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International private equity firms which flocked to Turkey are finding that a strong economy is not enough for them to get deals done, as target companies’ valuations rise and the industry faces stiff competition.
The fastest-growing economy has attracted some of the top names in private equity over the past decade, including US-based firms Carlyle Group, KKR and TPG Capital, and Europe’s Bridgepoint.
Turkey appeared to fit their desire for new opportunities, as its economy continued growing despite the global credit crisis, Europe’s debt problems and political turmoil in the Middle East.
But the same firms are now finding it increasingly difficult to identify new investments and exit their current ones, in a market which some analysts believe has grown unsustainably fast and has become overvalued.
“Investing in Turkey is not easy, but for a private equity investor life is even more difficult,” said Can Deldag, co-head of Carlyle Mena Partners, told the SuperReturn International conference in Berlin this week.
Few people expressed such sentiments two or three years ago, when Turkey was the go-to place for many private equity investors and large deals were getting done.
Among some of the big deals was the $2.1bn sale of Turkish spirits group Mey Icki by TPG Capital and local private equity group Actera to Diageo in 2011. BC Partners agreed to buy Migros Turk, the country’s largest supermarket chain, for $3.2bn in 2008.
In 2007, KKR bought shipping company UN Ro-Ro Isletmeleri for about €910mn ($1.2bn)
But such deals have dried up, making it tougher for some investors to make profits. Private equity transactions in 2012 made up just 6% of Turkey’s mergers and acquisitions activity of $28bn, Carlyle’s Deldag said.
Excluding Internet and e-commerce investments, the average number of Turkish deals per private equity fund is just 0.5 per year, he estimated.
“There is no easy money in this market any more. It is not a place where you can fly in and fly out and expect to close deals and exit investments,” Selcuk Yorgancioglu, Abraaj Group’s Turkey head, said in an interview in Istanbul.
The emerging markets private equity firm sold its stake in Turkey’s largest hospital chain, Acibadem, to a unit of Malaysian state firm Khazanah Nasional for an enterprise value of over $2bn last year.
Abraaj is now looking to exit its investment in Acibadem Insurance, a leading health care insurer, to a strategic investor in 2013, an industry source aware of the fund’s plans said, declining to be named because the matter is not public. The firm declined to comment.
A major reason for the recent dearth in deal activity is the rising expectations of Turkish companies, which are often owned by large family firms.
Strong economic growth, expected to be around 4% this year, and the possibility that Turkey will win a second investment-grade rating from credit rating agencies have made sellers more demanding, widening the gap between the valuations they quote and what buyers feel they can afford to pay.
Turkey’s stock market soared 53% in 2012, making it one of the world’s biggest gainers. Turkish companies are trading at about 11.8 times estimated earnings for this year, a slight premium to emerging markets globally. Earnings growth is expected to be around 11% this year, compared to 15% last year.
“Company owners are asking for a high price. They are also not willing to give up control of family-held businesses in the final negotiation stage,” another industry source said, speaking on condition of anonymity because of the sensitivity of the matter.
Deldag said sellers in Turkey were in some cases demanding valuations of 20 to 25 times earnings before EBITDA (interest, taxes, depreciation and amortisation).
Valuations in Turkey have risen so high that private equity firms risk lowering their global profit rate on investments by putting large sums into the country, some market participants say. High valuations also make exits from investments difficult.
Carlyle has been looking to sell its 40% stake in Turkish hospital chain Medical Park for nearly a year, mandating Credit Suisse and Goldman Sachs to arrange the deal. It may complete the sale in the first half of 2013, the Turkish group’s chairman said.
Competition in the private equity industry has increased substantially in the last few years as a number of local players expanded their operations.
Over 70 private equity funds are now looking for deals in the country. Local firms such as Turkven and Actera are increasingly active, taking market share from the foreigners.
The locals benefit from their extended on-the-ground presence, an understanding of local market conditions, and in some cases friendly relationships with Turkish family conglomerates and the government.
Since clients have become more demanding, it is important for senior private equity executives to be present in Turkey; for foreign firms covering the country from another financial centre such as New York or London, that is a disadvantage.
“The kinds of names we want to do business with are the successful ones, and those names demand a lot of time and attention. They want to see us on the ground and be able to reach out at short notice,” Abraaj’s Yorgancioglu said.
Because of Turkey’s young and growing population, industry executives still see opportunities in sectors such as healthcare, the retailing of “fast-moving consumer goods” (FMCG) such as groceries, and education.
In some sectors, the government is moving to stimulate investment. Last week it passed regulations covering public-private partnerships, under which the state can rent city hospitals built and run by the private sector for 25 years.
For the foreseeable future, however, private equity deal sizes are expected to be smaller than they were a few years ago.
“We are interested in a range of sectors, from healthcare to FMCG and financial services. Obviously, the price expectations are high but there are still deals to be done at the right price,” Yorgancioglu said.