which have raised a fund since 2012, are both seeking to raise new Turkey funds, people familiar with the matter said.
Actera is seeking to raise as much as $1.3 billion, more than its last fund, which raised $1.1 billion, one of the people said. Turkven, which raised $840 million last time around, has yet to settle on a target size, another person said.
Perhaps the biggest concern for international investors weighing up investments in Turkey is outside either Turkven’s or Actera’s control: Turkish President Recep Tayyip Erdogan and his impact on financial markets.
The Turkish lira slid to a record low Thursday after the White House said it would impose sanctions on two Turkish government ministers over the detention of a U.S. pastor accused of aiding a failed coup against Mr. Erdogan in 2016. The pastor denies the charges.
A long decline in the lira has accelerated this year as the strengthening U.S. dollar weighed on emerging-market currencies. Turkey’s large dollar-denominated debt load has made the lira particular vulnerable. It has shed around a quarter of its value in 2018.
Actera and Turkven raise dollar-denominated funds, so a further plunge in the value of the lira would imperil the performance of their investments.
Ugras Ulku, an emerging-markets economist at the Institute of International Finance, said there is little prospect of a rebound in the currency until Turkey’s central bank shows it is committed to raising interest rates and the government reins in spending. That could take a while. Mr. Ulku said the government is likely to prioritise boosting growth over appeasing the currency markets until local elections due in March.
Turkish private-equity deal-making has hit a hiatus amid the uncertainty
This year is on course to be the Turkish market’s slowest year in more than a decade, according to data provider PitchBook Inc. There were just three private-equity investments worth a combined $290 million in the first seven months of the year, according PitchBook, compared with 20 deals worth $1.2 billion in the whole of 2017.
The current uncertainty could work to the advantage of buyout firms like Actera and Turkven if they pick the right time to re-enter the market.
Companies could be available cheaply for investors willing to risk their money, said Mr. Ulku at Institute of International Finance. An index of the 100 top stocks on the Turkish stock exchange has declined 18% this year.
“There are many interesting buying opportunities in Turkey and therefore the potential to make good returns with modest growth and leverage in the case of an eventual rerating,” said Seymur Tari, Turkven’s founder and chief executive, in an emailed statement.
The prospect of asset sales by large Turkish companies could spell opportunity for buyout firms. The net foreign-exchange liabilities of Turkish nonfinancial companies stood at $221 billion in April, according to the country’s central bank, and the weaker lira is making it harder for them to meet their obligations. Several conglomerates have already begun restructuring their debt.
“There’s uncertainty about the future of the currency and the exchange rate, but on the other side of the ledger the currency being depressed should lead to attractive entry prices,” said Neil Harper, chief investment officer for private markets at Morgan Stanley Alternative Investment Partners.
“Some investors have expressed a degree of caution; others would look at Turkey and say this is a great buying opportunity,” he added.
For investors willing to accept the currency risk, Actera and Turkven have a few other factors in their favour.
For a start, they don’t have much competition. A handful of Turkey-focused firms have raised funds around the $200 million mark. The nearest rival to Turkven and Actera in terms of fund size is Abraaj Group, which raised $526 million for deals in Turkey in 2016. However, a successor to that fund looks like a dim prospect.
Abraaj’s assets are up for sale after a scandal over the firm’s handling of investor money left the firm unable to pay its debts.
Just six funds that invest in Turkey as part of their mandate closed in 2017, raising $1.73 billion between them, according to data provider Preqin Ltd.
Foreign private-equity firms have become less active in recent years, reducing competition for assets. Turkey became a favoured destination for firms including
Advent International, BC Partners and Bridgepoint in the years after the financial crisis, but deal flow has waned in recent years.
Non-Turkish firms participated in 12 private-equity investments worth a combined $720 million in Turkey last year, according to PitchBook. That was the lowest figure since 2009, both by number and value.
Anne Fossemalle, director of equity funds at the European Bank for Reconstruction and Development, said: “If you want exposure to Turkey, you need to look at these Turkey funds that are raising at the moment.”
The EBRD began investing in Turkish funds in 2009, complementing its portfolio of assets in Russia and Central and Eastern Europe, and it has backed both Actera and Turkven. Ms. Fossemalle didn’t comment on individual funds’ performance, but said that as a group, Turkey-focused funds are among the best performers in the EBRD’s portfolio.
Ms. Fossemalle said Turkven, Actera and other Turkish firms have already shown themselves capable of generating returns while battling the decline of the ever-weakening lira.
“It’s testament to their capacity to add real value—to roll up their sleeves and do the real private-equity work, rather than sitting there and waiting for multiple expansion,” she said.
Of the two firms, Turkven has sold more of the assets from its previous funds. In euro terms, it achieved an eight-times return from its investment in jeans brand Mavi Giyim Sanayi ve Ticaret AS when the company went public with a valuation of around 1.17 billion lira ($236 million) in June 2017, a person familiar with the matter said.
In local-currency terms, the return was more like 20 times, the person said.
The same month, the £291 million listing of DP Eurasia NV, which runs the Domino’s Pizza franchise in Turkey and neighbouring countries, delivered another eight-times euro return for Turkven, the person added. The firm completed four initial public offerings last year.
Actera, meanwhile, generated a four-times return on investment in euro terms from the €950 million sale of Turkish ferry operator U.N. Ro-Ro Isletmeleri A.S. in April this year, a person familiar with the matter said. Actera bought U.N. Ro-Ro for an undisclosed price alongside another Turkish investment firm, Esas Holding, from KKR & Co. in 2013.
The EBRD’s mandate to boost private investment in developing economies means it has more risk appetite than most institutional investors. It has already provisionally approved an investment in Actera’s new fund, its website says.
“What we have seen in the 25 years of our portfolio is that when times are hard and it’s difficult to fundraise, the scarcity of capital allows fund managers to be much more selective,” Ms. Fossemalle said. “There is less competition for assets, and hopefully that leads to good returns.”
From that perspective, Turkish private equity sounds like a winning proposition. But portfolio managers holding the purse strings at big institutional investors may be more cautious. Without a quick turnaround in Turkey’s economic situation, Actera and Turkven may be on the road a while.