By David Rosenberg Of DOW JONES NEWSWIRES
JERUSALEM (Dow Jones)--Private equity investors are starting to explore opportunities in Turkey - one of Europe's last great uncharted markets for investment, but one fraught with risk.
The latest in a trickle of new investors is Advent International (X.AVT), one of Europe's biggest venture capital firms. In March the company launched a $41 million fund that targets medium-sized companies that need capital and management assistance.
Other foreign investor groups are looking but haven't taken the leap, including George Soros' $150 million Southeast Europe Equity Fund. The fund was formed 18 months ago to invest in Turkey and eight other countries in the region. "It's by far the largest (country) in Southeast Europe. Human capital is quite substantial - a very dynamic entrepreneurial community, a variety of different businesses and business sectors. It's fertile ground for investment," says fund manager David Mathewson. But the fund hasn't done any deals, and the fact is Turkey isn't an easy place to invest.
Economic reforms imposed after a financial crisis early in 2001 are mostly in place and have encouraged investors. But economic output shrunk a hefty 8% in 2001. UBS Warburg estimates gross domestic product will grow 3% this year and 5% in 2003. Inflation is running at 46% this year and is expected to stay deep into the double digits next year, too. And the Turkish lira has gained some 13% against the dollar since October, leaving potential foreign investors fearing they could be buying assets denominated in an overvalued currency. "Even domestic investors want to see if there is a return to growth. They're also watching the (International Monetary Fund) program, particularly how inflation will hold. They're also very uncertain on the movement of the currency," says Sujata Lamba, IMF country manager for southeast Europe and Central Asia.
Some Gains Amid The Pain
But a few courageous investors see opportunities amid Turkey's economic difficulties. American International Group Inc. (AIG) formed its Blue Voyage Fund in 2000, which at $100 million is the biggest private equity investment vehicle dedicated to Turkey. It's committed about 30% of its capital to three investments - AFM Theaters, which is the country's leading cinema chain; a sports-marketing joint venture called Galatasaray Sportif AS; and a third, undisclosed investment. "We're interested in companies that are profitable and successful, either a leader in their sector or a candidate to be one in Turkey or the region," says Serkan Elden, a vice president for AIG Capital Partners and the manager of the Blue Voyage fund. A clutch of regional funds specializing in eastern and southeast Europe are also expanding into Turkey, like Athens-based Commercial Capital, which made its first Turkish investment in 2000 and opened an Istanbul office last summer. No one yet monitors investment activity, but everyone agrees it's modest. Gonca Egilmez Inegol, a director of private equity at Istanbul's Ata Invest brokerage, estimates there is only about $250 million to $300 million in private equity available for investment in Turkey, and between 15 an 20 funds.
Stable Of Smaller Firms Ripe For Growth
A potentially important source of private equity deals is Turkey's privatization program, adds the IMF's Lamba. Most of the planned sales will involve companies too big for private equity investors to digest, but Lamba says smaller firms, such as city gas distribution companies, will also be on the block. Turkey's principal draw for private equity investors is its huge stable of small- and medium-sized enterprises, most of them family-run businesses ready for expansion capital and restructuring. Commercial Capital estimates there are some 27,000 of these with a turnover of $10 million to $50 million a year, which makes the best fit for an injection of private equity capital and management support. These companies target a home market of some 65 million people. With the devaluation of the Turkish lira and a five-year-old customs union with the European Union, Turkish companies are ripe to begin exporting. What they lack are capital and management, two important ingredients that private equity investors can offer. Turkey's economic crisis has left its banking system emptied of lending capital. Much of exists goes to big borrowers, and real interest rates on dollar loans can run 10%-20%. The use of nominal accounting in Turkey's high-inflation economy has often wiped out the working capital and equity of small- and medium-sized companies. The financial crisis also highlighted the need for more professional management. "Before they could be run by a lackluster management team. After the crisis, all the mistakes that had been okay became a problem," says Osman Boyner, who heads an informal group of buyout investors and is working to set up a venture capital industry group. In its favor, Turkey has a strong entrepreneurial tradition. But corporate governance is poor. Legal protections for minority shareholders and rules governing stock options are poor or non-existent. Many Turkish companies won't even consider private equity partners. "You talk to a hundred people, maybe 10 of them are willing to accept the fact that private equity can add value to the business," says Blue Voyage's Elden. The Turkish initial public offering market is too volatile to rely on as an exit for investors, leaving trade sales as the preferred way to cash out. Simos Sikiaridis, executive director at Commercial Capital, says foreign companies, especially in the food and beverages, have begun buying Turkish firms. But, he says, better opportunities will only emerge in three or five years.
By David Rosenberg, Dow Jones Newswires; 972-2-537-6985;