MENA and Turkey: Turkish delights?

Turkey has all the ingredients for rapid growth, and is increasingly attracting the attention of GCC investors, especially those with a focus on private equity. But will the development of the country’s capital markets presage a wider boom in the asset management industry?

Bridging the gap between Europe and the Middle East, Turkey occupies an interesting position as an investment destination. Having overcome a major financial crisis at the beginning of the millennium, it now represents a story of rapid economic growth. Perhaps it is these growth prospects, as much as any geographical or cultural factors, that have led to growing numbers of Mena managers embracing Turkey as part of their investment universe.

Private equity has traditionally attracted attention from the Mena region, and for some, this is still the most interesting play. NBK Capital, one of the region’s most active private equity investors, has been investing in Turkey over the past seven years and has achieved some impressive results.

Fund manager Amjad Ahmad believes that consumer-driven sectors in Turkey are particularly appealing at the moment, given the young and growing population.

“We believe that the middle class will continue to grow with disposable income and spending also climbing,” says Ahmad. “As young people enter the workforce and begin to create families, significant pressure will be put on all forms of consumer goods and services, which presents a lot of opportunities.”

One reason private equity continues to flourish is that the underdevelopment of many companies provides fertile ground for an active investment philosophy. Ahmad says that initiatives to drive efficiency and productivity in companies have been central to NBK Capital’s returns.

“There are many good companies that have not yet transformed or modernised their strategies, processes and people. This presents an opportunity for us to invest and implement an array of value creating initiatives to make businesses more agile and dynamic.”

The $250m NBK Capital Equity Partners Fund I recently enjoyed a successful exit from Dunya Goz, Turkey’s largest chain of eye hospitals, in which it had invested since 2010.

Having a proper exit strategy and understanding the nuances of the market are crucial to making successful investments, stresses Ahmad. While Turkey has grown in popularity as both an emerging European market and a destination of Mena managers, it isn’t necessarily a straightforward landscape to traverse, and getting advice on local legal and regulatory systems is crucial.

Additionally, Ahmad highlights that unlike GCC investments which are predominantly pegged to the dollar, investments in Turkey are at risk to the fluctuations of Turkey’s free-floating Lira. “It is imperative to ensure that you have a strong capital structure with the right equity/debt mix.”

Stock market development

The public equity space also presents a mixture of challenges and opportunities. Göktürk Işikpinar, chief investment officer at AK Asset Management, one of the country’s largest asset managers, says that the number of listed firms is set for a rapid expansion.

“If you look at the current market, the free float is 29%. The Istanbul Stock Exchange is conducting a campaign to increase the number of shares listed there. The major market currently has 330 stocks, but plans to increase this number to 1000 by 2020,” says Işikpinar.

If these ambitions are realised it would be good news for the local asset management industry, which is gradually taking root in the country, helped in part by a growth in the number of pension funds.

Pension funds are certainly among the biggest clients for AK Asset Management, which manages an estimated $2.7 billion on their behalf. Işikpinar believes that Turkey will see further growth in this area, as the government tries to counter the low rate of savings and the current account deficit that have previously characterised the country.

He also believes mutual funds will see an upturn in their appeal as the low interest rate environment and demand for real estate (a very popular alternative to capital market products in Turkey) loses steam.

“I believe that in three to five years we are going to see more people demanding capital market products,” says Işikpinar. “We are at the beginning of a growth period in asset management.”

One factor that may inhibit regional asset managers looking to gain a foothold in the country is distribution power. Emerging markets manager Ashmore has been in Turkey for five years, starting from scratch to now managing $200m from Istanbul. Yet Didem Gordon, chief executive officer at Ashmore Portföy Yönetimi A.S (Ashmore Asset Management, incorporated in Turkey), admits that their distribution network remains relatively limited.

“Mutual fund distribution is dominated by banking networks, which independent asset managers such as us have very limited access to,” she complains.

Işikpinar agrees that the market can be difficult to break into. “Four large asset managers make up around 90% of the market and there aren’t that many foreign asset managers in Turkey at the moment.”

“Of course the market is open just like anywhere else. Whoever can establish innovative, competitive products - whether large or small asset management companies - will attract investor attention, and there are successful examples of that,” he adds.

Emerging market wobbles

In common with other emerging markets, Turkey has experienced volatility recently driven by fears surrounding the Fed’s mooted tapering of quantitative easing. “The general market sentiment has resulted in an outflow from Turkish listed equities as well as fixed income last month,” explains Ashmore’s Gordon.

She adds: “This led to increases in bond yields, going from 6% to 9% levels, which consequently led to a re-rating of listed equities. Valuations have been coming down at a very rapid rate.”

Nonetheless, the medium-term investment outlook remains positive, with estimated annual growth earnings of around 7% for 2013 and higher in ‘14, she explains. “When markets are normalised, we’ll see valuations taking effect and investments will flow into the most attractive markets.”

Gordon goes further in pointing out that market volatility can create additional opportunities for those who know how to exploit them. “The mispricing that can occur when there is a temporary disconnect between prices and fundamentals can create opportunities to amplify returns in the long-term. Our aim is to sift through the noise and make rational investment decisions based on our analysis and research.”

NBAD Asset Management’s head of equities, Saleem Khokhar, agrees. “I expect near-term volatility but this will create opportunities to enter the market at attractive levels as the long-term outlook remains bright.” Although the NBAD MENA Dividend Leader Fund doesn’t currently have any exposure to Turkish equities, it is within their potential investment remit.

Developments in the political arena can also play a marked role in the country’s investment space; Işikpinar highlights that regional instability caused by the prolonged Syrian conflict may present a challenge to the market. He also adds that local elections in March 2014 should be monitored closely.

The political protests that recently brought Turkey to the forefront of media attention have also added to the volatility in the market as well as making some investors more cautious.

“We want to increase exposure once again, but are first looking to see some stability around the current political events, and want to see the government focus back on the economy,” says Afa Boran, Head of Asset Management at Qatari-based manager Amwal (see box).

Local, parliamentary and presidential elections are all set to take place within the next two years, but NBK Capital’s Ahmad stresses that whoever follows in the footsteps of the current regime has fairly big shoes to fill. The AKP has presided over the pro-business policies which have seen the economy flourish and investments increase.

“The next government knows that the AKP’s policies have been beneficial for business and that they will have to maintain the momentum. No matter who wins the elections, economic development and growth will be a priority,” he says.

Clearly Turkey presents interested and savvy investors with plenty of opportunities, whether in private or public equity space. Nonetheless, current global economic trends, political developments as well as market competition make this emerging market more difficult to succeed in than some may imagine.

Ashmore Launches Turkish Equity Fund

Ashmore Investment Management has announced the launch of their new Ashmore Sicav Turkish Equity Fund.

The fund is open-ended and will primarily invest in Turkish equity and equity related instruments issued by corporates and quasi-sovereigns.

Didem Gordon, CEO of Ashmore Turkey, said: “Ashmore’s new Turkish Equity Fund will provide global institutional and retail investors with the opportunity for long-term capital growth.

“Turkey’s fundamentals offer a very attractive investment proposition. Turkey has a young population, its economy is growing and fiscal performance is strong.

“Investing in Ashmore’s Turkish Equity Fund, which we will manage actively based on fundamental analysis and research, will provide investors with a well-diversified portfolio of Turkish equities.”

Ashmore has been investing in Turkish equities since 1987 and in 2008 launched Ashmore Portföy, one of the investment manager’s first domestic asset management ventures.

Christoph Hofmann, global head of distribution at Ashmore, said: “We are seeing significant investor interest from large allocators of capital who are looking to access key individual Emerging Markets economies through dedicated strategies.

“The launch of the Ashmore Turkish Equity Fund is therefore an important addition to our existing range of regional and single country funds.”

The Sicav Turkish Equity Fund is an open-ended daily dealing Ucits IV Luxembourg registered fund.

Abraaj sells stake in Turkish health insurer

Dubai-based Abraaj Group, a leading private equity investor in growth markets, is to sell its 50% shareholding in health insurer Acıbadem Sağlık ve Hayat Sigorta A.Ş. to Khazanah Nasional Berhad, the Government of Malaysia’s strategic investment fund.

Khazanah will acquire a combined 90% shareholding in Acıbadem Sigorta from both Abraaj and Turkey’s Aydınlar family in exchange for a cash consideration. Mehmet Ali Aydınlar will retain a 10% stake in the Company and will remain as chairman of Acıbadem Sigorta.

Abraaj helped Acıbadem Sigorta become one of the fastest growing and most profitable health insurance companies in Turkey, achieving over 30% annual premium growth over the past two years and one of the highest returns on equity in the market.

Partner and region head of Central Asia and Turkey at Abraaj, Selçuk Yorgancıoğlu, said: “The successful outcome of this transaction demonstrates our continued track record of investing in quality assets in growth markets to generate significant and attractive returns.”

“It also marks another chapter in Abraaj’s successful collaboration with Khazanah, which has included our partnership in IHH Healthcare, one of the largest private healthcare providers in the world,” he said.

Acıbadem Sigorta is a provider of health insurance services for corporate and individual clients in Turkey, and has the second largest market share in the industry.

Abraaj divested its entire shareholding in Acıbadem Healthcare to IHH Healthcare Berhad and Khazanah in exchange of cash and shares in IHH, while retaining its 50% shareholding in Acıbadem Sigorta.

The company later sold its entire shareholding in IHH in July 2012 at IHH’s initial public offering, which raised US$  2billion, making it the third largest IPO of 2012 after Facebook and Felda Global.

The transaction is expected to be completed following regulatory approvals in Turkey and Malaysia.

Gulf Capital invests $15m in Turknet

Abu Dhabi-based Gulf Capital, a leading alternative investment firm, has completed an investment in Turknet Iletisim Hizmetleri A.S. (TurkNet) through Gulf Credit Partners, its regional credit and mezzanine fund.

TurkNet is a prominent provider of broadband internet services, long distance telephony services, and corporate telecom, wholesale and hosting services in Turkey.

Dr Karim El Solh, Gulf Capital’s CEO, said: “The growth capital financing facility from Gulf Credit Partners will assist TurkNet in its growth trajectory at an exciting time for the Turkish telecommunications sector.”

“TurkNet’s market leadership in this growing sector, sound strategy and strong management are the precise ingredients that our credit and mezzanine fund is looking for in a business partner,” he added.

The telecoms market in Turkey is emerging rapidly, as the number of internet users showed a year-on-year growth of 42.3%, from 14.1 million to 20.1 million last year.

“The new regulations allow for alternative operators to increase their presence in a market where the incumbent operator has retained a significant market share,” said Cem Celebiler, co-founder and CEO of TurkNet.

“TurkNet has been well positioned to benefit from the growth in the market through its investments in infrastructure as well as in innovative services and simplified pricing offers,” he said.

The telecoms company hopes the investment will enhance its rate of growth.

Mehmet Celebiler, co-founder and chairman of TurkNet, said: “Gulf Capital has demonstrated a sound understanding of our business and has shown great flexibility in tailoring a financing solution in line with our strategic growth plans for telephony, broadband, cloud and IPTV services.”

Gulf Credit Partners provides financing facilities to growing companies in the Middle East, North Africa and Turkey through its flagship credit and mezzanine fund.

It completed its first investment of USD$ 25million in an energy solutions business, SES FZCO, through its Gulf Credit Opportunities Fund.

Walid Cherif, the co-head of Gulf Credit Partners stated: “We are very pleased to partner with the Celebiler family.”

“We believe that TurkNet is extremely well-positioned to benefit from structural trends and the on-going liberalisation in the telecommunications industry on the back of its viable growth strategy, as well as the high-calibre senior management team that is committed to continuing the implementation of best-in-class operational practices.”

Turkey: Untapped Opportunities

Is it time for Mena and international investors to take another look at Turkey? Gokturk Isikpinar of AK Asset Management puts the investment case


As the 16th largest economy globally, and the 8th largest emerging economy, Turkey has many points in its favour as an investment destination. GDP per Capita has tripled in less than a decade; it has a young population, with 50% of people under the age of 29. Population growth expectation, according to the UN, is 1.16%, much higher than most countries within EMEA. Average GDP growth since 2008 has been solid and comparably higher than peers within its investment grade. Current sentiment in domestic market activity looks healthy, with PMI above 50, the Business Confidence Index above 100, while average employment growth at 4% is much higher than emerging economies.

Of course, there are risks: the high Current Account deficit – 7% of GDP - is a major one, although it has been on a declining trend lately. The financing of the CA deficit with portfolio investments raises more concern. However, Turkey’s gradually improving credit outlook is appreciated by rating agencies. Fitch upgraded Turkey to Investment Grade in 2012, and Moody’s is expected to follow suit in 2013.

We believe the Turkish market is underresearched and offers numerous opportunities to exploit market inefficiencies. In particular, global investors are missing an opportunity with Turkish small caps. In the past three years, while large cap stocks have generated 73% return, Turkish SMEs managed to generate 150% return over the same period. But good research can yield even better results; I believe it is a stock pickers’ paradise. In the last 3 years, the 25 best performing SMEs managed to generate 929% return, and the first quarter of the entire SME universe managed to generate 458% return.

Manufacturing, which makes up 24% of GDP, is a key component of this and there are cities where manufacturing is very strong, such as Kayseri, Kocaeli, Bursa, Gaziantep, and Denizli. However, SMEs are a highly liquid investment universe with companies in variety of industries. We believe inhouse research to find the right opportunities and assess corporate governance is vital, which is why our equity research analysts made 131 company visits to 76 different companies in 2012.

Middle Eastern investors traditionally have an eye for private equity projects (mainly in healthcare and retail) and real estate projects in Turkey, but this interest should now extend further, especially given the growing economic links between Turkey and the Middle East. Turkish exports to Mena are rising quickly and make up 34% of the total, replacing falling exports to the EU. It’s natural that MENA consumers buying goods made in Turkey should become interested in the companies that produce those goods, and the recent legal change of allowing foreigners with property to have a residential permit in Turkey for a year is also boosting interest.

Cross border banking activity - with Bank Audi starting up ODEA Bank in Turkey, Burgan Bank purchasing EFG Tekfenbank and Commercial Bank of Qatar purchasing Abank, will increase capital flow to Turkey from the region.

Finally, cultural links can also help: Turkish TV soap operas are very popular in MENA, and their stars are getting Hollywood star treatment in the region. And in the sporting world, I would like to end by asking your support for Istanbul, candidate for 2020 Olympic Games.


Gokturk Isikpinar is Chief Investment Officer, Equities at AK Asset Management, one of the largest asset managers in Turkey with a total AUM of approximately US$5.6 bn.

GEM managers increase allocations to Mena, report finds

Global emerging market (GEM) fund managers are currently favouring investments in the Mena region over those in Africa, a study published yesterday found.

The Bank of America (BofA) Merrill Lynch Global Research Report shows that GEM funds have recently pared back overweight allocations in African markets and switched them to Mena markets, including Saudi Arabia, Qatar and the UAE.

GEM managers have consistently preferred off-benchmark allocations in Africa over the past year, said the report, but this trend now appears to have ended.

The latest figures show GEM funds’ allocations to Qatar were 0.13% on average, up 5 basis points in the last 3 months, while the UAE was up 1.7 bps to 0.09% and Saudi up 3.5 bps to 0.12% over the same period.

The report also shows an increase of inflows to frontier market funds, and to equity funds overall.

Frontier market funds have seen US$ 1billion of net inflow (equivalent to 14% of AUM) over the past 26 weeks, while equity funds overall have experienced US$178 billion of inflows (3% of AUM) over the same period.

Turkey has been a particular focus of attention in recent weeks, with Turkey-dedicated mutual funds seeing 12 consecutive weeks of inflows, cancelling out the effect of net redemptions seen earlier in the year.

However, its positioning in the GEM fund allocation showed little change in April, and over a quarter of funds (27%) are underweight on Turkey.

NBK Capital makes successful exit in Turkey

NBK Capital has announced the successful sale of its equity stake in Dunya Goz, Turkey’s largest chain of eye hospitals.

The sale, to the chain’s founding shareholder, represents a realisation for the $250m NBK Capital Equity Partners Fund I, the firm’s regional private equity fund focusing on Mena growth opportunities. The fund first invested in Dunya Goz in 2010. Since then, the company has expanded from six hospitals in four cities to eleven hospitals in eight cities, and has entered new markets in Germany, the UK and the Netherlands.

Amjad Ahmad, Head of Alternative Investments at NBK Capital, said: “Dunya was an attractive investment because of the growth in private healthcare, due to favourable regulatory trends and surging per capita income. Additionally, the company had a strong national brand with opportunities for scale.

“We continue to drive substantial value in our portfolio companies and seek timely realizations to deliver returns to investors. Our strategy of investing in midmarket growth companies in the MENA region and actively driving key value initiatives continues to deliver positive results.”

He said that the fund focuses on consumer-driven sectors including consumer staples, consumer discretionary, healthcare and education. NBK Capital, which also runs a mezzanine fund in its alternative investments division, is planning to launch a further private equity fund later this year.

“We are launching another private equity fund in the coming months and therefore we are actively reviewing new investments,” said Ahmad. “The region is compelling especially in the midmarket segment, given the opportunity for growth and operational improvement. The macro-economic outlook in a number of countries including Saudi Arabia, the UAE and Turkey is favourable with positive government initiatives driving increasing private sector activity and growth. The competitive landscape for private equity is rather interesting given the limited number of reputable GPs who have continued to operate after the global economic crisis and Arab Spring.”

NBK Capital aims to implement an active investment approach in its alternative investment portfolios, creating long-term sustainable value through strategic, operating, financial and corporate governance enhancements.