* Large deals drying up in last two years
* High valuations cause problems
* Turkish family groups reluctant to lose control
* Over 70 PE firms crowd market
By Dinesh Nair and Asli Kandemir and Greg Roumeliotis
ISTANBUL/BERLIN, Feb 27 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
Europe's fastest-growing economy has attracted some of the
top names in private equity over the past decade, including
U.S.-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
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 $2.1 billion 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 $3.2 billion in 2008.
In 2007, KKR bought shipping company U.N. Ro-Ro Isletmeleri
for about 910 million euros ($1.2 billion)
But such deals have dried up, making it tougher for some
investors to make profits. Private equity transactions in 2012
made up just 6 percent of Turkey's mergers and acquisitions
activity of $28 billion, 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 $2 billion 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 percent 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 percent 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 percent this year, compared to 15
percent 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
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 percent 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
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 health
care, 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 health care
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.