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.