The previously fast-growing economy is slowing, and civil unrest is mounting, threatening to shrink dealmaking opportunities
The country straddles Asia and Europe, with the border between the two continents running through Istanbul, Turkey's largest city. Turkey is a republican parliamentary democracy, and Turkish is its official language. English is widely spoken in Istanbul. In 2011, Turkey boasted the fastest-growing economy in Europe, but it is currently expanding at only about 2 percent annually. Talks with the European Union for full membership began in 2005, but have stalled in 2013.
Financial sponsors have been lured by Turkey's growth, with some of the top private equity firms in the U.S. considering it as a potential locale to source deals. They include Carlyle, Kohlberg Kravis Roberts & Co. (NYSE: KKR) and TPG. Turkey welcomes private equity fundraising in a way that is not found in other countries in the region, says Sevket Basev, CEO of Istanbul-based investment bank 3 Seas Capital Partners. "Throughout the Middle East, it is very difficult to raise a fund right now," he adds, explaining that investors are wary of the political instability in other countries in the region. "But in Turkey, it's easier," says Basev. "I would compare it with Brazil, as far as opportunities and potential."
With a young and growing population of 81 million, many of whom are uninsured, opportunities abound in health care. The Abraaj Group, considered the Middle East's largest private equity firm, with $7.5 billion in assets and 31 offices in Asia, Africa, Latin America and the Middle East, has already begun to see some exits in Turkey. In 2012, Abraaj sold its stake in Turkey's largest hospital chain Acibadem Saglik to Integrated Healthcare Holdings, a unit of Malaysian state investment arm Khazanah Nasional. Now, the firm is reportedly looking to sell its stake in Turkish health insurer Acibadem Sigorta.
Abraaj expects to continue sourcing deals in the health care sector, says Selcuk Yorgancioglu, who is based in Istanbul and who oversees the firm's investments in Turkey and Central Asian markets. "Imagine not having good hospitals around you or private health insurance - that's how it was 10 years ago," he says, adding that Abraaj is likely to remain on the hunt for targets in health care in all emerging markets. "There is huge demand and not only in Turkey, where it is in a far better condition than other growth markets currently."
Other sectors of opportunity for transactions include energy, manufacturing, financial services and real estate, according to Ernst & Young.
Turkey's swift expansion, which saw GDP growth around 9 percent in 2010 and in 2011, created some concern among investors who felt the economy was overheating. Turkey's central bank tightened some policies in response to the rapid growth and was later blamed for the drop in economic activity: In 2012, GDP grew just slightly more than 3 percent, to $783 billion.
Turkey continues to struggle with civil unrest, with protests mounting against prime minister Recep Tayyip Erdogan, clashes between protestors and police escalating and the government threatening to restrict the use of Twitter and other social media.
Since the beginning of 2012, U.S. companies have closed 11 deals in Turkey. The largest was Thousand Oaks, Calif.-based Amgen Inc.'s (Nasdaq: AMGN) purchase of Mustafa Nevzat Ilac Sanayii AS, a developer of generic drugs, in June for about $700 million. Also in June, a joint venture between Abraaj and Dalea Investment Group LLC, based in Dallas, purchased Viking Services BV, a Middle East and North Africa oilfield services company, in a deal valued at $164 million. In January, Abraaj agreed to sell a 21 percent stake in Viking to BXR Group, an investment group based in Amsterdam, for an undisclosed price. Young & Rubicam Inc., the New York marketing company, acquired a majority interest in CS Reklam Hizmetleri Sanayi ve Ticaret AS, an Istanbul-based provider of digital advertising services, for undisclosed terms.
"I expect 2013 to be a better year than 2012," Yorgancioglu says, regarding deal flow. Turkey's healthy banking system and well-capitalized economy will continue to make it a prime destination for M&A activity, he argues. More private equity firms and investment banks are also expected to set up shop in the country. "In the old days, there would not be many bidders, and so you could identify them from behind your desk," Yorgancioglu says. "Not anymore. If you sit in London and fly to Istanbul for 24 hours, you won't find the right opportunities. You need to meet the right circles and be on the ground producing your own leads."