March 1, 2012
Interviewed by: David Snow
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Turkish Exit “Proof”

In order for private equity to thrive in a region, there must be exits. Turkey hasn’t seen many private equity exits over the years, but they are beginning to occur, as our two Turkish private equity insiders discuss. David Wilton, CIO of Global Private Equity for the IFC, and Demet Ozdemir, Private Equity Leader for EY – Turkey, analyze recent exits in Turkey and discuss the environment for investment realizations going forward.

In order for private equity to thrive in a region, there must be exits. Turkey hasn’t seen many private equity exits over the years, but they are beginning to occur, as our two Turkish private equity insiders discuss. David Wilton, CIO of Global Private Equity for the IFC, and Demet Ozdemir, Private Equity Leader for EY – Turkey, analyze recent exits in Turkey and discuss the environment for investment realizations going forward.

David Snow, Privcap: I’m interested in hearing from both of you more of an anecdotal overview of your impressions of Turkey. It’s easy to talk about it in the abstract sense, but since both of you have been involved in the Turkish private equity for quite a while, you’re going to have some stories to share. David, your firm, the IFC, has been backing Turkish managers for about 10 years now, starting in 2003. Can you talk about initially what you did by way of backing a Turkish fund manager in 2003, what your impressions were at the time, and then now 10 years, or almost 10 years later, how the market has changed?

David Wilton, IFC: It’s changed a lot. When we backed Turkven, which was the first local private equity fund, in 2003, those guys had been trained by Advent. They were first time managers. They hadn’t done private equity before. They came from operational consulting backgrounds. There was no proof of concept of private equity in Turkey, and this was a new thing.

Now, they’ve done very well. The return on that first fund is very healthy. They’ve raised a second fund, which is doing well, but now, also, quite apart from Turkven.

There’s now at least three or four other similar sized, competent managers in the market started after them, local players. You’ve now got a very large number of global or regional– either Middle East regional or European regional– players all interested in Turkey. So the number of players focused on Turkey, the amount of money committed to Turkey, or potentially committed to Turkey as parts of regional funds, has grown enormously.

With the next round of fundraising, all these funds are going up in size. So it looks like it’s going to become a much more active market.

Snow: It sounds like one of the most powerful stories that one can tell, in a private equity market, that tends to breed further private equity activity is the story of the exit, the fact that, yes, you can make an investment in this market and several years later actually sell that investment to make money. Demet, in 2011, there were actually two high profile private equity exits in Turkey. Can you give an overview of those, and also talk about the impact that you think those will have on the market, and on the market awareness of the private equity opportunity?

Demet Ozedmir, EY: Abraaj Capital had an investment in a hospital, Turkish hospital, Acibadem Hospital. And again, maybe to talk about the numbers, they have invested– maybe to talk about a bit of the history of this Turkish hospital, Acibadem was, the first time, listed on the Istanbul Stock Exchange back in ’91. And then in 2006,  they acquired another hospital, which was International Hospital by name.

2007 is the first time that Abraaj Capital have invested, and the concentration value for 22% of the shares was at $163 million. And then they acquired another 36% with a concentration value of $443 million after one year, which is in 2008. And then, so, in the meanwhile, Abraaj also acquired certain other shares through the Istanbul Stock Exchange. So they were holding 92% of Acibadem Hospital. Now, by the end of 2011, just last week of 2011, it was a disclosed transaction that Abraaj Capital have existed from its investment, and the concentration value of the exit was 1.26 billion.

So it, again, is a significant value for Turkey. And this is only a beginning, we believe, just because there will be further exits in 2012, as well. The major exit value transaction will be Migros, probably. Currently, BC Partners and Turkven do have an investment in Migros, the food retail company. And Carlyle having investment in medical park hospital, so they will probably exit in 2012.

Again, Turkven a leading local funds. They’ll have certain investments in their portfolio, which will be imminent in the exit future in 2012.

Snow: You are someone who invests across the emerging markets and have seen different stages of development from the very developed markets of places like China, and the less developed places. I know that you are looking at Cambodia, for example. So there’s a whole range of levels of development. But what kind of an impact does successful exits have on the rest of the market?

Wilton: Oh, a huge impact. Once you get that proof that you can exit, it gives LPs confidence to go into a market. A lot of LPs hang back until they can see that you can actually exit in a market. So it has that impact. It gives owners of companies further confidence and interest to work with private equity. So it’s a very important part of the dynamic to get going.

Ozdemir: Just as a verification of your sayings, Advent has opened an office in Turkey, probably having seen the first fund. And as you said, they were together with Turkven in the first fund. And having seen the success of the exits and successful investments, they then decided to open an office. And the offices, I assume– it has been almost two years, one and a half year, maybe.

Snow: Would you say that local business owners in Turkey, when they see a successful exit like that, it helps them to imagine themselves being part of a similar deal? And does it make it easier for you to tell your clients more about the private equity opportunity?

Ozdemir: Definitely yes. That makes help. That is a benefit not only for ourselves, like advisers, but also for the education of the industry. They feel like they can be like that, but the thing is, there’s always a success story of each and every transaction, or a company. So not necessarily all the companies can be at that level.

But the sellers are– or the potential Turkish people that may consider a sale, also, when they’re approached by private equity houses, they feel like the value of the firm are increasing. And therefore, the increasing appetite from the private equity funds do increase the value expectations of the seller.

Snow: So it sounds like today, and over the next, maybe, couple of years, it’s a good time to be an owner of good Turkish companies as a private equity firm. But if you’re trying to buy companies at that level, the competition has really heated up, both from strategic buyers, and it sounds like from new, well-heeled private equity buyers like, perhaps, Advent.

Wilton: And also, too, the fund sizes are going up. So Assetera, you said this was oversubscribed. Turkven’s new fund was at a much bigger scale. So the amount of money, both domestic and regional, going into the market, is going to increase.

Snow: Where do you think the most competitive part of the market is going to be, starting from the very smallest, local Turkish deals up to the big international deals?

Wilton: I think in common with most markets, it’s going to be large international deals that have the most competition. If you look at a chart of fundraising for most markets, at the large end of the market, that’s where about 65%, 75%, of the money’s being raised. So that’s typically the most competitive part.

Snow: As these exits are becoming well known, and the small number of veteran Turkish private equity firms are becoming more successful, raising bigger funds, are there new groups coming in to invest in the smaller and the middle size, the mid-range of the Turkish market?

Ozdemir: Yes. For example, another local fund, Mediterra Capital, has just recently raised funds, around $400 million, which is a significant value of investment, just gathered together for Turkey investments. So it is another local competitor for the ones we have been already been talking about.

Snow: I’m going to ask one final question– I’m going to ask you to look into your crystal balls– and that is, Turkey, very large market, again, relatively under-penetrated by private equity. What do you think the Turkish private equity market will look like, let’s say, in 10 years? What are your predictions?

Since you’ve already been in it for 10 years, I’m interested. And this could be for the benefit of someone who’s thinking about, hmm, are the best years of Turkish private equity behind it? Should I still get involved? What is your view?

Wilton: If I was to completely guess, I’d say because of its geographic position, you could well see Turkey become a larger hub for regional activity. And so rather than the present situation, we have European funds, Middle Eastern funds coming into Turkey, Turkish funds going out and being a hub for the rest of the region. I think that’s a very likely development going forward.

I think Turkey, probably in common with some of the other emerging markets, will go through a flavor-of-the-month phase with investors. You may go through some phase of too much money being raised in one particular vintage cycle, which suppresses returns. But that hasn’t happened just yet. I think it’s probably likely to become a much more major c for private equity in the region.

Snow: What do you think?

Ozdemir: Fully agreed. That’s totally my personal opinion again, but I would fully expect to have a dual P industry. But other than that, the current situation of private equity houses being located either locally or global ones looking into these different stories, I would fully share the potential opinion of David in terms of locally based private equity houses investing in southeast Europe, and maybe Middle East, and maybe North Africa, so countries surrounding Turkey.

That will not only be possible given the current geographical position, but also with the support of the educated and developing industry, and the professionals in Turkey, as well, because the PE professionals have been, over the recent period– 10 year timeframe– have been educated in the country. So having considered all this, that’s where we could expect.

Snow: Well, it sounds like, from both of you, that over the next few years, with the expected exits in this year and possibly next, and with the big, international private equity firms continuing to establish a presence in Turkey, that there’s still quite a bit of time to go before Turkey hits its first peak, or hits its flavor-of-the-month, as you say. And so as that growth continues, I hope I can have both of you back on Privcap to give us an update on the Turkish private equity market.

Wilton: It would be a pleasure.

Snow: Great.

Ozdemir: It’s our pleasure. And as a Turkish national, as well, obviously I hope our guesstimates would become true, obviously.

Snow: Well, great. Well, thank you to both of you and thanks for joining Privcap today.

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